qfa pensions 2018/2019 lecture - lia...gross remuneration less employee scheme contributions, within...

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QFA Pensions2018/2019Lecture

Workshop Day

Look at chapters

Slides and manual

Questions

Your question

Examples

Calculations

Approaching the exam On time

Calculator…simple

Pencil and rubber given

Exam paper & Answer sheet

Ignore others

Time Time ‐just over a minute ‐Tougher…longer mark and go back

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Approaching the exam

Focus and Concentrate

Use your pencil

Watch out for key words

Reading the question

Starting off

Read Twice

Key WordsCapitalised……nots

Summary

Preparation

Practice questions

Prioritise your time

Read the question and focus

Study Resources

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Supplied on the Day

QFA Pensions Examination

How many marks?

Multiple Choice Questions

100 Questions

2 hours to complete examination

40% Pass rate

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For each correct answer a candidate will score 3 marks

For each incorrect answer a candidate will score ‐1 mark (minus one mark)

For each unanswered question a candidate will score 0 marks

The exam will be marked out of 300 marks (100 x3 =300)

40%= 120 Marks

Marks

100 x 3 =300 100%

80 x 3 =240 – 20 = 220 73%

60 x 3 =180 ‐40 =140 47%

55x3 = 165 ‐45 = 120 40%

50 x 3 = 150 ‐50 = 100 33

40 x 3 = 120 …none wrong 40

Study Regular Study (Early

morning)

Make Notes

Use Coloured Markers

Join a study group

Use Mind Maps

Think how it Think how it affects your

life

Use Technology

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Webinar 1

The Need for Retirement Planning

Death

Earned income stops

Illness

Earned income is reduced or stops

Retirement

Earned income stops

Financial needs

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State Pension• Contributory• Non Contributory

Private Provision• Personal Contracts• Employer schemes

Personal Savings & Investments

Earnings in retirement

Different pillars of retirement provision

Tax relief on contributionsTax relief on contributions

Tax free investment return

Tax free investment return

Tax free lump sum at retirement

Tax free lump sum at retirement

Limit of €200,000

Within limits

Tax incentives for private pension provision

Which one of the following is earned income?

A Credit union share dividends

B Rental income

C Income from a self employed trade

D Gain on the sale of an investment property

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Webinar 1

Q & A

Webinar 2

State Pensions

Social Insurance

Must meet PRSI contribution conditions

State Pension (Contributory)

Survivor’s pension

Invalidity Pension

Social Assistance

Means tested

State Pension (Non

Contributory)


Disability Allowance

Two different types of State Pension

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PRSIClass

Covers

A1 Most employees in the private sector.

Civil and public servants recruited after 6th

April 1995.

B1 &D1

Permanent civil servants recruited before 6th April 1995

S1 The self employed and proprietary directors.

PRSI Contribution Classes

Year of BirthUp to & incl1954

66

1955‐60 67

1961 andlater

68

State Pension Age

PRSI classes A and S. Class B don’t qualify

Pension €243.30 pw max

Means tested No

Qaulification conditions Yearly average of at least 10 week PRSI contributions; or1/40th for each year of PRSI contributions

Adult dependant supplement Means test related to dependant’s weekly income.

Income tax Liable to income tax but not USC; PAYE not deducted at source

State Pension Contributory

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PRSI qualification conditions No

Pension (max) €232 pw (under 80)

Means tested Yes. Scaled by level of ‘weekly means’

Qualified adult supplement Yes


State Pension Contributory

PRSI classes A, S, B & DEither deceased or survivor’s PRSI record can qualify

Conditions Not cohabiting. Ceases if remarries or new civil partnership

Means tested No


State Pension Widow/Widowers/Civil Partners Contributory

PRSI classes No PRSI requirements

Conditions Not cohabiting. Ceases if remarries or new civil partnership.No dependant children.

Means tested Yes


State Pension Widow/Widowers/Civil Partners Contributory

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Class S PRSI applies to which one of the following?

A Frank, a Garda who joined the public service in 1990

B Paula, a self employed dentist

C Fiona, a civil servant, who joined the public service in 2008

D Owen, who is an employee of a large Bank in the private sector.

Which one of the following groups are NOT covered for the State Pension (Contributory)?

A Employees in the private sector

B Public service employees who joined the public service before 6th April 1995.

C Public service employees who joined the public service after 6th April 1995.

D Proprietary directors in the private sector.

Webinar 2

Q & A

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Webinar 3

Personal Contracts

Retirement Annuity Contracts

(RACs)

provided by life assurance

companies only

Personal Retirement Savings Accounts (PRSAs)

provided by life assurance

companies and by investment firms

Personal Contracts

Contributions

Retirement Fund

Provider

A legal contract

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Has a source of ‘relevant earnings’ in the current tax year

Had a source of ‘relevant earnings’ in a past tax year and paid an RAC/Section 785 contribution in that year

Relevant earnings : self employed trade/profession earnings & non pensionable employment earnings

Who can take out an RAC?

Anyone … but income tax relief only allowed against relevant earnings

Who can take out a PRSA

No relief for USC or PRSI

Max Net Relevant Earnings : €115,000

Age attained during year

Tax relief limit (% of Net Relevant

Earnings)Less than 30 15%30 to 39 20%40 – 49 25%50 – 54 30%55 – 59 35%

60 and over 40%

30% rate also applies to professional sports earnings under age 50

Income Tax relief on RAC & PRSA contributions

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Employer contribution

BIK for income tax

• No PRSI or USC

Claim income tax

relief

•As personal contribution, within limits

Employer contribution to an employee’s PRSA

RAC/PRSA contributions not

allowed for income tax relief in 2018

Allowed as a deduction against relevant earnings in 2019

Carry forward income tax relief

Backdated and deducted for income

tax against 2017 relevant earnings

RAC/PRSA contributions paid in 2018

Must opt to backdate before the 31st October (mid November if paying AND filing tax online

with the online ROS system)

Backdating contributions

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Entry Ongoing Exit

Charges

Contribution charge

Non allocation period

Fixed monetary charge

Entry Charges

Annual fund charge

Policy feeFund

switching charge

Ongoing Charges

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Early encashment charge

Exit Charges

Initial Renewal Trail

Intermediary commission charges

Standard PRSA

Maximum 5% contribution

charge

Maximum 1% pa annual fund charge

Non Standard PRSA

No maximum charges

Restriction on PRSA charges

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A measure of the impact of charges in terms of the

equivalent annual reduction in investment return

Reduction in Yield (RIY)

Before age 60

Permanent incapacity at any age

From 50 for certain occupations

PRSA: voluntary early retirement from an

employment, from 50 onwards.

60 to 75

Anytime between these ages; no

requrement to give up work

When RAC/PRSA can benefits can be taken?

If not receiving pension of

€12,700 pa or have previously

invested €63,500 in an AMRF or

annuity

First 25%

• Lump sum;

• tax free up to €200k

• Next €300k taxed at standard rate

Next €63,500

• Approved Minimum Retirement Fund (AMRF), or

• Annuity

Balance

• Taxable lump sum, or

• Approved Retirement Fund (ARF), or

• Annuity

How can RAC/PRSA benefits can be taken?

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annuity

First 25%

• Lump sum;



Next €63,500

• Retain as ring fenced amount

Balance

• Retain as non ring fenced amount

Vested PRSA alternative

Generic Disclosure Notice

Specific Disclosure Notice

Annual statement of

value

Provision of Information RACs

Preliminary Disclosure

Certificate (PDC)

Statement of Reasonable Projection (SORP)

Half yearly Invesment Report +

Statement of Account

Annual SRP

Provision of Information PRSAs

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Standalone

• Not attached to an RAC

Standalone

• Not attached to an RAC

Associated

• Attached to an RAC

Associated

• Attached to an RAC

Own life only

Life cover only, payable to estate

Can not be assigned

Cover can not extend beyond 75

Pension Term Assurance cover

A Pension Term Assurance policy can provide which one of the following benefits?

A Life cover to age 80

B Joint life cover

C Life cover to age 75

D Serious illness cover

Joe is employed by a small shop and contributes to an RAC. What is the earliest age he can take retirement benefits from the RAC, assuming he remains in good health?

A 50

B 55

C 60

D 65

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Webinar 3

Q & A

Webinar 4

Employer PensionSchemes

Employer Pension Schemes

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Defined Benefit (DB)

Promises a retirement benefit

related to the member's earnings

Final salary

Career average

Defined Contribution

(DC)

A retirement fund is built up for each member from

invested contributions.

No promise on level of retirement

benefit which may be provided by the fund at retirement.


the amount of contributions paid in

how long the contributions are invested

investment return earned

charges

DC scheme benefits will be dictated by

Insured Self Administered

Different types of employer schemes

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Integrated

Benefits/ contributions based on pensionable salary

Pensionable salary = Actual salary less a State Pension offset

Non integrated

Benefits/ contributions based on actual salary

Different types of employer schemes

Employer

Employees

Schedule ERemuneration

Former employees can also be included

Who can be included in an employer scheme?

Member pension

Retirement lump sum

Death in service lump sum


What benefits can an employer scheme provide?

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No relief for USC or PRSI

Max remuneration: €115,000

Age attained during year

Income Tax relief limit (% of Remuneration)

Less than 30 15%30 to 39 20%40 – 49 25%50 – 54 30%55 – 59 35%

60 and over 40%

Tax relief on employee scheme contributions

Gross Remuneration

Less employee scheme

contributions, within limits

Remuneration subject to income tax

Net pay on employee contributions

Special Contribution / Ordinary Annual Contribution

Tax relief spread over a number of years, max 5

Spread Period:

If < 2 : Round up to 2 years

If > 2 : Round to nearer number of years

Tax relief on employer special contributions

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OAC = €7,500 SP : €20,000

Spread Period:

€20,000 / €7,500 = 2.67 years, rounded up to 3 years

Relief allowed :Yr 1 : €7,500Yr 2 : €7,500Yr 3 : €5,000

Spread Period:

€20,000 / €7,500 = 2.67 years, rounded up to 3 years




OAC = €20,000 SP : €65,000

Spread Period:

€65,000/ €20,000 = 3.25, rounded down to 3 years


Spread Period:

€65,000/ €20,000 = 3.25, rounded down to 3 years



Revenue Max Pension x Factor less (fund + retained benefits) / Term to NRA

Example : Male NRA 60, married. Age 40.

Revenue Max Pension : 2/3rds x €90,000 = €60,000 paExisting fund : €200,000Retained benefits : Nil

Max OAC = (€60,000 x 32.4 ‐ €200,000) / 20 = €87,200 pa

Example : Male NRA 60, married. Age 40.

Revenue Max Pension : 2/3rds x €90,000 = €60,000 paExisting fund : €200,000Retained benefits : Nil

Max OAC = (€60,000 x 32.4 ‐ €200,000) / 20 = €87,200 pa

Calculation of Revenue maximum OAC

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On ill health retirement

At any time

‘physical or mental deterioration ... serious enough to prevent the

individual from following his/her normal employment or which very seriously impairs his/her earning

capacity’

On voluntary early retirement

On retirement from 50 onwards

On Normal Retirement Age

Age set in scheme rules, between 60 and 70

No need to retire; benefits can be taken and the member can work on

When can scheme benefits can be taken?

Traditonal benefit optionTraditonal

benefit optionARF optionARF option

How can DC scheme benefits can be taken? – pick your door

Up to 150% x final

remuneration

Tax free Lump Sum

Balance

Annuity

Traditional Benefit option (door)

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annuity

First 25%

• Lump sum;



Next €63,500

• Approved Minimum Retirement Fund (AMRF), or

• Annuity

Balance

• Taxable lump sum, or

• Approved Retirement Fund (ARF), or

• Annuity

The ARF Option (Door)

• Final Remuneration : €80,000• Completed service @ NRA : 24 years• Retained benefits : Nil• Accumulated Fund @ NRA : €200,000

Traditional Benefit Option

OR ARF Option

Tax free lump sum

150% x €80,000 = €120,000

25% X €200,000 = €50,000

Balance €80,000 must be used to buy an annuity

€63,500 to AMRF or annuity€86,500 take as taxable cash or transfer to ARF or purchase annuity

DC Scheme : how benefits can be taken at NRA

The member’s final remuneration

The member’s completed service

whether benefits are being taken at NRA or on early

retirement

any other retained benefits the

member may have

Revenue maximum approvable benefits … based on traditional benefit option

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Average of total emoluments for 3 or more* consecutive years ending no later than 10 years before NRA* Can’t be less than 3 – could be more

Final remuneration for 20% directors

Years of service completed with employer by Normal

Retirement Age

‘Uplifted Pension’ as a fraction of final remuneration

1 1/10th x 2/3rds

2 2/10th x 2/3rds

3 3/10th x 2/3rds

4 4/10th x 2/3rds

5 5/10th x 2/3rds

6 6/10th x 2/3rds

7 7/10th x 2/3rds

8 8/10th x 2/3rds

9 9/10th x 2/3rds

10 + 2/3rds

Revenue maximum approvable pension at NRA

Maximum approvable pension

Open market annuity rate for maximum approvable type of pension

€30,000

2.0%€1,500,000

Maximum DC fund at NRA

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Maximum approvable pension at NRA

Open market annuity rate for maximum approvable type of pension

€30,000 x 20/25

1.80%€1,333,333

N

NS

Maximum DC fund at voluntary early retirement

Years of service completed by NRA

Maximum lump sum as a fraction of final remuneration (inclusive of

any retained lump sums)

1 ‐8 3/80th for each year of service

9 30/80ths10 36/80ths11 42/80ths12 48/80ths13 54/80ths14 63/80ths15 72/80ths16 81/80ths17 90/80ths18 99/80ths19 108/80ths20 120/80ths

Revenue maximum approvable lump sum at NRA

4 x final remuneration + refund of employee contributions (+ interest)

Example : Final remuneration = €100,000

Max lump sum death in service = 4 x €100,000 = €400,000

Maximum approvable lump sum on death in service

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Currently an employee

AND

A member of employer’s pension scheme

Who can take out an AVC?

EmployerBenefits

AVCs

Revenue Maximum

DC fund < Revenue maximum

Pensionable remuneration may exclude bonuses, overtime, etc.

DB scheme integrated with State Pension

Short service

The scope for AVCs … the gap

Standalone PRSA

To employer pension scheme

To separate AVC trust scheme

Different ways to pay AVCs

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Employer DC Scheme Benefits

Traditional

AVCs: Lump sum within

Revenue Limits

AVCs: Balance to AMRF/ARF/

Taxable lump sum

ARF

AVCs: Lump sum: 25%

AVCs: Balance to an AMRF/ARF/ Taxable lump

sum

Taking AVC benefits at retirement – DC scheme

Ordinary Scheme Contribution AVCs

Can not exceed personal tax relief limit for that tax year

AVCs tax relief limits

Annual Benefit Statement

Statement of Reasonable Projection

On other events

Provision of Information to active scheme members

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Retain in the scheme

can take benefits

immediately, if over age 50, or later right up to

NRA

But some DB schemes may not allow preserved

pension to be taken until NRA

Take a transfer Take a transfer value to another scheme

the individual may be moving jobs and the fund can be

transferred to a new

employer's scheme

Take a transfer value to a Buy Out Bond

an individual DC arrangement

can be drawn on at the same time and in the same way as if the fund had been left in the

original scheme, e.g. from 50 onwards

Take a transfer value to a PRSA

only allowed if the individual has been an

active member of the scheme for less than 15

years

AVC benefits can be

transferred to a PRSA even if member has more than 15 years active

scheme service

Certificate of Benefit Comparison required

Options on leaving service

Basic exemption: €10,160 + €765 for each complete year

SCSB : N/15 x (average annual remuneration) – Present value of pension scheme Lump Sum

Increased : Basic + max of €10,000

Ex gratia termination payments – tax free amount

N / 15

Average annual emoluments over last 36 months

x

Less

Present value of tax free pension lump sum entitlement

If waiver signed

Standard Capital Superannuation Benefit (SCSB)

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AVCs can NOT be paid to which one of the following?

A A non Standard PRSA

B A DC occupational pension scheme

C A DB occupational pension scheme

D An RAC

A proprietary director’s total emoluments must be averaged over what MINIMUM period to calculate their final remuneration for Revenue maximum benefit purposes in an employer pension scheme?

A 2 years

B 3 years

C 5 years

D 10 years

Peter is taking voluntary early retirement after 22 years service, at age 58. His NRA is 60. He is in his employer’s DB scheme.

If his final remuneration is €80,000 pa and he has no retained benefits, what is the maximum immediate lump sum his employer’s scheme can pay him?

A €100,000

B €110,000

C €120,000

D €200,000

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Webinar 4

Q & A

Webinar 5

Transfers

Transfers allowed

PRSA

Employer scheme

PRSA

Overseas Scheme

RAC

RAC

PRSA

Employer scheme

Employer scheme

PRSA*

Overseas scheme

Buy Out Bond

Buy Out Bond

Buy Out Bond

Employer scheme

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Transfers not allowed

PRSA

RAC

Buy Out Bond

RAC

Buy Out Bond

Employer scheme

Employer scheme

RAC

Buy Out Bond

PRSA

RAC

An RAC can NOT be transferred to a(n):

A Buy Out Bond

B Non Standard PRSA

C Another RAC

D Standard PRSA

Webinar 5

Q & A

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Webinar 6

Investment

Investment returns

Cash Bonds

Equities Property

Traditional asset classes

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Private EquityPrecious metals

Works of Art.

Collectible coins, vintage wine, etc.

Commodities.Foreign

currencies

Infrastructure

Alternative asset classes

Source: Barclays Capital Equity Gilt Study 2017

Historic Returns

Direct investment

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Indirect investment through collective investment funds

Life company unit funds

Unit Trusts

Investment Companies

UCITS

Pooled Funds

Equities &

Property

Bonds

Cash

Asset Allocation … the most important decision

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Active

Aims to beat market returns

Passive

Aims to match market

returns

Different investment management styles

Risk rating of collective investment funds

Equities/Property Cash/Bonds

AgeRetirement

Fund Switching OR Lifestyle Fund

Default investment strategies

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Standard PRSA Non Standard PRSA

Default fundDefault fund Pooled Pooled

Other fundsOther funds Pooled No restriction

CAN include self invested & guaranteed/smoothed funds

PRSA fund options

Group DC schemes can only offer funds which are predominantlyinvested on regulated markets

DC scheme Investment Regulations

Which one of the following can NOT invest in a Self Invested Fund?

A A Standard PRSA

B A non Standard PRSA

C An RAC

D A one member DC scheme

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A passive investment fund aims to:

A Outperform the market

B Underperform the market

C Match market returns

D Achieve a return higher than inflation

Webinar 6

Q & A

Webinar 7

Pension AdjustmentOrders

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Divorce

Judicial Separation

Dissolution of a civil partnership

Ending of a period of co-habitation

Relationship Breakdown

trustees

Pension Adjustment Order

retirement

benefits

contingent

benefits

Relationship Breakdown

Specified %

of the retirement benefit accrued

during the relevant period

Relevant period

a period during which retirement benefits built up

Pension Adjustment Order over retirement benefit

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PAO can only apply to part of retirement benefits built up during the relevant period

PAO Retirement Benefit Example

Option to split …. take a transfer value in lieu of earmarked benefit

Individual’s arrangement PAO beneficiary can take his or her benefitsin a PRSA or BOB:

An employer pension scheme From the individual’s 50th birthday

A Buy Out Bond From the individual’s 50th birthday

Retirement Annuity From the individual’s 60th birthday

When PAO beneficiary can take benefits in new arrangement

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Transfer value must be paid to PAO beneficiary’s estate within 3 months

If the PAO beneficiary dies before taking a transfer value?

If the member dies before PAO takes a transfer value?

Transfer value must be paid to PAO beneficiary’s estate within 3 months

On death : 60% of lump sum death benefit paid to PAO beneficiary

Specified % : 60%

PAO over scheme death in service lump sum

PAO Contingent Benefit Example

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PropertyAdjustment

Order

A PAO can NOT be made over an ARF or AMRF.

A different type of Order called a Property Adjustment Order can be made instead

ARFs & AMRFs

A Pension Adjustment Order can NOT be applied to a(n):

A Retirement Annuity

B State (Contributory) Pension

C Buy Out Bond

D Section 785 policy

Mary has a PAO over Jack’s PRSA. If she dies before getting a share of his PRSA, what happens?

A Nothing; the PAO lapses

B Mary’s estate must seek a new PAO over the PRSA

C Mary’s estate become a creditor of Jack

D A transfer value must be paid from the PRSA to her estate

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Webinar 7

Q & A

Webinar 8

Taxation

Schedule Type of Income

E Employment salary/wages, BIKs, Pensions/annuities

D – Case I Self employed occupation

D – Case II Self employed profession

D – Case III Income from foreign investments

D – Case IV Deposit interest subject to DIRT

F Dividends from Irish companies

Earned In

come

Earned In

come

Income Tax Schedules

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Income Rate

First €12,012 0.5%

Next € 7,360 2.0%

Next €50,672 4.75%

Over €70,044 8% + 3% (self employed non PAYE income > €100,000)

Reduced rate of 2.5% applies to :• Over 70’s with total income < €60,000• Under 70’s with full medical card and total income < €60,000

USC exemption if total income < €13,000

USC applies to most incomes

ThresholdChargeable

excess

Balance of benefits taxable

7th December 2005 Income Tax @ 40%

Chargeable excess tax

Date Standard Fund Threshold applying

Personal Fund Threshold which could have been obtained at

that date

7th December 2005 €5m > €5m

7th December 2010 ‐ €2.3m €2.3m ‐ €5.4m

1st January 2014 €2.0m €2.0m ‐ €2.3m

Threshold limits

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1st January 2014

Annual Pension x 20 Annual Pension x age related factor; 37 at 50 reducing to 22 at age 70

and over

Example : €40,000 pension accrued at 1st January 2014

Value = €40,000 x 20 = €800,000

Example : €20,000 pension accrued after 1st January 2014. Age at retirement : 65

Value = €20,000 x 26 = €520,000

Value of DB pensions for Threshold Limit

[higher rate income tax rate x chargeable excess

LESS

any standard rate tax deducted from retirement lump sums taken since 1st January 2011, which has not

already been offset against a chargeable excess tax liability.]

Chargeable Excess Tax liability

Deemed crystallised at

75

Based on value at age 75

No benefits can be taken after age 75

75

RACs and PRSAs not matured by age 75

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Schedule D Case V covers which of the following types of income, for income tax purposes?

A Rents from an Irish property

B Income from a self employedprofession

C Rents from a UK property

D Deposit interest subject to DIRT

Frank previously took benefits of €1.5m from an SSAS in 2013 and had an unvested PRSA valued at €1.0m at 1st January 2014.

What is the maximum PFT Frank could have applied for at 1st January 2014?

A €2.0m

B €2.2m

C €2.3m

D €2.5m

Webinar 8

Q & A

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Webinar 9

Annuities

Lump sum (purchase price) secures a guaranteed income for life from a life assurance company … longevity insurance

What is an ‘Annuity’?

Example ‐ Male 65 level annuity

Annuity rate : 4.00%

Purchase price : €150,000

Guaranteed income for life :

€150,000 x 4.00% = €6,000 pa

Annuity rate

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Example ‐ Male 65 level annuity

Annuity rate : 4.00%

Annuity required: €8,600 pa

Purchase price:

€8,600 / 4.00% = €215,000

Purchase price to secure a particular annuity

Age HealthType of annuity

Bond yields

Investment amount

Factors which impact on annuity rates

Higher annuity rate offered because of reduced life expectancy

‘Enhanced’ annuities

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If the annuity rate for the type of annuity Lynne wants is 4%, how much capital will she need to secure an annuity of €9,000 pa?

A €36,000

B €63,500

C €195,000

D €225,000

An enhanced annuity is an annuity which pays out:

A A higher income, to reflect the individual's reduced life expectancy.

B A return of the sum invested, on death within the first 10 years

C A separate income to two different people

D A higher income, if the individual develops a serious illness in retirement

Webinar 9

Q & A

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Webinar 10

ARFs

Pension Arrangement

Personal Investment Account

ARF

Managed by a QFM

What is an ‘ARF’?

Different types of ARF

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ARF

ARF lifetime withdrawals

Withdrawals subject to PAYE & USC + PRSI up to

age 66

A forced tax charge over age 60 unless actual withdrawals during year exceed:

Age in tax year ARFs & vested PRSAs < €2m

ARFs & vested PRSAs > €2m

61 to 70 4% 6%

71 and over 5% 6%

Based on value at 30th November

Imputed distributions

Example : ARF value @ 30th November 2017 : €200,000

Age : 68

Actual withdrawals in 2017 : €3,000

Imputed distribution liable to income tax deduction:

4% x €200,000 less €3,000 = €5,000

Age in tax year ARFs & vested PRSAs < €2m

ARFs & vested PRSAs > €2m

61 to 70 4% 6%

71 and over 5% 6%

ARF imputed distribution Example

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investment risk

return is less than expected

longevity risk

individual lives longer than expected

ARF ‘bomb out’ risk

investment risk

return is less than expected

longevity risk

individual lives longer than expected

Risk of ARF buying an annuity

ARFOptional

withdrawals up to 4% pa, subject to

PAYE & USC

No imputed distributions

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AMRF

Turns into an ARF

Earlier of death, receiving

pension income of €12,700 pa, and age 75

ARF

Another ARF opened by spouse/civil partner

• Exempt from Income Tax

• Exempt from Inheritance Tax

Spouse/civil partner direct

• Subject to PAYE as deceased's income in the year of death


Child of deceased, over age 21

• 30% income tax charge


Child of deceased, under age 21

• Exempt from income tax

• Taxable Inheritance for Inheritance Tax, with benefit of any unused Threshold

To anyone else

• Subject to PAYE

• Net amount taxable inheritance for Inheritance Tax purposes, with benefit of any unused Threshold

First ARF & vested PRSA – post death distributions

A ‘second’ ARF

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Child of deceased, over age 21

•30% income tax charge

•Exempt from Inheritance Tax

Child of deceased, under age 21

•Taxable Inheritance for Inheritance Tax, with benefit of any unused Threshold

To anyone else

•30% income tax charge

•Net amount taxable inheritance for Inheritance Tax purposes, with benefit of any unused Threshold

Second ARF– post death distributions

Paula is aged 68 and has taken a withdrawal from her ARF. The withdrawal is NOT subject to :

A Income tax

B PRSI

C USC

D PAYE

Paula is aged 68 and has takes a withdrawal from her ARF. The withdrawal is NOT subject to :

A Income tax

B PRSI

C USC

D PAYE

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Which one of the following transfers is NOT allowed?

A A full transfer from one AMRF to another AMRF

B A partial transfer from one ARF to another ARF

C A partial transfer from one AMRF to another AMRF

D A transfer from a vested PRSA to an AMRF

Webinar 10

Q & A

Webinar 11

Regulatory Bodies

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The Pensions Authority

Revenue Commissioners

Central Bank of Ireland

Pension Regulatory Authorities

DB and DC schemes

Registered Administrators

PRSAs (jointly approved with Revenue)

Guidance

PRSA activities of PRSA providers

Pensions Authority regulates


RACs

Buy Out Bonds

PRSAs (jointly with Pensions Authority)

Revenue Commissioners approve

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Banks

Life assurance companies

MIFID investment firms

Retail investment intermediaries

Insurance intermediaries

Central Bank of Ireland regulates

financial loss arising from maladministration

Dispute of fact or law

Occupational Pension Schemes & PRSAs

Pensions Ombudsman deals with unresolved complaints about pension providers

Complaint

• First made to scheme trustees or relevant financial institution

Internal Resolutions of Complaints Procedures

•Must go through the procedures

Pensions Ombudsman

•Referred to Pensions Ombudsman only if unresolved by internal resolution of disputes procedures

Complaints : Internal Resolution of Disputes

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“ … reason to believe that material misappropriation or fraudulent conversion of an occupational pension scheme or PRSA resources has occurred, is occurring or is to be attempted”

Whistle Blowing to the Pensions Authority

The Pensions Ombudsman can investigatewhich one of the following complaints?

A A complaint about the poor investment returns of a PRSA

B A complaint about a fund switch instruction which was not carried out on an ARF

C A complaint about the way a PRSA claim was administered, leading to an alleged financial loss.

D A complaint about the way an RAC was sold to the complainant

The Pensions Ombudsman can investigatewhich one of the following complaints?

A A complaint about the poor investment returns of a PRSA

B A complaint about a fund switch instruction which was not carried out on an ARF

C A complaint about the way a PRSA claim was administered, leading to an alleged financial loss.

D A complaint about the way an RAC was sold to the complainant

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Webinar 11

Q & A

Webinar 12Inflation

& Compound Interest

Inflation

Increase in the price of an average basked of goods and services

Deflation

Decrease in the price of an average basked of goods and services

Consumer Price Index : Inflation and Deflation

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How to calculate rate of inflation

Obtain a real investment return

Increase in earnings

Retirement income needs to increase

Allowing for impact of inflation

€1,000 today €1,00010 years from

now

Will NOT purchase the same value of goods &

services as €100 can today

Compound Interest

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After Accumulated Value of €1,000

@1.5% pa @ 2.5% pa @ 5% pa

5 yrs €1,077 €1,131 €1,27610 yrs €1,161 €1,280 €1,62915 yrs €1,250 €1,448 €2,07920 yrs €1,347 €1,639 €2,65325 yrs €1,451 €1,854 €3,386

Accumulated value of €5,000 after 10 years at 5% pa =

5 x €1,629 = €8,145

Accumulation

€1,000payableafter

Present Value Today

@ 1.5% pa @ 2.5% pa @ 5% pa

5 yrs €928 €884 €78410 yrs €862 €781 €61415 yrs €800 €690 €48120 yrs €742 €610 €37725 yrs €689 €539 €295

Present value of €5,000 payable after 15 years at 3% pa =

5 x €690 = €3,450

Discounting

If €10,000 is invested today at a fixed return of 5% pa, what amount will it have accumulated to after 18 years?

A €13,070

B €15,600

C €22,290

D €24,070

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Webinar 12

Q & A

Webinar 13

Comparing Options & Plans

RAC PRSAWho can take out? Must have or have had

source of relevant earnings to take out and continue contributing.

Anyone.

However tax relief only available against relevant earnings.

Who can contribute Only the individualnormally.

The individual, or

Employer, or

Individual and employer

Tax relief on employer contribution

‐ BIK. Income Tax relief canbe claimed as personal contribution.No USC or PRSI liability

RACs v PRSAs

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RAC PRSAFund choice No restrictions.

No Default

Standard PRSA can onlyinvest in ‘pooled funds’.

Default investmentstrategy.

Charges No restrictions. Charges can only be a %of contributions and/or a% of the fund.

No cash charges.

Standard PRSA: max of5% of contribution + 1%pa of fund.

Other restrictions oncharges

AVCs No Yes. Can be paid to aPRSA

RACs v PRSAs

RAC PRSALife cover Can be added with Pension

Term Assurance cover, either on an inclusive or exclusive of PPP fund basis.

Pension Term Assurance cover can not be added or packaged with PRSA

Transfers in From another RAC only From :

A RAC

A PRSA

An occupational pensionscheme*

When benefits can be taken on early retirement before 60

Permanent incapacity. Permanent incapacity.

Employees on early retirement from 50 onwards.

RACs v PRSAs

Retain a preserved benefit in the scheme or take a transfer value?

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Retain inDCScheme

Transfer to BOB

Transfer to PRSA

Transfer to another Scheme

Charges ? Exit and entrycharge?

Exit charge?

No initialcharge onpayment toPRSA

Exit and entrycharge?

InvestmentOptions

? ? Narrow rangeon StandardPRSA

?

When canbenefits betaken?

Retirement from 50 onwards. On earlier ill health early retirement.Between NRA 60 and 70.

As scheme From 50onwards onearly retirementfrom newemployment.

On permanentincapacity.

Between 60and 75.

Retirement from 50 onwards in new scheme. On earlier ill health early retirement.Between NRA 60 and 70.


Retain inDCScheme

Transfer to BOB

Transfer to PRSA

Transfer to another Scheme

Death Full valuepayable toestate.

Full valuepayable toestate.

Full valuepayable toestate.

Limit of 4 xfinalremunerationas a lumpsum.

Any balancehas to be usedto buy annuityfor spouse/dependants.

Benefitoptions

ARF ortraditionalbenefit.

ARF ortraditionalbenefit.

ARF only. ARF ortraditionalbenefit overtotal newschemebenefits.


Traditional Benefit Option

ARF option

Lump sum Up to 150% x finalremuneration (inclusiveof retained lump sums),depending on completedservice and whethernormal or earlyretirement

25% of fund

Balance Must be used to buy anannuity

Can be transferred to anAMRF/ARF and/or beused to buy an annuity.

Traditional Benefit or ARF?

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Advantages Disadvantages

Preservation of capital on death Must withdraw at least 4% pa over age 60

Income flexibility No guaranteed income.Bombout risk

Defer annuity purchase Risk that annuity rates could fall further

Can invest in equities and property assets. Potential for inflation protection.

Complicated. Advice needed.

ARF

Advantages Disadvantages

Guaranteed income for life Loss of capital on death.Lack of income flexibility

No ongoing investment risk Timing risk on purchase of annuity.

Choice of annuity types Inflation risk, if level annuity purchased

Simple. Easy to understand.

Annuity

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ARF AnnuityIncome certainty No. Monetary level of

income likely to vary fromyear to year and to declineover time.

Yes. Monetary income

fixed and certain andknown in advance.

Preservation of capital on death

Yes. Remaining ARF

balance on death becomesasset of deceased’s estate

No. Other than balance

of annuity payments ondeath within theguarantee period and/or acontinuing pension tosurviving spouse/civilpartner.

ARF v Annuity

Range of investment funds

Other benefits

Charges

Default risk

Comparing similar products

A Standard PRSA differs from an RAC in relation to which one of the following factors?

A Potential access to retirement benefits before age 60

B The maximum tax free lump sum which can be taken

C The amount to be transferred to an AMRF

D Tax relief limits

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Which of the following charges can NOT be made to a PRSA?

A €100

B 3% of a regular contribution

C 0.75% of the fund value

D 2% of a once off contribution

Webinar 13

Q & A

Webinar 14

Providing Advice

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Investment Intermediaries Act

1995

Insurance Distribution Directive Regulations 2018

Authorisation to advise on insurance policies

Tied to one life assurance company

Employee

Tied agent

Providing Fair Analysis advice

Sufficiently large number of contracts

Neither tied or providing fair analysis advice

Narrower range of contracts

Insurance Distribution Regulations ..status of insurance advice provided

Competent and capable

Minimum Competency Code

honest, ethical and to act with integrity

Financially sound

Fitness & Probity

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Investment Intermediaries

Act 1995

MIFID Regulations

Shares listed on a Stock Exchange

Bonds listed on a Stock Exchange

Collective Investment Funds

Tracker Bonds

Transferable securities

Money market instruments

Collective investment funds

Options, swaps, Derivatives

Contracts for Difference (CFDs)

Scope of authorisation

Monitor and review

Make suitable recommendation

Devise a strategy

Identify, quantify and priortise financial needs and objectives

Determine consumer's circumstances

The Financial Planning Advisory Process

Needs and Objectives

Personal Circumstances

Financial situation

Knowing the Consumer

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Vulnerable customers

Step 1

• Project current earned income to retirement

Step 2

• Determine % of earned income to be replaced

Step 3

• Deduct existing retirement provision

Step 4

• Quantify additional contribution required to make up shortfall

Identifying and quantifying retirement income shortfall

only products suitable for the consumer’s needs can be considered by the advisor

all products which are suitable for the consumer’s needs, and which the advisor can offer advice on, must be considered

from the range of suitable products the advisor can advise on, the advisor must recommend the ‘most suitable’ product

Suitability

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Suits the client’s needs

Client can afford the financial commitment

Client can bear the financial risks

Investment funds consistent with client’s attitude and capacity for risk

Suitability

Age

Current investment portfolio

Investment experience

Financial capacity to lose capital

Purpose and term of investment

Term to retirement

Other financial needs and objectives

Assessing attitude and capacity for investment risk

the reasons whya financial

product offered to a consumer is considered to be suitable to that consumer;

or

the reasons whythe financial

product options contained in a selection of

product options offered to a consumer are considered to be the most

suitable to that consumer; or

the reasons whya recommended

financial product is

considered to be the most

suitable product for that

consumer.

Reason Why Statement

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Knowing the Consumer and Suitability do not apply where:

• the consumer has specified both the policy type and life company by name, and

• has not received any assistance from the advisor in the choice of that policy or life company

Execution Only

In order to be classified as an Execution Only transaction under the Consumer Protection Code, the consumer must have specified to the adviser the type of policy and :

A his or her attitude to risk

B The life assurance company

C the status of advice required

D how many other policies he or she has taken out in the past.

Webinar 14

Q & A

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74

QFA PensionsDecember 2018Lecture

qfa pensions 2018/2019 lecture - lia...gross remuneration less employee scheme contributions, within...

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