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Pensions & the Government 4 year plan

Pensions & the Government Four-Year Plan

Private Pensions

The main proposals that impact on private pension provision are:

  • All lump sums in excess of €200k will be taxed, probably from Budget Day.
  • In 2011 the Earnings Cap will be reduced from €150k to €115K.
  • Next year will also see the abolition of PRSI & Health Levy relief linked to pension contributions.
  • The Standard Fund Threshold will also be reduced, details in the Budget.
  • The rate of relief for personal pension contributions remains the same for 2011 but proposed reductions are:
Year Reduction
2012 34%
2013 27%
2014 20%
  • There is no indication that the tax treatment of employer contributions will change.
  • There is a very strong hint that the proposed auto enrolment scheme will never happen.

The Government is committed to rising €700m from the pensions sector over the period of the plan and is willing to engage with the industry to examine alternatives to deliver this outcome. This suggests to me that a reduction in the personal relief is not necessarily a done deal.

Turning to pension fund investments, the Government is considering proposals to encourage pension funds to invest in Irish Government Bonds. The NTMA will issue a CPI linked bond next year. The National Pension Reserve Fund will be used to support the Irish Government Bond Market.

Public Sector Pensions

Revised pay and pension arrangements will be introduced for all new entrants. Benefits will be calculated using career average and any pension increases will be linked to CPI. The existing retirement will be raised to link in with the proposed increases in the ages when the state pension becomes payable: 66 in 2014, 67 in 2021 and 68 in 2028. Presumably all private sector schemes will follow suit.

Existing pensions cut as follows:

First €12,000 0%

€12,001 – €24,000 6%

€24,001 – €60,000 9%

above €60,000 12%

Income Tax

The next 4 years will see a reduction of 16.5% in the value of tax credits and tax bands, with 65% of the reductions in 2011. There are other options including a mixture of the above changes to tax rates, PRSI and income levies. Final arrangements in the Budget. On average we will all pay 10% more in 2011.

A number of reliefs will be abolished in 2011 included those linked to trade union subscriptions, rent relief and approved share options schemes. The income tax age credit and age exemptions will be phased out over 4 years.

Social Welfare

Total expenditure will be reduced by €700m and details of rate reductions will be announced in the Budget. We can expect a reduction in the level of state pension payments.

NB Funding rates for Directors pensions are still very attractive.

National Pensions Framework Summary

1. New Auto-Enrolment Scheme – to be introduced in 2014 – subject to economic conditions

• Employees (aged 22 or over) will be automatically enrolled once they enter employment or change employment unless they are a member of their employer’s scheme which must be:
– a DB scheme, or
– a DC scheme with a ‘ee contribution rate greater than or equal to the new scheme and an ‘er contribution rate greater than or equal to the new scheme
• Contributions to the new auto-enrolment scheme will be collected through the PRSI system via a central processing agency.
• Contributions to the new auto-enrolment scheme will be made within a band of earnings which has yet to be decided e.g. must be earning €350 per week and paying contributions on earnings up to €1,000 per week.
• Employees will be required to make a fixed percentage contribution of 4%. Contributions will qualify for PRSI and Health Levy relief.

• There will be matching State contribution of 2% and an employer contribution of 2%. The State contribution will equal 33% tax relief – the delivery mechanism for this has yet to be decided.
• A range of funds, including a low-risk default option, will be available. There will be no Government guarantees on investment returns.
• Employer contribution is mandatory.
• Employees can opt out but they will be re-enrolled every two years.
• Once an employee remains in the scheme for six months, their contribution will be held in a pension account and no withdrawals will be allowed.
• Once-off bonus payment for people who remain in the scheme for more than five years continuously.
• Intended that benefit withdrawals will be similar to PRSAs
• Small DC funds (probably €10,000 but exact figure yet to be agreed) may be transferred into the scheme – no matching contribution from the State or employer will be provided.

2. Current Pension Arrangements – implementation dates not agreed
• The State contribution will equal 33% tax relief – the delivery mechanism for this has yet to be decided. Tax relief on employer contributions and tax-free investment income to remain.
• Access to Approved Retirement Funds will be provided for defined contribution scheme members with effect from 2011.
• Specified income test to be increased from €12,700 to 1.5 times the State Pension (Contributory). AMRF option no longer to apply for new retirees. For existing retirees, the AMRF can become an ARF once the then specified income test is satisfied.
• Tax-free lump sum exceeding €200,000 to be taxed
• The range of personal pension vehicles available will be reviewed with a view to rationalising provision in this area.
• Regulations will be introduced to increase the transparency of pension charges;
• A revised and more secure defined benefit (DB) model is proposed which schemes may wish to consider if restructuring in the future.

3. Social Welfare Pensions
• Mandatory social welfare pension coverage will continue. The Government will seek to maintain the rate at 35% of average earnings.
• The system will be simplified with a move to a total contributions approach in 2020.
• Retirement age for State Pension age will increase to 66 in 2014 [(with the abolition of the State Pension (Transition)], 67 in 2021 and 68 in 2028.
• Arrangements will be put in place to allow people to postpone receipt of the State pension and to make up contribution shortfalls.

4. Public Service Pensions
• A single new pension scheme will be introduced for all new entrants, with effect from 2010.

Is your greatest asset protected?

We don’t usually think of our current income and our future earnings as an asset. However, if you take a moment to think about it, the money you earn pays for almost everything you have….mortgage, car loan, bills, children’s education, insurance and so on. Without it, you are faced with a pretty worrying picture.

Nobody wants to think about what life would be like should disability or illness strike. But the reality is that 1 in 6 Irish people will be out of work for more than 6 months at least once during their career. With those who are out of work the average length of claim is 5.5 years. It is surprising then that we protect ourselves against so many of life’s eventualities, yet so few of us protect our salaries.

This is where an Income Protection plan is so important and is appropriate to anyone earning a salary, both the self-employed as well as other employees, regardless of their age or stage of life. With Income Protection you pay a monthly premium which is based on your occupation and the state of your health. This ensures that in the event of an accident or illness, which leaves you unable to work, the policy will pay you a regular income. As there are no restrictions on the type of injury, illness or disability that an income protection plan policy covers, you get complete peace of mind. Best of all, you get to choose and tailor an income protection plan that suits your individual circumstances, with a range of cover types. What’s more, as your needs and circumstances change, you can adapt your income protection policy to suit changes in your life.

In general, we tend to be overly optimistic about how we would manage if we were unable to work due to illness or injury. We over-estimate sick pay arrangements and the support provided by the State. Some employers will cover sick pay for the first 6 months of illness, however, they are not obliged to. The State Illness benefit for 2009 is only just €10,900. And if you are self-employed you don’t even qualify for this.

The reality for most people is that their level of “outgoings” either matches or exceeds their income. So, for a person who no longer is earning that income there will be a significantly negative impact on their lifestyle. But what can you do to protect your salary?

Take an example of a male, who is a sales rep, 38 next birthday is a non smoker and would like to take out an income protection policy which would pay him €500 per week after a deferred period of 26 weeks and up until age 65. The net cost after tax relief would only be €50.49 per month*. If he were to cover himself to age 60 the quote would be cheaper again.

Income Protection should form a core part of any financial plan.

* Quote used is based on the rates applicable to Friends First Guaranteed protection product as at 13/08/2009

Make your Money Work Harder!

Were you ever disappointed when you got your deposit book updated or received your statement in the post with the amount of interest your bank gave you? We might have a solution!

Interest rates are at an all time low. It is good for those of us who have a mortgage but not so well for those of you who have money on deposit. Low interest rates coupled with an increase in DIRT tax means that it is so important for you to make sure your money is earning as much interest as possible. Below are some keen rates available to you through Flanagan Ford Financial Advisors.

      • Anglo Irish Bank Premium Demand Account (instant access) 3.10% AER
      • Anglo Irish Bank 1 Year Fixed Account 3.80% AER
      • Investec Bank UK (Ireland) Ltd 1 year Fixed account 3.50% AER
      • Permanent TSB 9 Months Fixed account 3.50% AER

      (rates applicable and correct as at 30/07/2009 and are subject to change)

Both Anglo and PTSB are covered under the government guarantee scheme for deposits up until Sept 2010. With Investec bank you have a bank guarantee up to £50,000 Stg.

  • We also have an excellent capital guarantee investment bond over 3 ½ years through BCP. With this investment you are guaranteed to get a 5% return paid back to you on a quarter of your investment amount after 12 months. The remaining 75% of your investment is invested in a basket of 25 shares. You can earn up to 35% on this portion of your investment depending on the average performance of the 25 shares. Click this link to read the key features of this investment http://www.bcp.ie/pdf_docs/June_09/Red_Key_Features.pdf .

If you would like to discuss these options or more please do not hesitate to contact us on 0719159222.

Save yourself money or enhance policy benefits!!!

We mentioned it before in an April blog and we believe very strongly about it so we are mentioning it again.


Reviewing various financial products and policies you own can lead to a saving in valuable euros. In some cases it might lead to enhanced benefits for the same cost but most of all after carrying out a review you will go away fully understanding what you have and how you and your family will benefit from it.

Whether by design or not, some products have names which could in the eyes of the customer, be readily termed as misleading. For example one could be forgiven for assuming that a whole of life policy covered you, based on current premiums, for the whole of your life. Unfortunately, in many situations this is not the case.

3 key ingredients for making sure that the product you have is right for you are;

1. Expertise – deal with a QFA who is truly independent and one that you can trust to build a long term relationship with.

2. Transparency for all parties – in terms of charges but also in terms of product knowledge. What a customer purchases should be exactly what the customer thought they purchased.

3. Alignment of goals – client and advisor working together with a common goal without a conflict of interest.

Products are changing constantly, customer’s needs and circumstances are changing constantly and the financial services industry is changing constantly. Therefore what you took out some years back might have been the right product at the right price then but today you might be able to achieve better terms.

Review the financial products that you have to make sure that none of the following usual suspects are lurking:

· Mortgage repayment protection policies – these policies are meant to safe-guard loan repayments if a borrower loses their job or is unable to work due to illness. This cover can be expensive and there have been very mixed experiences when people have tried to make a claim. Very much a bank product and usually sold as part of the mortgage. In Britain lenders are not allowed to sell these products at the same time as the loan is been agreed to allow people more time to shop around.

· Bid offer charges – A bid offer charge is usually 5% and it means that although your product may have stated a 100% allocation rate, only 95% of your money was invested on your behalf. Many older pension contracts would have this charge while newer ones may not.

· Older products – this is really the be all and end all of why someone should have a financial check up. What was good and competitive in days gone by might not be the case not. Open the old files gather the information and make an appointment.

· Unit linked whole of life products – Even saying it is hard never mind getting an explanation on what it means. It can be sold as a low cost whole of life policy which would be a good thing but in reality the policy is dependent on too many factors to remain “low cost”. How it works is this. Your premiums are paid into an investment fund, with the idea that as you get older and the cost of your cover increases, the future investment gains pay for your protection benefits. What happens when markets fall and to the scale that we have witnessed over the last 18 months? Well the client is hit with an unexpected jump in premium or reduction in benefits which is not good if the purpose of the policy was to cover a mortgage. If you need a protection plan that should last for 20 years or more you are better off with a term product, where you know what you will pay over the period chosen.

· Non disclosure of commission – on some products like company pensions there is no obligation by the intermediary to disclose the commissions being earned. To be on the safe side and so that it will never become an issue into the future, ask for voluntary disclosure. If you don’t get it, it might be something you need to think about.

· Lack of review/update – As mentioned earlier in this article, our financial circumstances are always changing, it only makes sense to review your affairs regularly.

Call us to arrange a review of your financial well being today 0719159222.

Its good to Talk to us!!

We have just been able to save a business client of our €17,000 in annual premiums for a life assurance policy that our client had through his bank.

The client whom for confidential purposes cannot be named was delighted with the out come of his most recent review with us. The main purpose of this client’s review was to look at his pension so see how it was preforming in light of the turmoil in global financial markets as a result of the credit crisis. The client disclosed to us that he had a life policy through his bank. We were able to save him €2100 this year and a further €1140 each year for the next 13 years. We were also able to open a savings account for the client and double the interest that he was earning through his bank.

The client was astonished with the level of savings that was made. He was always told that his bank was looking after him, now he wonders.

How to live on less!!

Review! Review! Review!

A lot of businesses today are reviewing their business model to survive this downturn we are experiencing. One thing that a business can control somewhat is their costs.

Households should also adopt this approach also. On one hand you have your income (call it profit) and on the other hand you have your costs (expenses). Take one from the other and hopefully this is positive. If it is negative you are living beyond your means and you need to change immediately.

You need to cut your costs. Here are some tips to save money.

  • Complete an overall health check and then revise your budget.
  • Cut back on little luxuries until you get bank on track.
  • If you have a debit balance on your credit card, clear it. Look to switch providers and get a 0% rate for 6 months, use the six months to clear your debt. If at the end of the 6 months your debt is not cleared look at taking out a personal loan. The interest rate on a personal loan tends to be less than the interest you are paying on your credit card.
  • Make sure that you are claiming all tax allowances. Eg. Claim your allowance on refuse charges. If you are paying a pension which is not deducted at source through your wages make sure you claim the relief available on what you are paying.
  • Shop around for savings on your car insurance, your house insurance, weekly groceries etc.
  • People are switching their electricity supply from the ESB to Airtricity (www.airtricity.com) or even to Board Gas Energy (www.thebigswitch.ie) who say that they will save you a min of 10% on your electricity. Check it out.

If you can save a little each month, do so and start an emergency fund for the next rainy day.

If when you do the health check and you have excess income over household costs, make a conscious decision to make this money work harder for you. Do not assume that your bank is doing the best for you; it is always good to shop around!!

On a business front and as a result of a review we were able to save a client €17,000 on a life assurance policy that he had with his bank. Now who was the bank looking after?

Some good savings and protection ideas!!

Turn those monthly savings into worthwhile plans and investments!!

Mortgage rates have reduced significantly since last October. As a result clients have come to us to see what should be done with these savings.

For those of you who are paying a mortgage and are currently on a variable rate, you should be around €245 per month better off now than last October.*

*based on a mortgage of €200,000 over 25 years at a rate of 2.75% now and 5% last October

Here are some useful ideas to make you and your family more financially astute and protected.

· If you are married and you now have a family of your own, take out that extra bit of Life Assurance that you have put to the back of your mind. You know that it is the right thing to do.

o A dual life level term policy for €500,000 over 25 years would cost as little as €76.98 per month.* Life assurance is not expensive, living without it could be!

* based on New Ireland’s level term contract for male 35 next birthday and female 35 nb both non smokers.

· Protect your biggest asset – your income! You may have looked at this cover when taking out the mortgage but that’s all you did.

o To cover income of €400 per week it would cost €52.76 per month. * Tax relief is available against this premium.

* based on male 33 nb non smoker and on Friends First guaranteed product deferred for 26 weeks. Occupation class 2 has been used in this illustration

· Start a savings plan now to ensure that when your children decide that they want to go to college you do not need to re-mortgage to cover this cost.

o A savings plan starting with a monthly premium of €150 would amount to apx €41,600 after 15 years assuming 6% annualised growth.*

* based on Eagle Star’s Savings Plus contract

· Start your pension. You are already paying someone else’s pension through the PAYE and PRSI that you pay each week or month. Now do something about your own. Remember for every Euro you save in a pension you will receive tax relief of either 20% or 41% and PRSI relief up to 6%.

o Based on a contribution of €200 per month you could expect to have a retirement fund of circa €227,300 based on a male 35 nb retiring at age 65.*

* Figures based on Hibernian’s Standard PRSA product and 6% annualised growth.

· Start your own AVC plan to boost retirement benefits and save on the amount of tax and PRSI you are currently paying!

· Pay extra off your mortgage and extra €100 per month could mean a reduction of 4 years off the term of your loan.

We would be delighted to sit down to discuss your financial needs and circumstances to devise the best suited plans for you and your family. Please contact Ken O’Neill QFA (Qualified Financial Advisor) on 071 9159222 to make an appointment.