qfa pensions 2018/2019 lecture - lia...gross remuneration less employee scheme contributions, within...
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04/12/2018
1
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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3
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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4
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)
Survivor’s pension
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
Income tax Liable to income tax but not USC; PAYE not deducted at source
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
Income tax Liable to income tax but not USC; PAYE not deducted at source
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
Income tax Liable to income tax but not USC; PAYE not deducted at source
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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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
• 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.
Employer Pension Schemes
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
Survivor’s pension
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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Special Contribution / Ordinary Annual Contribution
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
Relief allowed :Yr 1 : €7,500Yr 2 : €7,500Yr 3 : €5,000
Tax relief on employer special contributions
Special Contribution / Ordinary Annual Contribution
OAC = €20,000 SP : €65,000
Spread Period:
€65,000/ €20,000 = 3.25, rounded down to 3 years
Relief allowed :Yr 1 : €21,667Yr 2 : €21,667Yr 3 : €21,667
Spread Period:
€65,000/ €20,000 = 3.25, rounded down to 3 years
Relief allowed :Yr 1 : €21,667Yr 2 : €21,667Yr 3 : €21,667
Tax relief on employer special contributions
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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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
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
• Exempt from Inheritance Tax
Child of deceased, over age 21
• 30% income tax charge
• Exempt from Inheritance Tax
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
Employer Pension Schemes
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 a preserved benefit in the scheme or take a transfer value?
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.
Retain a preserved benefit in the scheme or take a transfer value?
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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QFA PensionsDecember 2018Lecture
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