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Saturday, 27th April 2024 |
| Retire in comfort after 1999 |
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| Joe Byrne reflects on a year which brought new options as retirement planning crossed the desks of the people who matter |
Two new developments dominated the pensions scene in 1999: the new retirement options brought in by the Finance Act, and Charlie McCreevy's decision to invest part of the Telecom Eireann flotation proceeds to fund future State pensions.
New retirement options
The new retirement options have opened up the investment market for pension funds post-retirement. The self-employed and proprietary directors are no longer restricted to purchasing an annuity at retirement once they have taken their 25 per cent of the fund as tax-free cash. Subject to maintaining a certain minimum fund (£50,000) or pension (£10,000 per annum), they now have the option of either taking the balance of the fund as taxed cash immediately, or investing it in an 'Approved Retirement Fund' or ARF.
The ARF is an investment vehicle specifically designed for investing pension fund moneys after retirement. Tax is paid within the fund on any investment return, and the pensioner pays income tax on any capital withdrawn. There are no limits on the amount that can be withdrawn from the ARF (subject to any restrictions imposed by the investment manager).
Unlike an annuity, the ARF forms part of the pensioner's estate on death and is distributed according to the pensioner's will or the intestacy rules. Income tax and CAT are payable on death, but subject to certain exceptions for spouses and children.
After a somewhat sluggish start, the second half of 1999 has seen a steady growth in the number of ARF products available. The market is currently restricted to the self-employed and proprietary directors. However, it is expected that it will be opened up to the directly employed within the next few years.
The new retirement options combine flexibility with, in the case of the ARF, seductive estate planning opportunities. This new development is thus proving very appealing to those approaching retirement. Industry response has been mixed: while the need for increased flexibility was acknowledged, practitioners are also aware of the danger that an individual may, due to bad management or bad luck, exhaust their fund too early. It has been suggested that
Pension fund investment Pension funds have enjoyed high investment returns averaging 19.5 per cent per annum over the three years to 30th September 1999.
Arising from EMU, pension funds have begun to gradually reduce their Irish equity exposure by increasing their overseas equity exposure.
There are now currently five fund managers providing the consensus fund option. This has led to a greater use of the core and satellite approach to fund management.
State pension fund
The Minister for Finance's decision to establish a State pension fund for Ireland will vastly increase the amount of pension fund assets available for investment. This fund has been given a huge kick-start with most of the proceeds of the Telecom Eireann (now Eircom) flotation and the commitment of 1 per cent of GNP every year from general tax revenue, worth about £510 million this year. The fund should be worth in the region of £5.5 billion next year. The concept is unique for national governments, for whom 'Pay As You Go' is the norm, but the Minister sees pension funding as a sensible decision for a country in the throes of an economic boom with the youngest population in Europe. Given the Government's commitment to increase the State pension to £100 per week (about 1/3 of current average industrial earnings) by 2002, this advance funding for our increasingly ageing population should go some way to defusing the 'pensions time-bomb'.
Future developments
A new Pensions Bill is to be published in 2000. The Bill is expected to incorporate many of the proposals set out in 'Securing Retirement Income', the National Pensions Policy Initiative report of the Pensions Board published in April 1998. This should include greater protection for pension rights, together with the introduction of 'Personal Retirement Savings Accounts' (PRSAs), a flexible pension product available to all: self-employed, employed and even unemployed.
The Minister for Finance has stated that he 'hasn't finished with pensions yet'. Whether this is a promise or a threat remains to be seen; however the Minister has so far favoured a pensioner-friendly approach with increased flexibility. It is expected that he will develop this approach, opening out the pensions market even more. |
Joe V. Byrne is group actuary and deputy managing director at Coyle Hamilton Limited Employee Benefits and Investments Division.
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| Article appeared in the December 1999 issue.
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