The Gazette 1974

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

Gross premium

contribution

£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

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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