I propose to take Questions Nos. 315 and 316 together.
Flexible options at retirement (the so-called ARF option) are available in respect of all benefits from Defined Contribution (DC) retirement benefit schemes and other DC-based pension savings. Choices available to individuals (after taking the tax-free retirement lump sum) include the option to purchase an annuity with the remaining funds, to receive the balance of the pension funds in cash (subject to marginal rate income tax, as appropriate), to invest in an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF), once certain conditions are met.
To deal first of all with the changes to access to AMRFs, I should explain by way of background, that under the flexible options at retirement arrangements, where an individual in a DC pension savings arrangement is under age 75 at the time of exercising the option and does not meet the guaranteed pension income requirement of €12,700 per annum, that individual must place a maximum set aside amount of €63,500 (or the remainder of the pension funds if less than €63,500 after taking the retirement lump sum) in an AMRF or purchase an annuity with those funds.
Any amount of remaining pension funds in excess of €63,500 can be invested in an ARF with access to those funds at the owner's discretion, subject to tax, at the marginal rate.
The purpose of the AMRF is to ensure that an individual without the minimum guaranteed pension income for life has a pension nest egg to provide for the latter years of his/her retirement. Up to Finance Act 2014, the capital invested in an AMRF could not be accessed, except to purchase an annuity, until the AMRF owner reached age 75 (or meets the guaranteed pension income requirement before then) at which point the AMRF becomes an ARF with unrestricted access to the funds, subject to taxation. While the capital sum in an AMRF could not be accessed, as set out, any income, profits or gains accrued from the investment of the capital could, up to now, be withdrawn by the AMRF owner, subject to tax at the marginal rate.
I decided to change, from the 2015 tax year, the arrangements for AMRFs so as to allow AMRF owners voluntary, tax-liable access to a maximum of 4% of their AMRF assets each year up to the point at which the AMRF becomes an ARF. This change provides AMRF owners with access to a definitive and certain level of income from their AMRF rather than the uncertain level of income which access to the accrued income, profits and gains in the AMRF provided.
Under the previous access arrangements for AMRFs, the extent of any income, profit or gains would depend on the performance of the investment options taken and could, therefore, be highly volatile with the possibility of little or no gains accruing in certain years. In addition, the scale of the capital allowed for in an AMRF, at €63,500, would not always permit for investment returns of any significant scale to be made using a prudent investment policy.
The change allowing access to a specified percentage of the capital in an AMRF is primarily aimed at those individuals whose AMRF constitutes a significant part of their retirement funds and who, while not wishing to purchase a pension annuity with those funds, may require access to a portion of these funds to provide a more certain form of supplementary pension income prior to reaching age 75. This facility also ensures that an individual will have some remaining funds in the AMRF at age 75 to provide for their remaining years, assuming the individual has not purchased a pension annuity in the meantime.
Individuals whose AMRF represents a less significant part of their retirement funds and whose circumstances would allow for greater investment risk and, therefore, potentially greater investment returns will be limited to the 4% level of asset draw down. However, this draw down will also be available to them for periods when their AMRF investments make losses or returns of less than 4% of the value of their AMRF assets and where, under the previous arrangement, they would not have been able to make a draw down or the draw down would have been of a lesser value than will now be permitted.
Finally, in this regard, it is open to the owner of an AMRF at any time to use some or all of the capital in an AMRF to purchase a pension annuity.
As to changes in legislation relating to AMRFs over the past 3 years, there have been a number of changes made in this period relating to the ARF option of which AMRFs form part.
Budget and Finance Act 2012 increased the annual imputed distribution applying to ARFs from 5% to 6% in respect of ARFs with asset values in excess of €2 million while also extending the imputed distribution arrangements to vested Personal Retirement Savings Accounts (i.e. PRSAs where benefits have commenced.
Finance Act 2014 reduced the annual imputed distribution rate from 5% to 4% for ARF owners in the age group 60 to 70 years whose ARFs have assets of €2 million or under. This change was introduced in order to reduce the risk that individuals in that age group might outlive the funds in their ARFs.
In Finance Act 2013, I rescinded the Finance Act 2011 changes to the specified or guaranteed pension income requirement for ARF access which had increased that income requirement from €12,700 to a variable limit based on 1.5 times the State Pension (Contributory) which amounted to €18,000 per annum. At the same time, I also rescinded the Finance Act 2011 change which increased the maximum set aside amount required to be invested in an AMRF from €63,500 of the remaining pension fund (after taking the permissible tax-free lump sum) to a variable amount equal to 10 times the annual State Pension (Contributory) rounded to the nearest €100 which amounted to €119,800 or the remainder of the pension fund if less than this increased amount.
I re-introduced the original specified income requirement and maximum AMRF set-aside amount on the grounds, among other reasons, that without an appropriate transition period the 2011 Finance Act changes would detrimentally affect the plans of many individuals preparing for retirement over the medium term. The intention at the time of Finance Act 2013 was that the 2011 changes would be re-introduced in 2016. This matter is being examined in the context of the preparations for Finance Bill 2015 taking account of developments since 2013 and the current situation.
