BUDGET SUMMARY FOR PUBLIC SECTOR EMPLOYEES Inside is a quick outline of how the budget affects public sector employees and examples of the difference it will make to their take home pay. As the days progress, we will bring members further updates. If members want specific advice on how the Budget affects their salary/household income, they can contact Cornmarket on (01) 408 4162 today. We have a dedicated team who are equipped with specialist software and post budget calculators to analyse all the areas of their finances.
1. PENSIONS State pension There will be no reduction in the State Pension in 2011. Croke Park agreement extension Any Public Sector employee who retires before the end of February 2012 will have their pension and tax free lump sum based on their 2009 salary i.e. before the government reduced the Public Sector pay in 2009. (Any Public Sector employee who retires from March 2012 will have their pension and Tax Free Lump Sum based on their current reduced salary). Tax Free Lump Sum CAP The overall life-time limit on the amount of tax-free retirement lump sums that an individual can draw down from pension arrangements is being reduced to 200,000. Any lump sum paid in excess of this amount will be taxed at the standard income tax rate (currently 20%) up to an amount equal to 575,000. Any lump sum over this amount will be taxed at the taxpayer s marginal rate of income tax. Tax-free retirement lump sums taken on or after 7th December 2005 will count towards using up the new tax free amount so that if an individual has already taken tax free retirement lump sums of 200,000 or more since 7th December 2005, any further retirement lump sums paid to the individual on or after 1st January 2011 will be taxable. Pension CAP Pensions will be capped at 115,000. Very few public sector employees will be affected by this cap. New pension scheme for new Public Sector entrants A new single pension scheme for new entrants will come into effect in 2011, with pensions based on career average earnings rather than final pay. The pension age will be increased; and post-retirement increases will be linked to retail price inflation rather than pay. Tax Relief Pensions (Superannuation, Notional Service, AVC s and PRSA AVC s) will continue to get the same full tax relief in 2011 as they did in 2010. This is good news for AVC members and means that they can continue to avail of attractive tax breaks. Employees who receive relief at the top rate of tax will still receive their full 41% tax relief for 2011. Therefore, if members can afford to invest extra money into their AVC and have the tax relief scope to do so, now is the time to do it. Please note: From 1st January 2011 pension contributions will not receive relief from PRSI or from the new Universal Social Charge. For most employees, this reduces relief by 4.9% ( PRSI) or 8% ( PRSI). Proposed change for 2012 2014 The National Recovery Plan details the intention to reduce the tax relief for top rate tax payers from 2012 to 2014. The plan is to reduce the rate by 7% each year so we will see tax relief reduce from 41% in 2012 to 20% in 2014. Year Projection of reduced Tax relief 2010 41% 2011 41% 2012 34% 2013 27% 2014 20% Example Relief in 2011 Relief in 2014 AVC Contribution 1000.00 1000.00 Less tax relief for top rate taxpayer 410.00 200.00 Real cost to you for every 590.00 800.00 1,000 you invest! Please note that the Government have stated in the plan that they are willing to engage with the [Pension] industry to examine alternatives to this. Some opposition parties have indicated that they are not happy with this new arrangement and if they were in government they would continue to allow tax relief remain at current levels. The removal of PRSI relief in 2011 may mean that AVC members who will pay tax in retirement on their AVC at the same (or higher) rate as the relief they receive while contributing to their AVC should seek advice regarding their AVC as it may be in their interest to only fund for their tax free lump sum shortfall and they may have to reduce or stop their AVC. If an AVC member will pay tax in retirement at a lower rate than the relief they receive while contributing to their AVC they should continue to pay into their AVC to avail of this relief (affordability allowing). Pension reduction for RETIRED Public Sector employees Retired Public Sector employees whose superannuated pension is over 12,000 per annum will see their pension reduced on average by 4% (see table below for actual reduction rates). Our understanding right now is that this reduction will also apply to any supplementary pension a Public Sector employee may be in receipt of from their employer. As previously stated, there will be no reduction to the state pension. The reduction will apply to existing beneficiaries of public service pensions and those who retire between now and February 2012. PLEASE NOTE: The reduction will not be applicable to any public sector employee who retires after February 2012. To protect those on low pensions, the first 12,000 of public service pension will be entirely exempt: all public service pensions which are equal to or less than this amount will not be reduced. Annual public service pensions above this level will be reduced in accordance with the following rates and bands: Annual Public Reduction Service Pension rate % First 12,000 0% Between 12,001 and 24,000 6% Between 24,001 and 60,000 9% Balance above 60,001 12%
Example: Pension Annual reduction Annual reduction before reduction to pension to pension % 12,000 0 0% 15,000 180 1.2% 25,000 810 3.2% 30,000 1,260 4.2% 40,000 2,160 5.4% 80,000 6,360 8.0% Please note: It is our understanding at the date of going to print that these deductions will only apply to the portion of your pension paid by your former employer. Any payments made by the Department of Social Protection e.g. State Pension will not be included when calculating the reduction rate on your total pension. We are waiting for further clarification on this matter. Change in Pension Contribution limit The annual earnings limit which (along with age-related percentage limits) determines the maximum tax-relievable contributions for pension purposes is being reduced from 150,000 (2010) to 115,000 for 2011. Please see table below which compares the 2010 and 2011 Maximum Tax-Relievable pension contributions according to age. <30 30-39 40-49 50-54 55-59 60+ 2010 22,500 30,000 37,500 45,000 52,500 60,000 2011 17,250 23,000 28,750 34,500 40,250 46,000 Maximum allowable pension funds The maximum allowable pension fund on retirement for tax purposes (known as the Standard Fund Threshold (SFT)), was reduced from 5.4 million to 2.3 million from 7 December 2010. This should not effect Public Sector Employees. Approved Retirement Funds* Public sector employees who have an AVC or PRSA can at retirement choose to invest some of their AVC fund in an Approved Retirement Fund (ARF). Before the Budget, to invest some of your AVC in an ARF, you had to have a guaranteed income of 12,700 per annum. However following the budget, this figure has been increased to 1.5 times the maximum rate of the State pension (Contributory) bringing the guaranteed income requirement closer to 18,000 per annum. If you do not have the guaranteed income required at the time of retirement, you must invest approximately 120,000 (10 times the rate of State pension) in either an Approved Minimum Retirement Fund (AMRF) or an annuity (pension). This figure used to be 63,500. The essential difference between an AMRF and an ARF is that while you can make a withdrawal net of tax from an ARF at any time, you cannot withdraw any of the capital you ve invested in an AMRF (although you may make withdrawals of any interest earned) until you reach age 75. The Government s logic in setting this rule is that, if you are on a low pension, you should invest your lump sum for the longer term (i.e. in an AMRF) rather than be tempted to spend it in the years immediately after retirement. Up until now, once the AMRF was set up, there was no further income test so the money invested in an AMRF remained there until the AMRF holder turned 75 and the AMRF expires (you could of course access any interest earned on the AMRF). The Budget 2011 will now allow someone who has invested in an AMRF to transfer into an ARF at any stage before 75 years of age once they meet the guaranteed income requirement (approx. 18,000 or whatever amount applies at that point in time). It also announced a transitional measure that they will allow current AMRF holders to transfer to an ARF over the next 3 years once they meet the 12,700 figure rather than the new increased figure. The actual dates relating to these ARF/AMRF changes have yet to be announced. An ARF is an investment fund with the potential to earn attractive returns over the years. You can control the money in your ARF and leave it to your dependants when you die if you wish (you can t do this with a pension). You can also draw down some or all of the money in your ARF at any time subject to income tax and the Universal Social Charge(at the standard rate which reduces to 4% at age 70). Going forward the Revenue will assume that you have withdrawn 5% of your ARF whether in fact you have withdrawn this money or not. The % was previously 3%. In other words, Revenue will require that tax be paid on the amount they assume you have withdrawn i.e. 5%.
2. SALARY AND PERSONAL TAXES Pay Public Sector pay will not be cut but salary will be capped at 250,000. New Public Sector recruits All new recruits to the entry grades of the public service must start at the first point of the relevant new entrant pay scale (i.e. 10% less that the existing pay scale) without exception. However, it appears that if a member joined the Public Sector for the first time but worked abroad previously in a similar role, there is a reciprocal arrangement across EU countries regarding incremental credits. This means the member will go on to the appropriate point of scale relevant to their service. If they worked outside the EU, the maximum number of increments they can receive for work outside of the EU is 7 increments irrespective of service. Reduction in credits The value of tax bands and tax credits will be reduced by 10%. Universal Social Charge Income and health levies to be replaced by a single Universal Social Charge (USC). Please note, if a members salary is less than 4,004 they are completely exempt from the USC. For those on salaries more than 4,004 the rates are set out in the table below. % of Salary Payable Income (tiered) % OF SALARY PAYABLE Salary of less than 4,004 Exempt 0-10,036 2% (once salary exceeds 4,004) 10,037-16,016 4% Further earnings over 16,016 7% PRSI The employee PRSI contribution ceiling of 75,036 will be abolished and members will pay the contribution on all their earnings. Public servants paying PRSI will pay 4% of their income on earnings in excess of 75,036, an increase from 0.9% on earnings up to 75,036. Please see tables below. Example 1: Class Standard contribution rate of PRSI from 1st January 2011 Per week EmPLOYEE Employer PRSI Contribution (%) PRSI Contribution (%) First 127 0% 10.75% Balance 4% 10.75% This covers Public Servants recruited from 6th April 1995 and employees in industrial, commercial and service-type employment with reckonable pay of 38 or more per week from all employments Example 2: Class Public Sector employment rates of contribution form 1st January 2011 Per week EmPLOYEE Employer PRSI Contribution (%) PRSI Contribution (%) First 26 0% 2.35% 27-1,443 0.90% 2.35% Balance 4% 2.35% This covers permanent and pensionable employees in the public service recruited before 6th April 1995. 3. Others CHILDCARE & STUDENTS Third-level registration student s charges are to rise from 1,500 to 2,000. The higher Student Services charge will only apply to one child in a family at any one time. Student grants are to be cut by 4% 10 reduction in level of child benefit for each child with a further 20 reduction for a third child and a further 10 reduction for any subsequent children. STAMP DUTY CHANGE A flat rate of 1% stamp duty will apply on all sales of residential properties up to a value of 1m. A stamp duty charge of 2% will apply on the value over 1m. These new rates will apply to transfers on or after 08 December 2010 subject to transitional provisions Child Benefit Monthly Levels Now 2011 One child 150 140 Two children 300 280 Three children 487 447 Four children 674 624
EXAMPLE OF HOW THE BUDGET WILL AFFECT THE TAKE HOME PAY OF PUBLIC SECTOR EMPLOYEES Pension Figures assume Superannuation, Spouse & Children, and Pension Levy. Example 1 - Public Sector Employee Single, no children earning 35,000. Assuming pension contribution made of 3,187 Income Tax 2,703 3,063 2,703 3,063 PRSI 1,008 1,136 274 303 Income Levy 1,973 0 1,973 0 Universal Social Charge 0 1,769 0 1,769 Total 5,684 5,968 4,949 5,134 Difference - 284 ( 5.46pw) - 185 ( 3.55pw) Example 2 - Public Sector Employee Married couple, one income, two children total earnings 70,000. Assuming pension contribution made of 6,487 & home carers tax credit being granted Income Tax 10,116 11,502 10,116 11,502 PRSI 2,276 2,536 559 618 Health Levy & Income Levy 3,941 0 3,941 0 Universal Social Charge 0 4,219 0 4,219 Total 16,333 18,257 14,616 16,339 Difference - 1,703 ( 32.75pw) - 1,502 ( 28.88pw) Example 3 - Public Sector Employee Married couple, two incomes, no children, 50,000 each - total earnings 100,000. Assuming pension contribution made of 3,000 each - total 6,000. Income Tax 15,932 18,164 15,932 18,164 PRSI 3,232 3,472 822 875 Income Levy 5,760 0 5,760 0 Universal Social Charge 0 5,638 0 5,638 Total 24,924 27,273 22,514 24,677 Difference - 3,391 ( 65.21pw) - 3,204 ( 61.61pw) Example 4 - Public Sector Employee Single, earning 60,000. Assuming pension contribution made of 5% & 6.5% Income Tax 12,066 13,182 11,697 12,813 PRSI 2,016 2,136 493 528 Income Levy 3,480 0 3,444 0 Universal Social Charge 0 3,519 0 3,519 Total 17,562 18,837 15,634 16,860 Difference - 1,275 ( 24.51pw) - 1,226 ( 23.57pw) Example 5 - Public Sector Employee Married couple, two incomes, no children, 75,000 each - total earnings 150,000. Assuming pension contribution made of 12,000 each - total 24,000. Was Now Was Now Income Tax 29,052 31,284 29,052 31,284 PRSI 4,512 5,472 1,110 1,326 Income Levy 8,040 0 8,040 0 Universal Social Charge 0 9,138 0 9,138 Total 41,604 45,894 38,202 41,748 Difference - 4,290 ( 85.50pw) - 3,546 ( 68.19pw) Example 6 - Retired person Single, pension of 30,000. (Public Sector Retiree) was Now* Income Tax 2,340 2,448 PRSI 0 0 Income Levy 1,800 0 Universal Social Charge 0 1,331 Total 4,140 3,779 Difference - 361 ( 6.94pw) * Includes the pension deduction for retired public servants Example 7 - Retired person (Both Public Sector Retiree s) Married couple, two pensions, 35,000 each - total earnings 70,000. was Now* Income Tax 6,680 6,922 PRSI 0 0 Income Levy 4,200 0 Universal Social Charge 0 3,298 Total 10,880 10,220 Difference - 660 ( 12.69pw) * Includes the pension deduction for retired public servants.
There may be further changes in the Finance Bill. Every effort has been made to ensure that the information provided in this leaflet is accurate and up-to-date (December 2010). If you notice any errors or omissions please let us know. The information provided is of a general nature and may not address the specific circumstances of a particular individual. Cornmarket does not accept any liability whatsoever arising from any errors or omissions. Christchurch Square, Dublin 8. Tel: (01) 408 4000 Fax: (01) 408 4011 6 Kings Terrace, Lower Glanmire Road, Cork. Tel: (021) 455 3335 Fax: (021) 450 2014 Galway Office Tel: (091) 562 727 E-mail: info@cornmarket.ie Website: www.cornmarket.ie Cornmarket Group Financial Services Ltd. is regulated by the Central Bank of Ireland. Irish Life & Permanent plc is regulated by the Central Bank of Ireland. Telephone calls may be recorded for quality control and training purposes. A member of the Irish Life & Permanent Group 4781 Budget Sum PS employees 12/10