This is a slightly cynical change in the AMRF rules which crept into the Finance Bill since it reduces the size of the AmRF fund for no reason other than to provide more income to tax which, even though it is only a temporary measure, could prejudice a pensioner's financial security in retirement.
The Approved Minimum Retirement Fund has been reduced back to €63,500 forcing more money into ARFs which will therefore now be subject to income tax.
Although this is only a temporary measure for the next 3 years, it has the effect of forcing higher withdrawals from retirement funds than at present.
You might think that the change from €119,800 to €63,500 would therefore result in an additional €56,300 being subjected to imputed distributions and therefore an income payment of 5%.
This would represent an extra €2,815 income which will be subject to the highest marginal rate of tax for the pensioner assuming that this is up to 55% this means that up to €1548 in tax could be paid.
However, in practice for many people it will be even worse than this.
Case Study
Under the current rules, a pensioner with an AmRF isn't required to take income from their AmRF until they are aged 75. Therefore a good planning strategy has been to allow all of the growth of an AmRF/ARF to occur in the AmRF account as this allows the client the flexibility to better manage their exposure to income tax.
For example, we have a client who invested €119,800 into an AmRF in August 2011. In line with our prudent asset allocation approach to Financial Planning and ARF cash-flow management, we recommend that our clients fill up their equity allocation first in their AmRF since, historically at least, they were not required to pay imputed distributions on the AmRF account and therefore this strategy offered the flexibility to minimise the taxation of the pension. In this example, the AmRF amount has increased by €35,500 to €155,300 today.
By reducing the limit to €63,500 not only will the difference between the two minimums now be taxed but also all of the growth in the AmRF will now be forced into the ARF and will now subject to income tax.
This means that, in this example, the amount in the ARF will now be increased by €91,800. The imputed distributions will increase by €4,590 and therefore the client’s income tax liability by up to €2,524pa.
So much for prudent financial planning...
The Approved Minimum Retirement Fund has been reduced back to €63,500 forcing more money into ARFs which will therefore now be subject to income tax.
Although this is only a temporary measure for the next 3 years, it has the effect of forcing higher withdrawals from retirement funds than at present.
You might think that the change from €119,800 to €63,500 would therefore result in an additional €56,300 being subjected to imputed distributions and therefore an income payment of 5%.
This would represent an extra €2,815 income which will be subject to the highest marginal rate of tax for the pensioner assuming that this is up to 55% this means that up to €1548 in tax could be paid.
However, in practice for many people it will be even worse than this.
Case Study
Under the current rules, a pensioner with an AmRF isn't required to take income from their AmRF until they are aged 75. Therefore a good planning strategy has been to allow all of the growth of an AmRF/ARF to occur in the AmRF account as this allows the client the flexibility to better manage their exposure to income tax.
For example, we have a client who invested €119,800 into an AmRF in August 2011. In line with our prudent asset allocation approach to Financial Planning and ARF cash-flow management, we recommend that our clients fill up their equity allocation first in their AmRF since, historically at least, they were not required to pay imputed distributions on the AmRF account and therefore this strategy offered the flexibility to minimise the taxation of the pension. In this example, the AmRF amount has increased by €35,500 to €155,300 today.
By reducing the limit to €63,500 not only will the difference between the two minimums now be taxed but also all of the growth in the AmRF will now be forced into the ARF and will now subject to income tax.
This means that, in this example, the amount in the ARF will now be increased by €91,800. The imputed distributions will increase by €4,590 and therefore the client’s income tax liability by up to €2,524pa.
So much for prudent financial planning...