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Pensions: an Irish Life overview of the Budget 2018

The only pension change announced by Minister Donohoe in his Budget speech is the increase in social welfare payments. Included in this increase is the state pension which will rise €5 per week, with the full rate contributory pension going to €243.30 per week from the end of March 2018. 
Key Points on Pensions 
No change to the marginal rate income tax relief on pension contributions 
No change to the tax exemption that applies on pension investment income 
No change to retirement lump sum options or €200,000 tax free lump sum threshold 
No change to the AMRF limit of €63,500 or guaranteed income requirement of €12,700 
Social Welfare 
The state pension will rise by €5 per week. Once this increase happens in March 2018, this will bring the full rate state pension (contributory) to €12,651. 
The state pension continues to form an important part of retirement income planning for many, although the concerns about long-term sustainability remain. 
The necessity to have €12,700 guaranteed income before being eligible for an Approved Retirement Fund (ARF), when this increase commences, leaves a small pension income shortfall. Some people will have other pension income that will bridge this gap, and others might have the option to purchase a pension to do so. Most annuity providers will have a product minimum purchase price or other fixed costs that restricts very small annuities. 
For those who are not currently in receipt of the specified pension income they will need to invest €63,500 in an AMRF, or purchase an annuity, before being eligible for an ARF. 
Where anyone has a pension income above €12,700 they have then immediately met the income requirement. Their AMRF becomes an ARF subject to the imputed distribution requirement (from the year turning age 61, or 60 if date of birth is 1 January). They cannot choose for their AMRF to continue as an AMRF and without the imputed distribution. If Irish Life is not informed of this pension income then we will not pay an automatic income, however the tax liability will still apply and will continue to accrue with the risk of interest and penalties. It is important that clients let us know when their pension income exceeds €12,700 so that they do not face this risk. 
Government Pension Roadmap 2017 – 2021 
It was surprising that there was no reference in the Budget speech to the Taoiseach’s recent announcement that the Government will be publishing its 5 year roadmap for pensions before the end of this year. A significant element of this is the proposal to introduce pension scheme auto-enrolment in 2021. 
Leo Varadkar has spoken a number of times of his wish to introduce pension auto-enrolment for workers. The Government’s proposals for pensions over this period will likely include 
Simplification and reform for Defined Contribution pension arrangements 
Implementation of the EU pensions directive, IORPs II 
The first steps are likely to be the introduction of legislation required by January 2019 under the EU pensions directive, IORPS II, which includes increased governance requirements for trustees. This is likely to continue the move away from employers acting as trustee and towards appointing professional trustees. 
While simplification is not part of the EU directive, the Pensions Authority is also looking at the rules governing Defined Contribution schemes, including personal pensions and PRSAs. The majority of current pension rules were put in place for Defined Benefit schemes and the expectation of people staying in one employment for the majority of their career. This is no longer the reality for most people. Simplification, by having consistent retirement and transfer rules across the various pension products, can allow greater focus on the need to set income aside now to have an adequate income in retirement. 
Looking further forward, the Government have said their wish is to see auto-enrolment commence in 2021. This would mean that employees, once they are over a certain age and certain income threshold, will automatically become members of a pension scheme. They will then have the choice to opt-out after a certain period, for example 6 months. The hope is that once people are in a pension scheme and used to making contributions, they will continue to do so. The international experience shows that this is true for the majority of people. If we look at the UK experience, opt-out rates have been lower than expected at approx. 9%. The impact has been that the proportion of private sector workers in a pension scheme has increased from 42% in 2012 to 73% in 2017. 
We believe that it is important that clients can save in the long-term with confidence. This requires that members trust that pension schemes will be well run. It requires that members are consistently kept well informed, and can understand their options, so that they can make informed decisions. And it requires a regulatory environment that is stable, in order to support long-term planning. We remain willing to play our part in working with the Government and regulators to achieve the best outcome for peoples pensions needs.