Pension Update: AMRF and Potential Retirement Options

When you retire you are usually given several options for your pension savings. In most cases it involves a tax free lump sum and an option with the remaining balance. This is normally an option to buy a Pension/Annuity for life or alternatively to reinvest the balance into another pension vehicle called an ARF (Approved Retirement Fund) or an AMRF (Approved Minimum Retirement Fund).

A new revenue update carried out in recent months may be very beneficial for anybody who has or will have an AMRF after drawing down their pension benefits. Previously pensioners who held an AMRF could not access their funds before they were 75 or unless they had a guaranteed pension/annuity of €12,700 a year. This created problems for those who were on the full State pension but with no other income as the maximum they receive is €12,651 (€243.50 per week).

As a result of this update, Revenue will now accept the Christmas Bonus payments to those receiving payments from the Department of Social Protection. This means that some people who were originally below the €12,700 annual income threshold are now eligible to deduct more income from their AMRF policy.

AMRF holders currently on the maximum rate of State pension should be able to access their funds in full in December this year after they receive the Christmas bonus on their State pension. Some people may not pay income tax over age 65 if their total income is less than €36,000 (married couple) or €18,000 (single person). A person/couple could use this as a strategic way to drawdown these pension benefits in a tax efficient manner.

Over a period of years, a retiree may be able to completely withdraw their current AMRF tax-free. They could withdraw it faster but might pay some tax on the withdrawals. I would always suggest that the most prudent way of doing this is with the help of a qualified accountant who can help calculate the most tax efficient way for your personal circumstances.

If you feel you may meet the €12,700 income criteria at this time, you can look to attain official documentation to confirm this. Some people do this by contacting the social welfare services office on 1890 500 000 and request a “Statement of Social Welfare Payments”.

What is a Guaranteed Pension/Annuity?

This is effectively a guaranteed Income for life and is taxable as income. The state pension, public service pension and private pensions are the main methods of building up such an income.

Unknowingly Underinsured - Restructuring Mortgage Protection

A new study undertaken by a leading life company has found that many families who fell into arrears on their mortgage during the recession may now be underinsured on their mortgage protection policy.

The impact of the recession resulted in around 1 in 8 mortgage holders, at its highest in 2013, falling behind on their payments.

As mortgage protection policies generally cannot be restructured, in most cases a new policy would need to be put in place to reflect the fact that the mortgage isn’t reducing or to match the revised mortgage agreement.

While no one likes to keep considering issues relating to their own or loved ones’ mortality, it’s important that policy owners take the time to reassess if their cover is adequate especially if they have a family with an ongoing need for a home to consider.

The case study looked at a couple who had taken out a €300,000 mortgage for 30 years in 2004, the couple also took out the equivalent amount of mortgage protection.  In 2014 their bank agreed to switch them to interest only for 4 years and they then return to full repayment in 2018. Should either pass away the individual left behind would currently have a payout shortfall of €11,569 – that being the difference between what they owe and what a typical mortgage protection policy would cover.

When the interest only period ends, the lender will re-establish repayments in one of two ways. They may extend the term sufficiently to ensure that if the homeowner resumes the monthly repayments at the original amount the loan will clear, usually after an extra couple of years. Or they can increase the regular repayment amount so that the arrears are repaid over the original mortgage term. Either way, there’s likely to be a shortfall. The higher the repayment, the quicker the shortfall may reduce.

There are a number of situations where mortgage holders in arrears enter into special agreements with their banks where it would be necessary to review or amend the mortgage protection cover in place to avoid any underinsurance. Some options designed to help the homeowner stay in their home are as follows;

1. Interest Only – over one year (probably beyond 2 years) regardless of whether the term is extended or repayments are increased in the remaining years

2. Interest Only – up to one year

3. Reduced Payment (less than interest only)

4. Reduced Payment (greater than interest only)

5. Term Extension

6. Arrears Capitalisation

7. Payment Moratorium

8. Deferred Interest Scheme

9. Split Mortgage

Protecting Your Legacy

Saving enough of your hard-earned money into your pension to prepare for retirement is a good idea. But how do you protect what you have saved and make sure it goes to your family

 The advantages of having a retirement fund include tax relief on your contributions, tax-free growth on its investment and you can take a tax-free lump sum at retirement of up to €200,000. However, if you were to pass away what you leave behind as a legacy financially, including your pension, will more than likely be subject to tax.

Your Total Retirement Fund

Think of your total retirement fund as a pot. If you leave your pot to your child it will potentially be subject to inheritance tax or income tax. By using a small proportion of the value of your pot on an annual basis you can set up and pay into a life insurance policy, which will cover the tax bill that will inevitably be due. In this case, 100% of your child’s inheritance from your retirement fund can be protected.

You may or may not be familiar with what is known as a Section 72 life insurance policy which is used to help offset an inheritance tax liability. It is a special insurance policy taken out specifically to help pay taxes arising from inheritance. If setup correctly, the money paid out, when it is used to pay these taxes, will not be subject to tax.

You may leave your Approved Retirement Fund to your husband or wife to make use of when you pass away. It won’t be subject to inheritance tax but any money they take out of it will be liable to income tax.

• If they decide to cash in the entire fund it will be subject to PAYE at marginal rate

(plus PRSI and USC).

• If they don’t take any money out, the fund will still be subject to tax. From the year they turn age 61 ‘Imputed Distribution Rules’ will apply which means income tax is payable on an annual minimum withdrawal amount drawn down from the fund.

And when your spouse passes away the retirement fund may then be left to your children. Alternatively, you could consider leaving your retirement fund to your children.

Case Study: “I don’t really know what we have, how can you help and if so, how much will it cost?”

Enquiry:

I received a call from Mary, a potential new client, asking me how I could help her and her husband to understand their current cover and pension provisions. She stated she had a mortgage protection policy but wasn’t sure exactly what this covered. She remembered her partner (Peter) taking out an insurance policy which included some illness cover but didn’t remember exactly why they had the policy. They both had various pensions with different companies and employers and she wanted to see if it would be worthwhile merging them.

Cost:

Mary hadn’t previously used a broker so was a bit apprehensive. “Before we go any further, what is the cost for you to review our policy’s?” I responded with “If you are happy for me to be your broker on these policies, there is no additional cost for you.” Mary: “But how do you get paid?” Me: “In many cases a broker’s fee is included in a policy whether you use a broker or not. You can request a fee-based charge which I can calculate based on work required but this will not reduce the cost of your existing plans.” In short, most people prefer to pay through fees paid direct from the pension/life providers.

Information gathering:

Mary asked me to investigate their policies and I informed her that if both partners simply sign a document entrusting me as her broker, I could obtain all the information required to review her policies. Mary asked if this would change her policies in any way or cost her more money. I reassured her that this just allowed me to discuss her policies with the companies but that it did not authorise me to make any changes or give any instructions that would impact these plans. I emailed this one-page document to Mary and they both signed and returned it to me.

Meeting:

I met with Mary and Peter following my review and was able to outline the exact cover and pension savings they currently held, along with the pro’s/con’s to making changes or leaving in place. They informed me of their priorities and as their children were in their teens there wasn’t a necessity for as much life assurance, so they decided to direct more of their funds towards their pension.

Peter had become a non-smoker, so a cheaper price or more cover for the same cost became available to him. Mary had the option to combine two pension plans, however she was better off moving it into a pension bond in her own name. If she had chosen to combine, she would have lost a tax-free lump sum option that was unavailable in her existing employers pension plan.  

Second Opinion?

Being diagnosed with a serious illness would be an emotionally overwhelming experience if it happened to you. You would have lots of questions: What will happen now? Is the diagnosis correct? Will the treatment be right? How can I be sure? Now, there is someone to help you answer these difficult questions. The result could save your life. If you or a loved one were diagnosed with serious illness, Aviva Best Doctors - Second Medical Opinion can help.

What is Best Doctors - Second Medical Opinion and how can their service help?

• Best Doctors - Second Medical Opinion is a global organisation which brings the world’s leading medical expertise to you and your family offering a second opinion when you need it most.

• Best Doctors - Second Medical Opinion has a unique and well-renowned network of over 53,000 peer reviewed medical professionals. Having such expertise at their fingertips and supported by a truly caring service team, is the reason why thousands of people around the world turn to Best Doctors - Second Medical Opinion when they need it most.

• Best Doctors - Second Medical Opinion can help you with those questions that are likely to be racing around your mind if you were diagnosed with a serious illness.

An in-depth review of your medical files will be conducted by a Best Doctors medical specialist to help verify your diagnosis and treatment options. The process can reduce potentially serious complications that can result from a misdiagnosis, and help you and your treating doctor determine the proper course of action.

But Best Doctors - Second Medical Opinion isn’t just for serious life threatening illness. You can use the service for any chronic or troubling ailments affecting quality of life. For example, sports injuries, skin diseases, cancer, blood diseases to name just a few.

This feature is available at no additional cost and Aviva will match the lowest market price available for the cover. It can even be used for conditions diagnosed before you took out your Aviva policy and is available with the following Aviva protection policies.

• Term Cover

• Mortgage Protection

• Specified Illness Cover

• Personal Income Protection

• Executive Income Protection

• Pension Term Assurance

Terms and conditions apply. If you currently have a Life Assurance policy and wish to review your cover, it’s worth consulting a financial broker.

Retire Inspired

The phrase ‘Retirement Planning’ is almost universally understood to relate to financial planning. But increasingly it is seen that there is more to retirement that just viewing this issue through a financial lens, i.e. planning for retirement.

As a financial adviser, I perhaps naturally focus on the figures – estimated pre-retirement earnings, fund projections, investment growth rates etc. But what sometimes is overlooked is getting the client to also envision what retirement will actually look like.

What do they plan to do in retirement, how they spend all the extra spare time, do they plan to do more travelling, what new interests/hobbies might they take up, will they engage in new learning etc?

When today’s retirees started working, perhaps in the early 1970s, the average life expectancy for retiring at age 65 was some 12 years for males and about 15 for females. Today the average is some 20 years and circa 24 years for females. Not alone can today’s retirees look forward to a much longer retirement, but in most cases, they are far healthier than in previous generations.

It is important that as people approach retirement, they have a good grasp of how their finances will be positioned so that they may look beyond the day of retirement. Some helpful questions to perhaps ask in the planning stage are;

• What do you plan to do in retirement, how will you spend your time?

• What are your major expenditures?

• What new or increased expenditures might arise in retirement, e.g. more travelling?

• Do you regularly shop around for better deals on items such as utilities?

• Will you perhaps downsize after retirement?

Recently I have been contacted by several people who have received their leaving-service and retirement options directly from the Pension company. They were originally going to choose the option they thought suited them. But upon meeting with me and going through the above questions, they felt more confident that they made the right choice for them and in some cases they made different decisions than initially planned.

One client was entitled to a substantial tax-free cash amount which she nearly missed out on as she did not fully understand the options. Another client who initially thought they were required to wait until age 65 to drawdown their pension benefits, was able to access their pension options.

The better you can envision retirement, the better you will be able to decide on financial planning options (e.g. what tax-free lump sum, whether Annuity or ARF, investment profile/risk rating of investment options etc).

The Benefits of Serious Illness Policies

Most of us do not like to think of how we would manage financially should either a spouse or child become seriously ill. Fortunately there are various options available when it comes to protecting yourself and your family and it can be an important addition if you have no health insurance cover in place.

1.    Standalone Serious Illness Cover
This is simply a Serious Illness plan without life cover. This type of policy is suitable should you have no dependants.

2.    Life & Serious Illness Cover
This plan provides you with both life cover and serious illness cover. If a serious illness claim is paid, the life cover amount remains the same. If you should die during the term of the policy, the life insurance cover will also then be paid out in full.

3.    Life & Accelerated Serious Illness Cover
As with above, this plan provides you with life cover and serious illness cover, however, if a serious illness claim is paid on this type of policy, the life cover amount is reduced by the serious illness pay-out amount. However, if you should die without having made a serious illness claim, the full life cover is paid.

The benefits can vary amongst the different life companies, but most will include the following:

Free Children’s Cover
It is important if you do have children to check this with your life company, as they may be covered for all of the illnesses listed on your policy, and sometimes for other child-related illnesses, such as meningitis.

Waiting list and overseas surgery benefit
Under this benefit the insurance company pays out part of the serious illness benefit, if you are put on a waiting list for certain major types of surgery, or if it is essential for you to have major surgery outside of Ireland.

PTD Benefit                                                                                                                                                     If you become permanently, totally disabled (PTD) from an illness, or condition that is not otherwise covered by the policy, you could claim the serious illness benefit cover under PTD.

The two types of PTD cover are: 

Any-Occupation PTD – you can only claim if you are not able to work at any job. It means you are permanently unable to do many normal daily activities, such as walking, lifting, bending, writing, or speaking.

Own-Occupation PTD – you can claim if you are permanently and totally unable to do your current job. You will usually pay extra for this type of PTD cover. You may not be able to get this extra cover, if your job carries a higher risk of disability. For example, if you are a sports professional.