Pensions simplification – what’s next?

IN November 2020 the Interdepartmental Pensions Reform and Taxation Group published its report on pension reform and simplification following various consultations with different key stakeholder groups carried out in 2018. The focus of the report was on supplementary private pensions and it provided recommendations to make the pensions regime in Ireland simpler to understand and operate.

At the end of the year we saw three of the recommendations covered in the report come into effect. The Approved Minimum Retirement Fund (AMRF) was abolished from 1 January 2022, the “15 year rule” for transfers from occupational pension schemes to PRSAs was removed and the option of investing in an ARF as opposed to compulsory annuity purchase with any remaining funds on death after the payment of the tax free lump sum of four times salary was introduced.

All very welcome changes. It is important these changes are just seen as the start of the journey to simplify the private pension regime in Ireland. When the Group published their report, their stated aim was to look at some “quick wins” by implementing change relating to some of the more straightforward measures covered in the report.

So what are the next quick wins?

First up, it would make sense to see the end of the requirement to complete a Certificate of Benefits Comparison in transferring from an occupational pension scheme to a PRSA as this comes hand in hand with the 15 year rule.

Many were surprised to see this requirement remain when the 15 year rule was removed at the end of last year. In terms of additional quick wins, we would suggest the introduction of the following recommendations would help simplify matters for clients and would be positive developments:

  • The ARF should be an option on retirement regardless of how you take your retirement benefits. At present if you are retiring from an occupational pension scheme and take your retirement lump sum based on salary and service then you must purchase an annuity with the balance of your fund.

  • Simplify the annual ARF distribution requirement so that the required drawdown is a standard percentage irrespective of your age or the size of your retirement pot. The current rules do not make it easy for the customer to understand how it works and it over complicates the administration of an ARF.

  • Change the retirement age across all pension products to a range between ages 55 and 75. Currently different retirement age ranges are legislated for across the pension products with no real logic to why this is. Flexibility and consistency is needed to move in line with the demands of society today.

  • Transfers between a personal pension and an occupational pension scheme should be allowed, but currently they are not. If you want to effect such a transfer it can be achieved by transferring the personal pension to a PRSA then to an occupational pension scheme. That being the case remove this barrier and allow direct transfers.

  • The definitions of ill health to receive retirement benefits at any age should be the same across all pension products.

It’s not all about quick wins though.

One bigger item that needs to be brought to the top of the agenda is the redesign of the PRSA product. It is proposed that the PRSA should operate as a whole-of-life product allowing policyholders to retain funds in the PRSA post-retirement and beyond age 75

More fundamental change is needed

One bigger item that needs to be brought to the top of the agenda is the redesign of the PRSA product. It is proposed that the PRSA should operate as a whole-of-life product allowing policyholders to retain funds in the PRSA post-retirement and beyond age 75.

A benefit in kind (BIK) tax charge currently applies to the PRSA holder where the combined employee and employer contributions to a PRSA exceed the age related tax relief limits in the relevant tax year. The Revenue Commissioners have confirmed that they are currently working on addressing this anomaly.

This would leave the door open for a redesign of the PRSA structure to bring it in line with an occupational pension scheme. This is even more important considering the agenda the Pensions Authority has to reduce the number of occupational pension schemes and trustees in Ireland.

In order to achieve this they will have to make the necessary changes to PRSAs so it mirrors the benefits and funding available under an occupational pension scheme. If, or when, this happens it would help facilitate the implementation of two other recommendations of the Interdepartmental Group, to close off Personal Retirement Bonds and Personal Pensions as retirement contracts for individuals.

These contracts could transfer to a PRSA. The Pensions Authority want to see change but real change is not going to happen until the PRSA issue is addressed. One final recommendation that was made that we feel should be dealt with as quickly as possible is the “levelling up” of the retirement lump sum available under pension products. Standardising this at 25% of the retirement fund would seem to be the best approach.

That way it makes it simple for the customer to understand. If we are going to encourage people to take out a pension we have to remove all the complexities. This could result in a negative impact for existing occupational pension scheme members but a suggestion of a lead in period could allow the current service and salary option to be availed of before any proposed change is made.

It is encouraging to see the simplification agenda in motion and it needs to keep moving at pace with some more radical changes brought in too, sooner rather than later, if we really are serious about introducing a simpler and fairer pensions system in Ireland.