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net relevant earnings, whichever was the lesser. This
restricted limit tended to favour the single premium
method of contribution but it is now felt that the
present limits would permit most persons to contribute
a regular annual premium which could be supple-
mented where necessary by varying supplementary
single premiums. Apart from the older ages the annual
premium method will invariably produce the better
final pension for any given contribution, particularly
when a with-profit contract is utilised. When the retire-
ment annuity was first introduced the non-profit policy
was the only contract made available to the Irish
market.
Whilst non-profit policies would be considered by
most commentators to be no longer an economic or
viable proposition for persons in the younger age groups
it is surprising to observe that there are but two with
profit contracts available in this country at the present
time, although it is conceivable that the impetus given
to the contract by present legislation will encourage
further developments in this area.
Illustrative example
If we assume that an annual premium contribution
of £500 is applied to purchase a retirement annuity at
age 65 under a with-profit contract, the following bene-
fits would apply :
Age at entry
40
45
50
Gross premium
contribution
£500
£500
£500
Estimated retirement
benefits
Option 1: Estimated
retirement pension of £4210 pa £2610 pa £1520 pa
Option 2: Estimated
cash gratuity of
£7440
£7610
£2690
plus reduced retirement
pension of
£3150 pa £1950 pa £1140 pa
No. of years contributing
25
20
15
Total effective outlay
allowing for tax relief at
50 per cent
£6250
£5000
£3750
65 per cent
£4375
£3500
£2625
80 per cent
£2500
£2000
£1500
Estimated capital value
of total retirement
benefits as illustrated
£29770
£18450
£10750
When preparing the above illustration it has been
assumed that an average future bonus rate will emerge
equal to the underwriters' current scale of distribution.
Gomments on illustrations
The full impact of the tax concessions available can
best be illustrated by indicating that for a person aged
40 at entry who is subject to a tax liability of 65 per
cent the differential between the effective premium out-
lay and the total capital value of the benefit provided is
such that it would be necessary for him to achieve a
gross yield from private investments in the order of
35 per cent per annum or 12.5 per cent per annum
after deduction of tax at 65 per cent, to provide similar
results.
It is interesting to note that, on retirement, the
optional cash gratuity will be at least equal to the
total net premiufn outlay for those taxed at the higher
rates.
Options on retirement
Various forms of pension can be selected on retire-
ment. For the purpose of the above illustration we
assumed that the pension would be payable in equal
monthly instalments following retirement, ceasing on
the death of the annuitant, but with five years payments
guaranteed in any event. The guarantee for a minimum
number of premium instalments is normally included
to safeguard the benefits purchased against the contin-
gency of early death. Whilst it would be normal to
include a guaranteed payment period of five or ten
years, it is worth noting that a policyholder would have
the option of sacrificing a portion of the pension to
provide for a reduced income to be payable during the
joint survivorship of himself and his wife following
retirement. To illustrate this point, it could be stated
that one particular underwriter would require the single
life pension to be reduced by 21 per cent to include this
particular option at age 65 for persons of equal age.
New innovations introduced by the Finance Act, 1974
Provision for dependants
—Apart
from the improved
premium thresholds and commutation option as de-
scribed above, Section 64, Finance Act, 1974, appears
to introduce further benefits similar to those launched
in the U.K. in 1970. These are, first, the provision of
annuities for dependants, and second, the provision of
a lump sum on death prior to retirement for the benefit
of one's personal representatives. Heretofore, it was
invariably necessary to include some form of temporary
life assurance for the protection of dependants to
supplement the premium refund on death.
The inclusion of this section in the legislation tends
to recognise this factor by providing similar tax incen-
tives to encourage the extension of provision to safe-
guard one's dependants. The contributions that can be
made to this section of the contract is limited to £500
per year or 5 per cent of net relevant earnings. Gontri-
butions under this section must be taken into account
when applying the premium thresholds on the basic
contract, thereby resulting in a reduction in the permis-
sible premium contribution to one's own pension. The
pension so purchased for a spouse or dependant may
not be commuted for a cash sum.
Gonclusion
The introduction of the commutation option on
retirement allows the self-employed person to make
provision similar to that available to members of occu-
pational pension schemes. The availability of the cash
sum at retirement overcomes the major objection levied
at this particular contract in former years, and the new
threshold limits now available are such that it would
be difficult to disregard this contract in future when
planning for retirement The terms for this contract are
so varied that professional guidance is to be recom-
mended before reviewing existing contracts or initiating
new arrangements to make sure that the policy or
policies effected best suit one's particular requirements
in the light of the ever-changing conditions.
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