Retirement Planning Update

December 2014 Markets Products Opinion Update December 2014 Retirement Planning Update In this issue... Review of Budget & Finance Bill 2014 Enhanced Annuities Investment Update Pension Funding as a means of Wealth Extraction Review of Budget and Finance Bill 2014 After a series of negative Budgets, one could be forgiven for dreading the annual Budget speech. From a Pensions & Retirement Planning point of view however, Minister Noonan s speech on 14th October contained no nasty surprises and in a nutshell, the only reference to Pensions was a welcome one in that the Pension Levy, introduced in 2011, will be 0.15% for 2015 and will cease at the end of that year. The Finance Bill published on 23rd October continued the general mood of positivity and contained a few additional pleasant surprises which have been widely welcomed by the Pensions Industry. While we await the Bill to be passed into law (in January), the following are some of the good news stories from a retirement planning perspective: Changes to Approved Retirement Fund (ARF) deemed distribution rates These changes will not apply until 1st January 2015. Where the relevant ARF value is not greater than 2,000,000, the existing deemed distribution requirements will change: Where an individual is not aged 70 years or over for the whole of the tax year, the annual deemed distribution rate is reduced to 4% Where an individual is aged 70 years or over for the whole of the tax year a 5% annual deemed distribution rate applies. The 6% annual deemed distribution rate remains where the relevant ARF value is greater than 2,000,000. Approved Minimum Retirement Fund (AMRF) A new option is being introduced for AMRF holders to draw down up to 4% per annum from their AMRF from 2015. With effect from 1st January 2015, the beneficial owner of an AMRF may draw down up to 4% of the value of the assets of the AMRF each year, subject to taxation at the marginal rate. At present the only withdrawal allowed from an AMRF is limited to the income or gains from the investment of the original capital in the AMRF. Alan Casey Retirement Planning Specialist Continued... Bank of Ireland Private Banking 1 1

December 2014 Chargeable Excess Tax on Standard Fund Threshold The amount by which an individual s pension fund exceeds the Standard Fund Threshold (or Personal Fund Threshold if applicable) when crystallised, is known as the Chargeable Excess. The current specified rate of Chargeable Excess tax of 41% is being reduced to 40% in line with the reduction in the higher rate of income tax provided for in Budget 2015. This amendment takes effect from 1st January 2015. Other Changes of Note The Bill proposes changes to how the Standard Fund Threshold works where there is a Pensions Adjustment Order in place (following Divorce / Legal Separation) so that the member and non-member spouse will share in an equitable manner any tax charge arising where the Standard Fund Threshold (or a Personal Fund Threshold if applicable) has been exceeded. Currently the member spouse bears the full tax charge even if the non member former spouse has transferred their entitlement to an arrangement in their own name. Opinion The reduction in the annual ARF deemed distribution to 4% for those aged between 61 and 70 is a welcome development. The present 5% requirement places additional pressure on ARF investors to generate investment returns equal to the rate of drawdown, if they wish to preserve their initial capital investment over the long term. Dropping the requirement to 4% will allow investors to either take a slightly less risky approach to their ARF investments or to generate returns in excess of the income requirement on a comfortable basis, to gain the benefit of compounding returns over time. The ability of AMRF investors to draw an income from their capital invested will help those in need of additional income. It may well give post retirement investors an extra option as to what type of investment fund they wish to draw an income from. The reduction in the Chargeable Excess tax in line with the reduction in the top rate of income tax is a common sense approach. With the Minister hinting at future reductions in the marginal rate of income tax, we could possibly expect a corresponding reduction in the Chargeable Excess tax in future years. The Pension Levy has contributed significantly to the coffers of the government since its introduction in 2011. Its abolishment at the end of 2015 is greatly welcomed. It will mean that from 2015 onwards, investment returns on pension funds will return to a truly tax exempt status. With no similar reduction in the rate of DIRT or Capital Gains or Acquisition Taxes announced this year, the importance of pension funding as a long term tax efficient savings strategy is reaffirmed. 2

Retirement planning Enhanced Annuities Deciding what to do with your accumulated pension fund at retirement can sometimes be a difficult decision. There are a range of options available. Everyone is different, and each person s individual circumstances will shape their decisions. An annuity works by you transferring part or all of your pension fund to an insurance company. In return, the insurance company guarantees to pay you a pension for the rest of your life. Annuities are most suitable if you: want a secure, stable and guaranteed amount of pension during your retirement are concerned with having an adequate amount of pension if you live for a long time during your retirement want the option to pass on a pension to your spouse or dependants after you die. An Approved Retirement Fund (ARF) is an investment arrangement from an approved provider that allows total flexibility in terms of how you use your pension fund. Approved Retirement Funds are most suitable for you if you: want to keep control and own your pension fund when you retire want flexibility around the income you draw from your fund in retirement want the option to pass the fund you have built up on to your dependants after you die; and have other sources of regular income to protect you if returns from investment markets are poor. One significant negative associated with annuities in recent years is cost (the annuity rate). The current low interest rate environment along with improvements in longevity, have resulted in annuities becoming increasingly more expensive in recent years. Traditionally, health has never been a factor considered by life assurance companies when calculating retirement annuity rates. Two 60 year olds retiring on the same day with the same retirement fund will be quoted the same annuity rate. The life assurance company, traditionally deciding that on average a 60 year old will live for say 20 more years and this is the potential length of time they will have to pay the guaranteed income for. In reality, if one of the individuals has a underlying medical issue or history, the probability is that both annuities will not be paid for the same period of time. A new annuity product which has been available overseas but has now just arrived on our shores is the concept of the Enhanced Annuity. With the Enhanced Annuity, the life assurance company assesses an individual s health and will give a quote based on individual health circumstances. Unlike traditional insurance where an underlying medical condition may go against you, with an Enhanced Annuity these factors might actually be able to provide you with a better annuity rate. Advice is critically important in making any retirement decision. One should take care in deciding whether the annuity or ARF option is most suited to your own particular needs and circumstances. If you are interested in exploring the annuity route, and for example, your weight, cholesterol or blood pressure might not be what it should, you may qualify for an improvement on the traditional annuity rate you would normally be quoted. If you would like more information on Enhanced Annuities or the range of retirement options generally, please contact your Private Banking Relationship Manager. 3

December 2014 Investment Update 2014 to date has seen global growth continue to be solid if unspectacular with markets overcoming temporary periods of volatility to post good returns to investors. Despite some mixed economic news, ongoing monetary support from central banks particularly from Europe and Japan has helped to sustain risk appetite. Overall, the economic picture looks healthy in the US with improving fundamentals in terms of employment, earnings, and corporate activity. The picture is more mixed in Europe with hopes of a growth pickup being dashed over the last few months, with particular disappointment around German growth numbers. Locally, the news is much better with the Irish economy set to deliver very strong economic growth in 2014, making it one of the star performers in Europe once again. Rewards to Euro based equity investors have been very healthy with a return of 18.3% for MSCI World. However, currency appreciation was a big driver of this return with the Euro Dollar rate falling 9.4% alone this year. Locally, returns have been solid with 13.3% (ISEQ) for Irish equities and 9.1% for European equities (MSCI Europe). The most surprising outcome perhaps this year has been the strength of bond markets which was not in most people s central case at the beginning of the year. Global bonds returned 7.2% year to date with European bonds posting even stronger returns at 11.9% for the Barclay Treasury index. The lack of inflationary pressure in major economies, as well as the ongoing hunt for yield, appears to have been the big driver of this performance. The big losers this year have been in the commodity space with oil down in excess of 30% over this year in dollar terms. As we look forward into 2015, we expect the global economy to continue to grow at circa 3% to 3.5% with the US being the engine of growth of the developed regions. Risks as always abound whether it is recessionary fears in Europe or a more significant growth slowdown in China. Overall we feel these risks are not excessive and investors continue to be paid reasonably to take on equity exposure. We have maintained relatively high equity weights across portfolios throughout the year and don t expect to alter too much in the short-term. This has been a good strategy over the year but counteracted somewhat by our cash weighting in lieu of bonds which has been a detractor. Tax Exempt Retirement Portfolio (TERP) Performance Table 2013 Returns 2014 Return to 30th November Exempt Conservative 6% 7.8% Exempt Balanced 10.6% 9.1% Exempt Dynamic 14.6% 10.7% Exempt Global Equity 19.1% 12.2% Core Plus Property -5.8% 12.1% Pension Cash -0.6% -0.5% 4

Retirement planning TERP Asset Allocations PBIS Conservative Fund Asset split as at 31st October 2014 35.6% 32.4% 20.5% 11.5% Equities Fixed Interest Alternatives Cash PBIS Balanced Fund Asset split as at 31st October 2014 56.7% 20.7% 13.9% 8.7% Equities Fixed Interest Alternatives Cash PBIS Dynamic Fund Asset split as at 31st October 2014 77.4% 11% 7% 4.6% Equities Alternatives Fixed Interest Cash 5

December 2014 Tax Exempt Investment Selection (TEIS) Our pre-2006 investment platform comprised a mix of funds from New Ireland, Zurich Life and Friends First. Below is a table of updated performance numbers for the most popular funds. 2013 Returns 2014 Return to 30th November New Ireland Pension Managed 16.2% 11% New Ireland Pension Gilt -2.4% 17.9% New Ireland Pension Equity 21.3% 9.9% New Ireland Pension International 20.1% 9.8% New Ireland Pension Property 1.6% 26.5% Friends First Mixed 15.8% 16.4% Zurich Life Dynamic 19.3% 14.5% Pension Funding as a means of Wealth Extraction Much of the wealth of company directors in Ireland is tied up in the fortunes and assets of their companies. It is however difficult sometimes, for directors to extract wealth from their business into their own name in a tax efficient manner. A taxexempt retirement planning structure can help with this process. 6

Retirement planning The illustration below compares how company profits or assets are taxed on transfer out of the company to the Director or their family, as opposed to implementing a tax-efficient retirement planning structure as an alternative. Your Company Retirement Planning Structure Profits Subject to Corporation Tax Transfer profits before Corporation Tax Income & Capital growth Tax Free Creditor Free Salary: PAYE - 41% USC - up to 7% PRSI - 4% Car: BIK 30% Dividends: Tax up to 41% Sell Shares: CGT up to 33% Death: CAT up to 33% 25% retirement lump sum ( 200k tax free) Balance to provide: Income for life Income for spouse Transfer to next generation Profits generated by the company are subject to Corporation Tax whilst profits or assets transferred to the Director personally are also liable to a variety of taxes (depending on how the transfer arises e.g. by way of Salary, Dividends, sale of Shares etc.). On the other hand company funds transferred to a tax-exempt Retirement Plan are free from Corporation Tax and are not taxed as BIK in the hands of the Director. Within the Pension Fund the capital accumulates tax-free (i.e. no income or capital gains tax). On encashment of the Retirement Plan, 25% of the accumulated fund can be taken by the individual as a lump sum (the first 200,000 being tax-free and the next 300,000 being taxable at only the Standard Rate of Income Tax, 20%), whilst the balance can be invested in a uniquely tax structured asset (ARF) either to provide income and/or as part of tax effective transfer of assets to the next generation. Extracting Company funds in this way means that the Director does not have all their financial eggs in the one basket. If for any reason the Company failed in the future, the pension assets are secure from creditors. The current maximum pension fund that any one individual can accumulate by retirement age is capped at 2m (subject to certain conditions). Exempt Approved Pension funding arrangements have a number of tax advantages therefore for Company Directors: Company contributions are treated as a trading expense for corporation tax purposes Company contributions are not taxable as BIK in hands of the directors There is no tax on any income or investment growth within the pension fund On retirement up to 25% of the accumulated fund can be taken as a lump sum, with the first 200,000 being tax-free. If you already have a Retirement Plan in place, it is important to regularly review it to make sure it can still meet your needs in the future. If you would like to discuss your Retirement Planning options or future funding potential, please contact your Private Banking Relationship Manager. 7

Bank of Ireland Private Banking Limited 40 Mespil Road, Dublin 4 +353 1 637 8600 Fax: +353 1 637 8700 Dockgate House, Dockgate, Galway +353 91 566 301 Fax: +353 91 565 437 32 South Mall, Cork +353 21 425 1527 Fax: +353 21 425 1539 www.privatebanking.ie Online Access You can find out more about our retirement planning service on our website at the following address: https://privatebanking.bankofireland.com/our-products/retirement-planning You may have already received a password on the cover letter which accompanied your half yearly reporting documents. If you no longer have this information you can access the premium level of the website with the following password: PNPB12 To help you login to the website, enclosed is a user guide to accessing the premium content. If you have any problems accessing the website or any questions in relation to this update, please contact your Relationship Manager. Fund Performance, Manager Performance and the Performance Chart figures are net of management fees. For more information on the fund please refer to your financial plan and the IMPORTANT INFORMATION ABOUT YOUR POLICY document. Disclaimers Bank of Ireland Private Banking Limited (BOIPBL) believes any information contained in this document to be accurate but BOIPBL does not warrant its accuracy and accepts no responsibility whatsoever for any loss or damage caused by any act or omission made as a result of the information contained in this document. Any investment, trading or hedging decision of a party will be based on their own judgement and not upon any view expressed by BOIPBL. You should obtain independent professional advice before making any investment decision. Any expression of opinion reflects current opinions of BOIPBL as at December 2014. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. This publication is based on information available as at December 2014. For private circulation only within the Bank of Ireland Group. Not to be reproduced in whole or in part without prior permission. For terms and conditions of any of the products described, please contact your Private Banking Manager. Bank of Ireland Private Banking Limited is regulated by the Central Bank of Ireland. Bank of Ireland Private Banking Limited is a member of Bank of Ireland Group. The Private Banking Investment Selection is a unit-linked policy underwritten by New Ireland Assurance Company plc ( NIA ). New Ireland Assurance Company plc is regulated by the Central Bank of Ireland. NIA is a member of the Bank of Ireland Group. RC179-14