LCP Radar Update - Finance Bill 2012
20 February 2012

Loophole closes as deemed distribution rules now apply to "Vested" PRSAs

For taxation purposes, holders of Approved Retirement Funds (ARFs) are assumed to withdraw 5% of their fund annually (this is called the "deemed distribution").  In a similar manner to ARFs, individuals with a "vested" Personal Retirement Savings Account (PRSA) will now be subject to the same deemed distribution provisions as ARFs. A vested PRSA is a PRSA where an individual has taken their retirement lump sum but the remaining assets are retained in the PRSA.

Deemed distribution % increases for large Approved Retirement Funds and vested PRSAs

Approved Retirement Funds (ARFs) and vested PRSAs valued at more than €2 million (in total) will now be subject to a deemed distribution of 6% (up from 5%) for tax purposes. The 6% distribution rate will apply to the entire value of the ARF (and/or vested PRSA), not just the amount in excess of €2 million.

As a result of this change, a person with an ARF/vested PRSA of just over €2m who chooses to draw the minimum allowed amount will now pay additional tax and levies of over €9,000 p.a. compared to a person with an ARF/vested PRSA of just under €2m.

Provisions are brought in to lessen the harsh tax implications for Public Sector employees with pension benefits  over €2.3m at retirement

Where the capital value of an individual's pension fund exceeds €2.3m (the Standard Fund Threshold or "SFT") or higher Personal Fund Threshold ("PFT"), the excess is subject to a one-off tax at 41% in addition to normal income tax which applies when the pension is drawn down. For public sector employees the tax was deducted from members retirement lump sums. A number of provisions have been introduced to help them pay the tax in more flexible manner;

• They will be given a one-off opportunity to cash in some or all of their private pension savings to reduce the likelihood of breaching the €2.3m limit.  Any amounts realised will be subject to income tax and universal social charge (if applicable). By availing of this option no retirement lump sum will be available from the private sector schemes.
• Limiting the amount of tax that can be deducted from the retirement lump sum to 50% of the value of the lump sum. A higher amount can be taken if agreed between the individual and the administrator.
• Any further tax liability can be paid by reducing the gross annual pension payable to the individual for up to the first ten years of retirement, or a gross distribution from an ARF owned by the individual or a combination of both.

Removal of Double Taxation Anomaly

It is interesting to note that the Bill addresses an unintended double taxation anomaly. Following Budget 2011, tax at 20%+ is payable on lump sums in excess of €200,000. Tax is also payable on any excess over the SFT (or PFT if appropriate). Now, any tax paid on the excess lump sum can be used to offset the chargeable excess tax.

Transfer of Assets on Death of ARF owner to a child over 21

The rate of tax payable on the transfer of assets to a child over 21 on the death of the ARF holder has increased significantly from 20% to 30%.

What next?

If you are concerned or have questions about the measures introduced in the Finance Bill, please contact Roma Burke (01 614 4393) or the LCP partner who normally advises you.