The Finance Act 2016 was signed into law on Christmas Day and introduced clarification primarily for Personal Retirement Savings Account (PRSA) investors as to exactly what happens when the PRSA holder attains age 75.
For some time a number of tax planning advisers held the view that PRSA contracts could continue in force unvested after age 75. Therefore, if income drawdown was not needed, the fact that benefit access could be deferred indefinitely meant that assets could continue to accumulate tax free until the death of the PRSA holder, which is not classified as a Benefit Crystallisation Event (BCE). As such, some individuals with substantial retirement funds were encouraged to transfer these funds into PRSAs and not vest the contracts at age 75. This strategy was with a view to using PRSA contracts primarily as estate planning tools where pre-vesting death benefit provisions could be maintained indefinitely allowing transfer of funds on death to estate with only capital acquisitions tax (CAT) rules applicable. The idea was that large funds could avoid any chargeable excess tax (CET) on proceeds in excess of Standard Fund Threshold (SFT) or Personal Fund Threshold (PFT) and also avoid income tax/imputed tax by not drawing down income.
Section 14 of the Finance Act 2016 now closes off scope for this interpretation and provides for a deemed BCE to occur upon attainment of age 75 by the holder of an unvested PRSA and for PRSA holders who had already passed their 75th birthdays without vesting from 25th December 2016. For the sake of completeness, the Act also inserts similar provisions to automatically vest retirement annuity contracts (RACs) at age 75.
The new Finance Act rules now provide certainty as to the tax and benefit implications of letting PRSAs and RACs run past age 75. The consequences are not good with an immediate BCE triggering payment of CET @ 40%, unless a BCE declaration to the contrary is submitted. Also, the lump sum option is forfeited and imputed drawdown tax still applies even though benefit access could be frozen. All together the result is far from the estate planning panacea once envisaged by some tax planning advisers.
The actual number of clients immediately affected is thought to be small. However if you act on behalf of any such clients then you should contact the relevant product provider straight away to arrange for a BCE declaration to be completed by 24th January 2017 and for a transfer to ARF / cash drawdown before 31st March 2017.
Now that all PRSAs are deemed vested from age 75, advisers may well ask what advantages, if any, apply on leaving funds in a vested PRSA up to age 75.
It may be easier to ask, what are dangers of retaining vested PRSA status after exercise of a lump sum cash option?
No income may be drawn down from the ring fenced (Approved Minimum Retirement Fund (AMRF)) amount of a vested PRSA. So if assets accumulate, ring-fenced assets do not increase in proportion to non-ring fenced assets and thereby imputed drawdown obligations increase. If assets decrease, then only non-ring fenced assets suffer the reduction, resulting in reduced drawdown access to non-ring fenced assets. In corresponding Approved Retirement Fund (ARF) investments, the ARF and AMRF assets are treated separately with access of 4% per annum to AMRF assets.
Vested PRSAs increase the danger of running past age 75 and losing access to assets while still liable for imputed drawdown tax. As older clients become less able to understand complex product details, the need to transfer from a PRSA to an ARF at age 75 can be avoided by transferring to an ARF at time of exercise of a cash option from a PRSA rather than moving to interim vested PRSA status.
In light of the new Finance Act provisions, now is an opportune time to review clients currently holding vested PRSAs and evaluate the benefits of transfer to ARF / AMRF both for benefits now and very importantly for benefit into the future.