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The Finance Act 2013

The Finance Act 2013 was signed into law on the 27th March 2013. Many of the provisions had already been flagged in the Finance Bill 2013 published in February.

 We have summarised the pension-related changes published in the Act for you and we have split the measures into two sections:

  • Changes flagged in the Budget back in December 2012
  • Changes not flagged in the Budget back in December 2012

 We hope you find the below information useful and don’t hesitate to contact us if you have any questions.

 Changes flagged in the Budget

 Access Prior to Retirement to Additional Voluntary Contributions (AVCs)

 There will be a once-off option for members of occupational pension schemes to withdraw up to 30% of their AVC fund. This option will be available for 3 years from the passing of the Finance Act 2013. “AVCs” include additional voluntary PRSA contributions to an AVC PRSA.

  • The option is available in respect of AVCs paid to provide benefits in retirement but does not include AVCs paid for the purposes of purchasing notional service
  • Where an AVC fund is subject to a pension adjustment order, both the scheme member and the spouse or former spouse or civil partner or former civil partner of the member may exercise the option independently in respect of their respective ‘‘share’’ of the AVC fund.
  • The definition of AVCs refers to the status of the contribution made. This appears to be a measure to ensure that withdrawals are allowed only in cases of genuine AVCs. 
  • Amounts paid under this option will be subject to income tax under PAYE. Unless a certificate of tax credits and standard rate cut-off is provided, the higher rate of tax (41%) will apply. Payments will not be liable to USC. It is intended to exempt them from PRSI in the next Social Welfare and Pensions Bill (date to be confirmed). 
  • The option is available in relation to an AVC portion of a personal retirement bond (PRB). It will be necessary to be able to clearly identify the portion of the PRB attributable to AVCs. 

A reminder of other pension-related measures flagged in the Budget:

  • The Minister decided against changing the current tax relief arrangements for 2013 and clarified that tax relief on pension contributions will remain available at the marginal rate of tax.
  • The annual net relevant earnings cap remains unchanged at €115,000.
  • The age-based contribution percentages, on which maximum tax deductible pension contributions by employees and self-employed individuals is based, remains unchanged.
  • The Minister did indicate that from 2014, arrangements will be put in place to cap subsidies for pension funds delivering an income of more that €60,000 per annum.
  • The Finance (No. 2) Act 2011 introduced a pension levy of 0.6% of fund value to apply for four years on company pensions, buy out bonds, personal pensions and PRSAs. The Minister confirmed in December that this levy would not extend beyond 2014.

Some Changes not flagged in the Budget

 Approved Minimum Retirement Fund (AMRF) and Guaranteed Income Limits

 There has been a reinstatement of the requirements of a €63,500 investment in an AMRF or pension annuity (previously €119,800 since February 2011), or possessing a guaranteed yearly income of €12,700 p.a. (previously €18,000 since February 2011) before an individual can invest in an Approved Retirement Fund (ARF).

  • These reduced limits will be reviewed in the future. It has been indicated that the lower limits will apply for three years, but this timeframe has not been included in the legislation.

Other provisions applying to individuals who have taken benefits since the introduction of the higher limits on the 6th February 2011:

  • Where such individuals have specified income of at least €12,700, any AMRF they have immediately becomes an ARF.
  • Where such individuals have specified income of less than €12,700 then, any amount in excess of €63,500 plus growth on the original investment remains an AMRF. Any amount in excess of this immediately becomes an ARF
  • Vested Personal Retirement Savings Accounts (Vested-PRSAs) are similarly changed, and any restricted fund of €119,800 will reduce to €63,500 plus any accumulated growth, or to nil if the client has a guaranteed income of €12,700. (Note that the vested-PRSA restricted fund is now defined in legislation as the “ring-fenced amount”).

Vested-Personal Retirement Savings Accounts (PRSAs) taxation treatment on death

 There has been an amendment to bring the inheritance tax treatment of a vested-PRSA in line with that of an Approved Retirement Fund(ARF). This clarifies the situation where a vested-PRSA passes to a child over age 21. In such circumstances the value of the vested-PRSA will be subject to income tax at 30% and will be exempt from inheritance tax.

 Other Change

There is a section in the Finance Bill referring to an extension of the €200,000 lifetime tax-free limit to include ex gratia payments made by an employer on death or disability. The legislation referred to is the redundancy lump sum €200,000 lifetime tax-free limit. Therefore, this is not a change to the legislation governing the retirement lump sum €200,000 lifetime tax-free limit.