New pension options for self-employed

The Government has outlined new pensions arrangements for the self-employed. The measures in the Finance Bill are designed to provide greater choice and flexibility in this area.

Instead of having to surrender their accumulated pension fund to an insurance company to purchase a traditional fixed rate annuity, the Bill provides alternative options for the self-employed.

Individuals can opt to take up to 25 per cent of the accumulated pension fund as a lump sum. At least £50,000 (€63,487) of the balance of the fund must then be set aside and placed in an Approved Minimum Retirement Fund (AMRF), unless an annuity of equivalent value is taken out or the pensioner already has a guaranteed income for life of at least £10,000 per annum.

The sum in the AMRF cannot be allowed to fall below £50,000 until the individual reaches 75.

The balance of the fund, after £50,000 is set aside into the AMRF, can then be taken or invested in an Approved Retirement Fund (ARF) which is basically any fund, bank account or similar product with a regulated financial institution or investment body. It is up to the individual to choose their own investment for the balance of the fund, provided it satisfies certain rules to be laid down by the Minister, such as the need to keep it separate from other investments.

However, the new measures have been criticised by some in the pensions industry for their complexity and for the scope they create for people to make the wrong decisions because they get bad advice or because of social or family pressures.

The Irish Association of Pension Funds (IAPF) said it was concerned at the implications of the new provisions for pensioners. "This will expose people, at a very vulnerable time, to being pressurised to cash in their pensions," IAPF chairman Mr Paul O'Faherty said. He also said the proposals appeared to involve an element of double taxation.

Mr Brian Duncan, of pensions consultants Mercer, described the proposals as "almost artificial in their complexity".

Meanwhile, the Society of Actuaries welcomed the fact that the Minister had recognised the need for a minimum fund or annuity. But it believes more work needs to be done on the issue, particularly the size of the sum to be invested in the AMRF. A £50,000 investment would provide an estimated income of just £3,300 a year, at current annuity rates, SAI President Mr Bruce Maxwell said.

The new options available to the self-employed are also being extended to owner directors. The proposed changes can be applied to existing pension plans as well as future plans. Currently, an individual must exercise the option to take a pension not later than 70 years of age but this will now increase to 75.

The Government intends to extend the new arrangements to other categories of pensioners in the light of experience with the provisions for the self-employed and the development of Personal Retirement Savings Accounts (PRSAs).

As part of the new system, the annual contribution limits for the self-employed are being increased, depending on the person's age and occupation, and will be subject to an earnings cap of £200,000 per annum which comes into effect on April 6th, 1999.

The detailed legislative provisions for these arrangements are not contained in the Finance Bill but will be included at the Committee stage.

A spokeswoman for the Irish Insurance Federation (IIF) said the measures were very detailed and needed further study while Ms Ann Maher of the Irish Pensions Board said it would be considering the proposals and reverting to the Minister as it thought appropriate.

However, the Institute of Chartered Accountants in Ireland (ICAI) welcomed the provision of more options for the self-employed in relation to their pension arrangements. "While well-intentioned, the existing legislation which compels the self-employed to invest their pension fund in an annuity smacks of a `nanny state' mentality," ICAI president Mr Pierce Kent said.