The Gazette 1974

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. 213

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 : 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 Age at entry 40 45 50 Gross premium contribution Estimated retirement £500 £500 £500 benefits