Occupational Pension schemes
The treatment of pension schemes is broadly similar to that which formerly applied in the United Kingdom. In broad terms, there are occupational pension schemes and various types of private pension schemes, principally for those outside the scope of an occupational pension scheme.
Employers qualify for tax relief on pension contributions to Revenue approved pension schemes on behalf of their employees. Employees subject to the relevant limits will be exempt from income tax, social insurance and PRSI. The contributions must be made to a Revenue approved occupational pension scheme.
The tax relieved amount of contributions by employers are limited by the forecasted pension income that will be provided from the scheme. Broadly speaking, a person with the maximum service may have a scheme funded for up to 2/3 of his final salary.
The pension may be up to 2/3 of final remuneration provided that there has been at least 10 years’ service at normal retirement age. This covers funding made by the employer or employee.
Pension schemes may be defined contribution scheme or defined benefit scheme. The defined contribution scheme is based on the fund size.
Defined benefit schemes promise a certain level of benefit for which the employer agrees to make the relevant contributions or to make up the shortfall, between the required sum and the agreed employee contributions. They are subject to significantly more regulation, given the employer’s pension promise.
Occupational pension funds are subject to a maximum limit based on the number of years of employment and the project final salary. This is the current salary projected forward.
PAYE requirements apply to the trustees of occupational pension schemes and other administrators who pay pension income after retirement.
In the case of personal pensions and personal retirement savings accounts (PRSAs) which are individual pension accounts, there are annual limits for contributions by employers and employees based on age. They are a percentage of salary. particulars set out below. Where contributions are unrelieved, they may be carried forward and relieved in subsequent years.
There are limits on personal pension contributions by an employee whether to a retirement annuity contract (personal pension) personal retirement savings account or direct contributions to occupational pension scheme additional voluntary contributions to top up an occupational pension scheme.
Individuals may make pension contributions, whether they have employed or self-employed income based on a percentage of maximum annual earnings limit of €115,000. Personal contributions to a pension plan are relieved from income and other taxes.
In addition, the maximum annual percentage of earnings permitted is as follows
- less than 30 years of age 15%
- 30 to 40 years 20%
- 40 to 50 years 25%
- 50 to 55 years 30%
- 55 to 60 years 25%
- 60+ years 40%
Some occupations have a higher percentage of contributions. The percentage applies to both employer and employee contributions to a PRSA.
There are overall funds limits which if exceeded cause tax charges to the total pension fund and effectively make contributions beyond this fund size tax inefficient. The maximum fund size for all pensions is €2 million save in the case of certain persons who had larger funds prior to the change in the law.
Where the fund exceeds this amount for other individuals the excess is subject to a tax of 40% at the exit. In this case, the pension payable may be subject to marginal tax rates
Personal Pensions /PRSA
Self-employed persons and employees who are not members of an occupational pension scheme (promising at least certain minimum retirement benefits) may contribute to a personal retirement savings account or a retirement annuity contract (personal pension plan).
There is no limit on the potential’s fund size. The limits are on the percentage contributions as set out above.
A PRSA may be used to purchase an annuity or be placed in an approved retirement fund (ARF). The approved retirement fund holder must deduct tax on distributions
Members of an occupational scheme are generally allowed by the terms of the scheme to take a lump sum. The personal pension lump sum is up to 1.5 times remuneration. In the case of proprietary directors (or employees (holding more than 5% of the company) they may take up to 25% of the fund
Formerly the lump sum was tax-free without limits. Limits now apply. The first €200,000 is tax-free. The next €300,000 is subject to standard rate income tax (20%) The balance is subject to marginal tax rate USC and PRSI, which will rarely make it tax inefficient.
On retirement, the pension holder generally takes the benefit of an annuity for his life (in certain cases for the benefit of spouses and children purchased by their fund or in accordance with the defined benefit scheme promise.
Approved Retirement Fund
An alternative which is now widely available is that the assets are taken into an approved retirement fund. This fund must be held by certain approved providers and is beneficially owned by the holder. On death, any remaining assets may pass to survivors. A tax of 30% applies when the fund is left to children over 21. General inheritance tax rules apply when paid to children under 21.
In broad terms, the option to take an approved retirement fund is available to persons with a personal pension i.e. retirement annuity contract for PRSA It has been extended so as to be available to certain members of a defined contribution occupational pension scheme.
In order to be permitted to invest in an ARF, the individual must have at least a defined amount of other annual pension income in payment and must have invested least have a minimum amount in an approved minimum retirement fund AMRF. This fund may not be drawn until the individual reaches the age of 75 years.
Distributions from approved retirement funds are subject to PAYE. There is a minimum required distribution. The deemed distribution is 4% for individuals aged 61 to 70 whose fund is less than €2 million and 5% for those over 70 years.
Where the fund is over €2 million in value the deemed distribution a 6%. Accordingly at least this distribution must be taken to avoid the taxation.