Irish Brokers Association: Ireland is suffering from one of the highest levels of personal debt in the world: the money is needed now: give people the same chance afforded to the banks – let them access their pension funds.
According to Ciaran Phelan, CEO of the Irish Brokers Association, “Allowing early access to pension funds could provide light at the end of the tunnel for hundreds of Irish households who are really struggling financially. We are lobbying for this as it’s one of the most feasible and workable options in a very limited list. No significant change to pension policy is required – Ireland already allows early access to pension funds where there is a termination of employment (from age 50 onwards); an individual suffers ill health (at any age); or as a financial relief for certain public servants (judges etc…per Finance Bill 2012).
The Irish Brokers Association say international comparisons identify financial hardship as a valid ground. The reasons for this are:
v Tax free pension lump sums are now capped at 25% of the total pension fund to a maximum of €200,000. This is a lifetime limit, so why not allow access at any time during a lifetime? The amendment necessary to achieve this is simply the deletion of two words: “on retirement” from Part 30 Taxes Consolidation Act 1997
v No changes would be made to the treatment of the balance of the fund (i.e. 75% of the total fund) – this could only be accessed to purchase a pension under the current rules.
v Early access to the National Pension Reserve Fund saved Ireland’s financial bacon: why not let individuals have the same opportunity?
v Early access can boost small business start-ups (leading to job creation), purchase of first home and investment in the economy.
Ciaran continued, “The UK government looked at this and decided not to go ahead due to “minimal support”: principally from the industry. However, in Ireland, this proposal has the backing of the Irish Brokers Association (which represents 70% of all pension contributions in Ireland), the Irish Association of Pension Funds (IAPF) and IBEC. And while some opponents may argue that this will lead to a reduction of individual pension funds in the long term we would contend that this reduction is already allowed by the State at retirement, so earlier access has no further negative impact on the fund. In fact, international experience suggests that this option encourages pension savers to contribute more and start earlier”. (See international examples below)
Other potential objections outlined & argued against by the Irish Brokers Association in their proposal are
– Early access will dissipate existing savings. The maximum amount available tax free is 25% of the fund and by definition, the earlier this is accessed, the smaller the amount. International figures suggest take up would be less than 20% (see international examples below). The fear of dissipation of funds was also an initial concern in relation to ARF drawdowns and proved groundless. A compulsory drawdown was introduced after 5 years as withdrawals were significantly lower than anticipated.
– This will cost the State money. By limiting it to funded pension schemes, and to amounts that the member is already permitted to take, tax free, there is NO extra cost to the State. The Pension Levy can be deducted prior to release.
– Banks would see this as a reason to put pressure on people to encash their pension funds. Firstly, banks are already doing this. Secondly, we would propose that early access should only be permitted after sign-off by an appropriate agency: MABS, Personal Insolvency Trustee or Independent Financial Advisor.
Ciaran concluded, “It is anticipated that one of the objections to this option will be the cost to the exchequer in relation to public servants. This can be managed by limiting it to funded pension schemes. Thus public servants could access tax free cash from their AVCs without being a draw on public finance.
A second issue that arises is in relation to defined benefit schemes. The question of early access to a tax free lump sum could put pressure on a fund that is already in deficit. This can be managed by ensuring DB drawdowns are only available with trustee consent. This mirrors what happens on early retirement. In many cases DB members will have access to AVCs or DC schemes which can be utilized instead of the DB scheme.
A further objection is likely to be that individuals will use the mechanism to get additional tax relief. This could happen where an individual pays a premium of (say) €1,000 and claims 41% tax relief giving a tax refund of €410. In addition the individual immediately accesses the early access option giving him a further amount of €250. This problem can be managed by insisting that benefits are place for a minimum period of 5 years”.