ARF Discussioin

perch

I wish to post concerning the discrimination against ARFs. ARFs are retirement funds usually owned by the erstwhile self-employed. The Revenue have decided that they are not pension funds and they have been subjected to punitive measures in the recent budgetary legislation.
I wish to start a discussion on the subject. Is this a suitable subject for your forum?

Mr. Incognito

I have moved your query into the general forum.

Approved retirement funds are just that, funds that receive beneficial tax treatment as retirement vehicles.

I am unaware that they have suddenly been designated "non-pension vehicles".

You might expand?

The "punitive" measures you speak of are the increase in the implied distribution from 3% to 5%. Simply put the assets that were rolling up tax free have to have a percentage distributed annuually or they non released funds are taxed. I think that's pretty mild in the scheme of things. What's your opinion?

perch

At 5% of capital, it means that my pension will have a falling value in money terms over time. A State pension, on the other hand, will not only maintain its money value over time, but is proofed against the decline in the value of money, known as inflation, and , as I understand it, it is index linked to the rises in real income of the current generation of state workers. But I digress.....

No pension fund, other than ARFs, is forced to make a distribution of its funds. In fact, the conventional wisdom would indicate that most such funds are under-funded in that a decent income from them would be impossible if the money was invested in secure asset classes. The German Government bond is considered to be a secure asset class, unlike its Irish counterpart. This is the basis for the problem with defined benefit funds at present and it has been suggested that the solution is to loosen the definition of "secure asset class" to include Irish Gilts, and this would solve the problem. But I digress....

The ARF has been defined as a non-pension because it does not have various characteristics which are deemed to be essential to the definition of a pension fund, such as loss of control by the beneficiary of the moneys, and lack of termination of value on the death of the beneficiary.
I doubt very much that a court would uphold such an exclusive definition of a pension. I invested in a pension. The money became a pension fund.
I am sure that any decent court would not pussyfoot as the Revenue have done.

My problem is that I cannot afford to go to court to check this out.

What I would like is to get the opinions and suggestions of other ARF holders. Maybe together, we can work out a way to tackle this discrimination.

perch

You asked about my view on the status of ARFs and this might give you an insight.

When I queried the imposition of PRSI on drawings from my ARF, it was explained to me by a manager in the department that ARFs were not considered to be pension funds because they do not terminate with the death of the beneficiary.

Mr. Incognito

You seem to be very confused here and are mixing terms like defined benefit pensions with ARFs and indexed linked Public Service pensions with State Pensions etc.

Just to clarify things I'm going to give you a very basic overview on pensions.

here's a link I suggest you have a look at: http://www.revenue.ie/en/tax/it/leaflets/it14.html

If you are in employment you can make contributions to your employers pension scheme or a self administered pension scheme (generally for people that are self employed) Tax relief at marginal rates is given up to certain thresholds depending on age. The reason there is no implied distribution is that you are not retired but saving for retirement.

An ARF and AMRF are vehicles you can set up ON RETIREMENT to allow further tax free roll ups of the accumulated fund. However as you are supposed to be retired you should be drawing down a fixed amount of this every year and the 5% implied distribution reflects this. The logic of the implied distribution is that persons cannot take advantage of the legislation to shelter their pensions pots from tax indefinielty by not drawing down the funds i.e If they did then it is not a pension but rather an avoidance mechanism.

Having read your facts I fail to see how "your manager" is referring to an ARF as you would seem to be in employment still.

Here is a summary of the budget 2010: http://www.budget.gov.ie/budgets/2010/Summary.aspx

You might try and highlight what provisions you are referring to as your facts seem to be quite confusing.

I think you may be referring to the application of PRSI and USC to the pension contributions :

PRSI & PENSION CONTRIBUTIONS

With effect from 1st January 2011, employee pension contributions will be subject to employee PRSI & the USC. Previously there was relief of PRSI and health levy for employee pension contributions.

Employer PRSI relief on pension contributions made by employees is also to be reduced by 50%. Therefore 50% of employee pension contributions will be subject to employer PRSI at 10.75%. This places a further cost on employers in providing funding for occupational pension schemes.

CONTRIBUTION LIMITS FOR PENSION RELIEF

High earners will take a further tax hit on the earnings cap for pension relief which is to be reduced from €150,000 to €115,000. This reduced limit apply for payments made in 2011 whether the contribution is against 2011 or 2010 earnings. Therefore, if you wish to maximise the current threshold of €150,000, you may want to making additional pension contributions before the end of this tax year.

perch

We will kill off this thread rather quickly as we are going. Please do not jump to conclusions in discussions with me. I would rather have you ask a question for clarification if desired. I find it best right now to simply ignore all the resulting red herrings. I apologise to any viewers who have been confused by anything which I have stated. So I will begin again and state my position in a simpler way.

1. I am retired
2. I have an ARF and an AMRF.
3. I denied myself a higher standard of living in the past to build up a fund so that I would not be destitute during the possible thirty odd years of my retirement. I took a conscious decision with my money.
4. This process began many years ago and I had the reasonable expectation that the basis on which I was saving would be honoured by the state and that the goalposts would not be moved after I had taken my shot. I was mistaken.
5. My plan was to cater for a future where there was inflation and where the real value of my money would be eroded, and even in a world run by Germans, three or four per cent inflation a year does not seem unlikely. At 2.5% inflation, the real value of my money becomes half in 30 years. In other words, my real income would halve at least. The position is even worse if there is a real improvement in the standard of living during this time because I would not be participating. Consequently it makes sense to live on other moneys where the income is fully taxed today and to roll up the ARF money as a protection against inflation for many years. Now I find that this plan is frustrated because I am given the choice of drawing 5% and paying tax on it, or suffering what is effectively a wealth tax of almost 2% of capital. I live in a banana republic where the State is grabbing my savings.
6. My children, all of whom are self-employed, are watching this process and have already realised that any moneys put into pension funds in Ireland are unsafe and can be targetted by the increasingly desperate state sector. If they can do it to an ARF, there is no reason why they should not do it to some other form of pension savings vehicle. Once money goes in, it cannot be extracted without drastic penalties. Goalposts can be easily changed by the State. So the question is been asked as to whether it would be better to get out of a country where your money becomes a slush fund to shore up the standard of living of the state sector at a level which is quite out of line internationally and totally unaffordable. Already the peers of my children who can easily move are emigrating. It is catastrophic, and they all talk to each other.
7. To put this in a national context, I have recently been asked by the Economics department of UCD to take part in a survey of family owned businesses in Ireland. It has been realised internationally that the standard of living of a country correlates quite closely with the strength and number of family owned businesses in that country and so UCD is having a look at the situation in Ireland. The standard of living of every public servant depends on this creative process continuing at a high rate. Driving self-starters overseas is beyond comprehension.
9 I am hoping that there are some ARF owners who are viewers who might engage in a discussion and possibly work towards a lobby or legal challenge or whatever to redress the injustice.

hmmm

You're right to be angry, pensions (and subsequent ARFs) are a long term savings vehicle yet we have governments making huge short term changes. It's crazy and stupid. Worse, I fear that the government has its eye on pension savings as a potential government slush fund. Some of their recent actions with pensions is little more than theft of private savings. The proposed tax relief changes will effectively outlaw the private sector pension, only public servants and bankers will be able to afford a pension.

All I can do is sympathise and suggest you make your views known to your politicians.

perch

Thanks for the encouragement, Hmmm. A quorum for a lobby is definitely one objective, and there are more. I'm disappointed at the level of response. Is there a way to check statistics of eyeballs etc on the thread? I may be wasting my sweetness on the desert air...
I would be surprised if Mr Incognito does not have some tools at his disposal???
Stop press....
OK I'm learning by observing... 161 pairs of eyeballs.... so not getting ARF owners attention, it seems. From off-line discussions, it would seem that the standards of anonymity on the "Boards" site are high, so no danger that potential responders are scared of coming under special Revenue scrutiny by responding..... or is this pious nonsense?

hmmm

Why would they be scared of Revenue, you're looking for a change in the law not to break the current one. My philosophy is if you keep plugging away making your point when relevant and to the right people, eventually a change will be considered.

perch

That last post is actually very helpful, Hmmm, and clears my head.

For now, I would simply like to separate my thread from tax incentivised savings threads. One may dislike a reduced incentive but there is nothing shady or unethical about it.

ARF owners, on the other hand, have done their saving on a certain basis, and can argue that it is unethical, and arguably downright illegal of government to change the ground rules after the event.

I will not leave this claim in the air but will explain it more fully in due course. I will follow up this theme of low standards of Government with more postings in due course... I will point to the culpability of the individual Public Servant in this regard. I will also point out how they are shooting themselves in the foot and will pay a big price for their actions. All this will be directly related to the thread.

I still have the hope that other ARF owners will come aboard and give their views on the subject but maybe I should pursue this objective in other fora also. I would welcome any ideas n this regard.

Mr. Incognito

This forum is for discussion of tax matters. If you want a political rant take it to politics please.

I'll leave this thread open for now but if people start getting up on soapboxes bashing civil servants etc I'll close it.

Confine discussions taxation policy and opinions of same please.

perch

I must be hard to understand or the subject must be hard to follow so I'll have to go back to the start again.

Summary of the argument:

Self-employment is the engine of growth in the economy. It is the source of new growing businesses, but it has a low success rate on all time scales. It is very inefficient because of the high failure rates. One sub-sector has better statistics. The phenomenon of entrepreneurial families is the exception. These are serial self starters with the cultural roots, the family discussions and experience necessary for high success rates. I have mentioned them earlier in the context of research being carried out by UCD.

Ireland has a bad history of successful development of long lasting and growing indigenous firms. I reckon that this is the result of our colonial past and that it will take time to develop sufficient of the entreneurial-type families which are at the root of success in the USA and Germany. There are two ways in which this is being promoted. Firstly a low corporate tax rate aids survivability during the first generation. Secondly ARFs are a vehicle by which the second generation can stand on the shoulders of the first generation. It is so hard for businesses to pass from generation to generation. Yet this is essential for a trend to develop nationally and for the multi-generational entreneurial-type family to be created. I'm not a university professor lecturing on the basis of papers which he has read. I'm speaking directly from experience.

The introduction of self administered pension funds which turn into ARFs on retirement was a solution to the problem of getting business founders to pass on the business rather than sit on it and give it little chance of survival into the next generation. I suppose that the thinking came from
efforts to encourage elderly farmers to retire so that the land might be worked more effectively by the energy of the next generation.

The visibility of these processes has been concealed because of the time scales involved for their fruition. Short-term phenomena such as the US investment here based on the low corporate tax regime and the property bubble have dominated the near view. The result is that tax reformers have lost sight of the long term objectives of the ARF scheme. They need to go back to the drawing board and consider what it is that they are trying to achieve.

ARFs are designed so that founders would pass on their businesses to the next generation. They were designed so that funds would survive to form a higher floor for the next generation. Is it wise to close this door?

Surely the authorities can find ways to prevent ARFs being used as loopholes by those who do not conform to the model described above but I will not venture any suggestion here as it is off my thread...

Mr. Incognito

ARFs are designed so that founders would pass on their businesses to the next generation. They were designed so that funds would survive to form a higher floor for the next generation. Is it wise to close this door?

No they are not.

The following reliefs apply to give tax relief to business passing onto the next generation.

Business Property relief.
Business farm relief
Site to child exemptions
CAT Thresholds
Effective Trust Funds

There are probably more if I thought about it but it's just to make the point.

ARF's are Retirement Vehicles not designed to cater for the next generation but to cater for ones self when you are retired. ARF's like all pensions are deferred taxation. You will ALWAYS be taxed on pension funds, the question is when. There is no such thing as a tax free pension. AMRFs and ARFs are vehicles for you to roll up a pension pot free of tax before it is paid out to increase the pot size. It will still be taxed when distributed. If a pension pot is distributed to your decendents it will be taxed twice, first to the estate and then on the inheritence.

The tax treatment has become le ss favourable, and PRSI will be charged on contributions which is probably a short sighted decision from a tax take perspective but it is hardly some sort of swashbuckling attack on the self employed. Corporate tax rates are unchanged. Seed capital relief and BPR relief have been expanded in a new format for example. EVERYONE is taking a hit. I suggest you take it on the chin and move on like everyone else and vote for someone else in the next election. That's democracy.

perch

Begging the question. Stating your opinion as if it were a fact is a logical error.
Lists of references used as a weapon with which to bully opponents.
Political cajolery used to haze opponents is directly contrary to the charter but now used for a second time by Incog* on this thread. Please Incognito, you can do better than this.

At this point it seems wise to refer viewers to the article by Garret Fitzgerald in the Irish Times of 16 October 2010. Take it as a starting point for a discussion of ethics.

In the meantime, I want to examine the question of whether my ARF represents at common law a contract between me and the government(or the Minister or whatever).
Firstly I want to apologise for an earlier claim which I made that the ARF impositions in recent taxation legislation were illegal. They are not illegal. However I will now demonstrate that they are in breach of contract with existing ARF owners up to the time of the legislation. This subtle change makes all the difference because in the latter case, it is necessary to sue to get redress.

There is legislation which enables the taxpayer to save in a tax effective manner now and get paid in a taxable manner after retirement. I believe that a common sense man would describe these as offers by the State. I looked at what was on offer and selected a form which would lead to an ARF on retirement. I carefully complied with the requirements and signed up with a registered Trustee, and in this way I accepted the offer. Thus I completed the first step in the formation of a valid contract which is known as “Offer and acceptance”.

The second requirement of a valid contract is called “consensus ad idem”. This is a requirement that the parties to a contract should have reached an agreement which is the same to both of them. It is completely obvious that the matter of the contract is a matter of the timing of expenditures and subsequent taxation and because of the written nature of the contract, this can be clearly demonstrated. So “consensus ad idem” will not be a threat to the validity of the contract.

The third requirement is called “valuable consideration”. I put a lot of money into this long term scheme and got significant deference of taxation so there is no doubt that I satisfy this requirement. What of the Government? What did they get? Surprisingly, I find this to be a more difficult question and open to debate. I guess that they got my forbearance represented by my money in the hands of the trustee, but I do not want to be pinned to this answer and may be able to improve on it with a little thought. One way or another, I am sure that the condition of “valuable consideration” can be satisfied.

I conclude therefore that I have a valid contract for my life through the vehicle of my ARF with the government, but, in recent years, they have unilaterally changed the timing terms of the contract, and since timing is critical, they are in breach of the contract.

The beauty of common law is that it is built up on the basis of long established ethical principles. So besides showing that the more recent legislation concerning ARFs is in breach of contract, I have also demonstrated that it is unethical. Dishonesty is the word normally used.

perch

Mr. Incognito is cumbersome. I would like to abbreviate with your permission. Inc, Ink, Inky, yes, Inky, I will use Inky to refer to you in future unless you object.

A short moniker is requested by the general charter of Boards...

Mr. Incognito

Oh dear.

A quote from garret fitzgerald that outlines a blatantly incorrect comparison of tax and budget legislation with contract law??

If the budget was a legally binding contract between the people and the government then everyone in the country would be able to sue every time any nuance of tax legislation changed.

I'll deal with your point. Valid contracts need at first pronciples:

Offer and Acceptance

The government does not offer ARF's by legislating for them. It is merely an application of the tax treatment that will be applied. These vehicles are established and run by a variety of institutions with which you have your contract. The changed tax treatment does not affect your contract with the provider.

Garret Fitzgerald is a person with no legal training who is giving his own unexpert and totally legally inaccurate opinion in a newspaper. It is not gospel, accurate or even persuasive to anyone that has any common sense.

ANYWAY,

This is not about taxation matters. If you want to discuss the legality of ARF's take it to legal.

Thread closed.