Monday, August 8, 2011

Pension Anomaly - Tax-Free-Cash and Guaranteed Annuity Rates

Under current pensions rules a person with a mix of multiple Personal Pensions (RACs) and PRSAs, that elects to draw down the 25% tax-free cash, must take this percentage from each individual policy.

If none of the policies had a guaranteed annuity rate (GAR), this would not make any difference to the policyholder.

However, if a GAR applied to one (or more) of the policies then you could be put at a financial disadvantage if your preference is to take the maximum tax-free cash (TFC) and buy an annuity with the balance.

The best way to illustrate this is by way of an example:

€300,000 in a GAR product with annuity rate of 11.11%
€100,000 in a non-GAR product

1. Current rules dictate that you take €75K from GAR product and €25K from non-GAR product, giving you total tax-free cash of €100K. You would then get a pension of €24,997 from GAR product and €4,218 from non-GAR product (buy annuity on open market) Total = €29,215 per annum

2. If you were allowed to take 25% of the total aggregate fund (€100K) from the non-GAR product alone, you would get a pension of €33,330 per annum

Option 1. would put you at a financial disadvantage to the tune of €4,115 per annum

If this anomaly applies to your pension contracts, you (or your advisor) should write to the retirement benefits section of Revenue and ask for a ‘concession’ by outlining the full details of the policies to show how you might be put in a disadvantageous position by being forced to take 25% of each individual policy.

If you (or your advisor) don’t ask, you shall not receive.