For Broker Use Only Pension Technical Services Bulletin Volume 1, Issue 1 February 2015 In this issue... Welcome to a new initiative from the recently established Pensions Technical Services Team. Our contact details can be found at the end of this bulletin. In these regular Pensions Technical Bulletins we aim to cover pension related topics that will assit you in responding to your clients queries. In our first communication, we focus on the Finance Act 2014 which was signed into law on 23 December 2014. While Budget 2015 did not contain many pension related issues, Finance Act 2014 contained some measures in relation to ARFs, AMRFs, vested PRSAs and Pension Adjustment Orders and we now present below some Q&As in relation to these changes. Richard Hales Service Manager Pensions Technical Services richard.hales@aviva.ie
Frequently Asked Questions (FAQs) Q1. What are the new AMRF Withdrawal Facilities? From 1 January 2015, AMRF customers are entitled to make a withdrawal of up to a maximum of 4% of the AMRF value in any one tax year. This withdrawal will be subject to income tax, USC & PRSI (where applicable). The 4% withdrawal will be calculated in line with the value of the policy at the time of the payment or transfer. Example 1 Aoife has an AMRF valued at 68,000 on 1 May 2015. She can withdraw up to 2,720 ( 68,000 x 4%) from her AMRF in 2015 based on a price date of 1 May 2015. Any withdrawal made will be subject to income tax, USC & PRSI (where applicable). She doesn t have to make a withdrawal from her AMRF if she doesn t want to as it is just an option for AMRF customers since 1 January 2015. Please note that the 4% a year withdrawal is the maximum amount that can be withdrawn from the AMRF in any one year. Should a customer be in a position where the growth accumulated on the AMRF policy is in excess of 4% of the value of the policy at the date the withdrawal is requested, the maximum that can be taken is still 4% (even if the growth is in excess of 4%). Please note that this 4% withdrawal facility does not apply to the ring-fenced amount in a vested PRSA. Vested PRSA customers are still entitled to make withdrawals equal to the growth above their restricted fund* amount. Example 2 Sean has an AMRF where the initial contribution of 63,500 was invested in June 2013. The fund he has invested in has performed well and its current value is 98,000. In the previous AMRF withdrawal regime Sean would have been able to withdraw the growth on the AMRF which is 34,500 ( 98,000 less 63,500), subject to income tax, USC & PRSI (where applicable). However, under the current legislation the maximum Sean can withdraw in 2015 is 3,920 ( 98,000 x 4%). *The restricted fund is the value of the vested PRSA above the AMRF requirement, where applicable. Page 2
Example 3 In example 3 the value of the AMRF fund has dropped to 50,000 from its initial contribution amount of 63,500. In the previous AMRF withdrawal regime, Sean would not be able to make any withdrawals from the AMRF as the current value has dropped below the initial capital amount (i.e. there is no growth on the policy). However, under the new legislation Sean can make a withdrawal in 2015 of 4% x current value regardless of whether there is growth or not. Therefore, in this example Sean can make a withdrawal of 2,000 ( 50,000 x 4%). Q2. Is this 4% withdrawal subject to the Imputed Distribution? No, the 4% withdrawal on the AMRF is not subject to the Imputed Distribution. However, AMRF withdrawals can be offset against ARF imputed distribution if both the ARF & the AMRF are held with the same provider. Example 4 AMRF customer, aged 64, with a current value of 60,000 at 1 May 2015 takes a withdrawal at this date of 2,400 ( 60,000 x 4%). The same customer has an ARF (with the same provider as where the AMRF is) and with a value of 100,000 at 30 November 2015 The ARF Imputed Distribution applying in 2015 will be 4% x 100,000 less 2,400 = 1,600 Q3. How can a policy holder withdraw this 4% amount? The payment can be made to a customer on receipt of the appropriate withdrawal instruction. The withdrawal of up to 4% of the AMRF value can be made on one occasion only in each tax year; i.e. a customer cannot request 2% in February and a subsequent 2% in September of any one tax year. Page 3
Q4. What are the ARF & vested PRSA changes with regard to Imputed Distribution? The imputed distribution rate of 5% applying to ARFs and vested PRSAs above the restricted fund* will be reduced in 2015 to 4% for those individuals under age 71 throughout the whole year and who have total ARFs and vested PRSAs of less than 2 million. Therefore the imputed distribution rates applying in 2015 will be: Age throughout 2015 Total ARF & vested PRSA funds are 2 million or less Total ARF & vested PRSA funds are greater than 2 million Less than 61 Nil Nil 61 to 70 4% 6% 71 and over 5% 6% Existing ARF and vested PRSA holders under age 71 who are currently drawing down at 5% per annum can either keep this rate of drawdown or drop down to the new lower minimum of 4% per annum. There is no change to the 30 November valuation date. Q5. What are the changes to the way tax is applied on a Member Spouse where a Pension Adjustment Order exists and a Benefit Crystallisation Event (BCE) occurs? Where an individual, who has a Pension Adjustment Order (PAO) made over their retirement benefits, takes his or her benefits and a chargeable excess tax liability arises, the tax liability will now be shared between the individual and the beneficiary of the PAO (usually his or her ex-spouse), in the same proportion as the PAO splits the benefits. Up until this change, the full chargeable excess tax liability rested with the member spouse and the beneficiary of the PAO had no chargeable excess tax liability, even though the beneficiary of the PAO has a share of the retirement benefits. Page 4
Example 5 A pension fund matures in June 2015 with a value of 3 million. There is a Pension Adjustment Order over this pension fund which provides 40% of retirement benefits to the non-member spouse. The member spouse has a Personal Fund Threshold of 2.3 million & the non-member spouse has a Standard Fund Threshold of 2 million. Under the new legislation, the member spouse matures a pension fund totalling 3 million. Calculation of Chargeable Excess Tax (CET): ( 3 million less 2.3 million) x 40% = 280,000 The CET split now follows the non-member spouse: - Member spouse: 1.8m/ 3m x 280k = 168,000 - Non-member spouse: 1.2m/ 3m x 280k = 112,000 280,000 Example 6 A pension fund matures in August 2015 with a value of 1.8 million. There was a Pension Adjustment Order awarded to the non-member spouse and they elected to transfer their benefit outside of the member spouse s fund with the result that a transfer value of 1 million was made to non-member s pension arrangement some years ago. Both the member & non-member spouse have Standard Fund Thresholds of 2 million. The pension fund would have been 3million if the PAO transfer value was never made and as a result, under new legislation, the member spouse matures a pension fund totalling 3 million. Calculation of Chargeable Excess Tax: ( 3 million less 2 million) x 40% = 400,000 The CET split now follows the non-member spouse: Member spouse: 1.8m/ 2.8m x 400k = 257,000 Non-member spouse: 1m/ 2.8m x 400k = 143,000 400,000 Page 5
Q6. What are the changes to tax on excesses over the 2 million Standard Fund Threshold (SFT)/Personal Fund Threshold (PFT)? Previously the tax rate applying to the excess over the SFT was at a specified rate of 41%. From 1 January 2015 the rate will be at the higher rate of income tax for the tax year in which the retirement claim is made. As such the rate for 2015 will be 40%, and going forward any changes to the higher rate of income tax will automatically apply to excesses over the SFT /PFT. Example 7 The SFT is 2 million. Michael becomes entitled to retirement benefits from a fund worth 3 million. He has no entitlement to any other benefits. The Benefit Crystallisation Event (BCE) is Michael s claims on his retirement benefits. The value to be taken into account is the full value of the pension fund inclusive of any tax free lump sum entitlement. Michael s fund exceeds the SFT by 1 million. Tax is chargeable at 40% on the excess of 1 million. This tax is payable by the fund administrator (which in our case would be Aviva Life & Pensions Ireland). Page 6
The information contained in this document is based on Aviva Life & Pension Ireland s understanding of legislation as at January 2015 which may change in the future. Pensions Technical Services Team Contact Details: Team Mailbox: PensionsTechnicalServices@aviva.ie Hunt Number: 01 775 6306 Richard Hales Service Manager E: richard.hales@aviva.ie T: 01 898 6346 Colette McCarthy Pensions Administrator E: colette.mccarthy@aviva.ie T: 01 898 6425 Angela Ward Pensions Administrator E: angela.ward@aviva.ie T: 01 898 8411 Christina McCartney Pensions Administrator E: christina.mccartney@aviva.ie T: 01 898 7675 Sean McMahon Pensions Administrator E: sean.mcmahon@aviva.ie T: 01 898 6356 Page 7
Warning: The value of your investment may go down as well as up. Warning: If you invest in this product you may lose some or all of the money you invest. Warning: If you invest in this product you will not have any access to your money before you retire. Warning: The income you get from this product may go down as well as up Warning: These products may be affected by changes in currency exchange rates. Warning: Withdrawals and switches from funds investing directly or indirectly in property may be deferred for up to 6 months. Warning: Withdrawals and switches from all other funds may be deferred for up to 3 months. Aviva Life & Pensions UK Limited, trading as Aviva Life & Pensions Ireland, is authorised by the Prudential Regulation Authority in the UK and is regulated by the Central Bank of Ireland for conduct of business rules. Aviva Life & Pensions UK Limited, trading as Aviva Life & Pensions Ireland, is also regulated in the UK: by the Prudential Regulation Authority for prudential rules and, to a limited extent, by the Financial Conduct Authority for applicable UK conduct rules. Registered Branch Office in Ireland (No 906464) at One Park Place, Hatch Street, Dublin 2. Tel (01) 898 7000 Web www.aviva.ie Registered in England (3253947) at 2 Rougier Street, York, YO90 1UU. Telephone calls may be recorded for quality assurance purposes. 3.434.02.15