MoneyTimes - February 20, 2013

Posted by Jill Kerby on February 20 2013 @ 09:00



You had to look closely, but last Wednesday, yet another sneaky ‘wealth’ tax was put into law, and it won’t just be paid by the wealthy.

The Finance Bill 2013 – which was passed by the houses of the Oireachtas on February 13, has changed the rules that regulate the way that AMRF / ARF post retirement fund operate.

Mainly the property of retired self-employed people and business owners or holders of personal retirement savings accounts (PRSAs) all approved minimum retirement fund (AMRF) holders will be paying more tax for the next three years.

AMRFs and ARFs – approved retirement funds – allow for pension funds to continue to be invested after retirement, rather than automatically being used to buy an inadequate pension annuity income for life.

Depressed bond rates are the culprit: for example, a man, aged 65, retiring this week with €150,000 in pension savings would end up with an income for life of just c€6,400 a year and just two thirds of that amount for his wife in her widowhood. That’s just €123 per week for them and in widowhood, just €82 per week for her.

Is it any wonder that since they were introduced, the majority of qualifying retirees have opted to buy an AMRF/ARF instead? These funds allows the retired person to draw down interest from the AMRF and, from the ARF both interest and capital. All interest/income is subject to income tax.

Unable to leave good enough alone, the government soon decided that at least 3%, then 5% of the ARF had to be drawn down every year and income tax on it paid to the state even if the person didn’t actually want or need to draw down any income in that particular year. (This is called ‘imputed distribution’.)

Then they changed the terms that applied to who had to have an AMRF and who could only have an ARF.

Under the original rules rom 1999,  if at retirement the pensioner didn’t have a separate guaranteed pension income of at least €12,700 (which could include their state pension) they had to invest at least €63,500 of their retirement fund into an AMRF and could only draw down the interest. The balance would be invested into the ARF from which you could draw down interest and capital.

A couple of years ago the AMRF minimum was raised to €119,800 if you didn’t have a guaranteed pension income from other sources of at least €18,000 a year. The purpose of the higher AMRF, said the (nanny) state, was to make sure that enough capital for old age was always preserved.

This year’s Finance Bill (now Act) has changed the rules again. The €119,800 AMRF / €18,000 requirement has reverted back to the original €63,500 and €12,700 combination, but only for the next three years.

Why has the government done this, pension experts are asking?  It obviously has nothing to do with a paternalistic concern that pensions don’t run out of their capital. The ones I’ve spoken to say it comes down to the fact the €119,800 required to be left in an AMRF is not subject to the 5% capital drawdown that pertains to ARFs and on which the government collects income tax.

“This is nothing but another tax-grab”, said one disgusted independent financial planner. “The government needs money. Raising the AMRF limit back-fired. They are now finding new ways to squeeze more tax out of old sources.”

What it means for the AMRF holder is that at least €56,300 worth (€119,800 - €63,500 = €56,300) of their pension assets will have to be shifted into their ARF. If they already had say, €100,000 in their ARF, they would have been liable to pay their top rate of income tax on €5,000 they had to draw down as pension income or €1,000 at 20% standard rate tax and €2,050 at 41% top rate tax.  Now their ARF fund will be worth €156,300 and or €7,815 will have to be drawn down, not €5,000. Their new tax bill is €1,563 if they pay tax at 20% or €3,204 if it’s 41%.

In both cases the tax they pay has jumped by over 50% while the percentage amount of their own money they must draw down has remained at just 5%.

This is not just a disproportionate tax move, but it is also discriminatory (it doesn’t affect occupational or public sector retirees) and, well…sneaky.

The government will say it only affects the very wealthy.  This isn’t true. Anyone who had to take out the AMRF had limited retirement funds to begin with and as a sole trader or small business owner had no union and probably no trade body to defend their interests.

If you are an AMRF holder, speak to your financial advisor as soon as possible. There was absolutely no lead in time given for these changes. The pension experts I have spoken to say there could be complications – and costs involved - in shifting some of your investments out of the AMRF vehicle and into the ARF. 


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