The 0.6% Pension Levy

There has been much negative comment on the introduction of an annual levy on the pension scheme assets of private pension savers. While no one likes paying additional taxes, there has been little or no commentary in the media on providing constructive information on minimising the damage the levy can do to your pension fund.

This levy was flagged in the Fine Gaels ‘Perspectives on Budget 2011 and the 4‐Year Plan’ published last December so it should not come as a great surprise that it would be implemented at some stage. The previous Government had an annual ‘bill’ of €700m for the pensions industry and it was up to them to argue/lobby which method of payment would suit them best.

The levy will apply to the ‘private’ pension assets of Defined Benefit and Defined Contribution Pension Schemes, Personal Pensions (RACs), Pension Retirement Bonds and PRSAs. Currently, it will not impact on the Defined Benefit Schemes of Civil and Public Servants.

The pension industry is pretty stagnant at the moment with many pension savers reducing or stopping their contributions. Those that were considering starting a pension have put it on the long finger. They have more urgent uses for their money and find it difficult to rationalise putting away funds that they cannot access for years to come. The foregoing of tax relief on their contributions is already saving the exchequer money but their current financial needs are more immediate, an indirect benefit to the exchequer.

Some, within the industry will decry the levy as ‘the’ catalyst for the decline in pension savings that will force financial advisors out of business and redundancies within the pension companies: the ebb of pension savings started well before now.

So, rather than describe the water when folk are drowning in a sea of increased costs/charges, why not throw them a lifeline? It’s time for a serious review of your pension.

It is unlikely that the pension providers are going to voluntarily reduce their contribution or annual management charges to offset the cost of the new levy. One of the biggest impediments to the ‘performance’ of a pension fund is the level of charges that are on the contract.

It may be possible to reduce your existing charges by rolling up your sleeves and taking a more proactive role in the choice of pension product and its charging structure. The two main charges on a pension product are a Contribution Charge and the Annual Management Charge. The contribution charge is a percentage of each payment that you (and/or employer) make to your pension: this can be up to 5%. The annual management charge is a percentage of the value of your pension fund that is deducted each year : this can be up to 2%pa.

If you can reduce either of these these two charges you will benefit from an increase in the value of your pension fund and offset some/all of the levy imposed by Government.

Let’s assume that you have €100K accumulated in your pension fund and that you are contributing €500 a month for the next 4 years.

If the Annual Management Charge (inclusive of 0.6% levy) was 1.5% and the contribution charge was 0%, then the estimated value on your fund at the end of 4 years would be €135,632.50*

If the Annual Management Charge was 1.75% (inclusive of 0.6% levy) and there was a contribution charge of 3% on each €500 paid in over the next 4 years, the estimated value at end of year 4 would be €133,413.95*

€2,218.55 in potential savings over 4 years by focusing on charges.

*Assumes 4% Growth Rate

It is possible that some of the media commentary will deter folk from making contributions to their private pensions. However, it could be argued that now is a good time to increase contributions up to the maximum allowed by Revenue because i) tax relief at the highest marginal rate (41%) may be reduced at a later date and ii) increasing the contribution would negate some/all of the levy in the form of tax relief on the higher contribution.

The new levy will only work if the revenue stream raised can be measured against specific employment generated in the broader economy. If the revenue is pooled in the general exchequer fund, like the National Solidarity Bond, there will be no measure ability or accountability in respect of ‘job creation’. On the plus side, we will get the opportunity to sack the instigators if it's not removed or does not fulfill its intended purpose in 4 years time.

Featured Website www.prsa.ie

Harvard Business School & The (Irish) Department of Social Protection

I recently read how students that were accepted to Harvard Business School emptied out their bank accounts, by either transferring the money to their parents or by buying luxury cars. They legitimately did so to qualify for financial aid.

I then got to thinking about a proposal by the Irish Department of Social Protection that would require motor tax applicants (car buyers) to provide their PPS number so that they could cross-reference this number against those that are in receipt of social welfare payments.

Is there a major scam going on whereby those applying for State benefits empty out savings accounts or transfer assets to family members in order to qualify for State financial assistance here in Ireland? Could it explain some of the upsurge in new car registrations?

Think about it. You have €30,000 in savings but you wont ‘qualify’ for full/partial State Benefits because you hold this asset. If you blow it on a luxury car (not deemed an asset) you could get the State to fund, or partly fund, your penchant for a nice car.

How sweet is that? Your taxes paying for your neighbours new car.

PRSA (Personal Retirement Savings Account) Anomaly

Seriously, does anyone know of any other Country in the World where a employee would be put at a financial disadvantage (via legislation) in choosing one pension product over another?

There is currently an anomaly for PRSA (Personal Retirement Savings Account) policy holders where the employer is contributing to the employee’s PRSA.

If an employer is contributing €100 to an employee’s PRSA, the employee is €11 worse off than an employee whose employer in contributing the same amount to an OPS (Occupational Pension Scheme).

Although Fine Gael have committed to putting the PRSA & OPS on an equal footing in respect of this anomaly, it probably will not happen before the next budget.

So, what’s happening in the meantime? Well, PRSA policy holders (where employer is contributing) are being advised to switch to OPS’s and I am aware of one PRSA Provider that has written to the employers suggesting that they change their PRSA Schemes to OP Schemes.

To me, this seems a tad extreme. i) There is no cap on charges on an OPS - Initial commission is way more generous and providers can increase the annual management charge if they see fit and ii) The OPS route will involve some form of Trustee Training for the employer or failing this, they will be charged for complying with the legislation.

If I may make a suggestion, while this anomaly is ‘put on an equal footing’. It would make a hell of a lot of sense for Revenue/Department of Finance to allow those that are disadvantaged to claim back the 11% via the PRSI Refund Section of Revenue in Limerick.

This might stop a mass exodus from PRSAs before the legislative changes can be made.

Featured Website : www.prsa.ie