Retirement & Pensions
- Company Pension Schemes (Employees and Directors)
- Level of Allowable Contributions
- Refund of Contributions
- Self Employed Individuals
- Directors Contributions
- Entitlements on Retirement
- Income Tax charge on pension funds
- Relief on Retirement for Sports Persons
- Self Administered Pension Funds
- Lump Sum Payments
- Retirement – Termination Lump Sum Payments
- Top Slicing Relief
- Lump-Sum Payment to Employees on Company Restructuring
- Retraining Exemption
- Reporting Requirement
Annual contributions paid by an employee to a Revenue approved company pension scheme are tax-deductible. The relevant contribution must be made from the employee’s total remuneration for the year from the employment the relief available by reference to the allowable contribution limits laid out below is subject to a salary cap of €115,000 (€150,000 for 2010). It should be noted that this cap does not apply to employers’ contributions to an Occupational Pension Scheme (OPS).
The relief available is limited to the individual’s marignal rate of income tax (max 41%),
Level of Allowable Contributions
Up to 1 January 2011 full relief was given for pension contributions from income tax at the individual’s marginal rate of tax up to 41%, PRSI at 4% and health levies at 2%. In addition any employee contribution did not attract employers PRSI, therefore a total saving of 47% could be made by an employee making a pension contribution, together with a 10.75% saving for the employer. With effect from 1 January 2011 the relief available and the amount an individual can contribute has been restricted. The relief available is now limited to the individuals marginal rate of income tax (max 41%). Relief from employers PRSI has been eliminated in full (for 2011 it was limited to half of the contribution made by the employee i.e. an effective relief of 5.375%).
From the employer’s point of view, they must fund at least 1/6 of the cost of the pension benefits and cannot fund for tax approved benefits in excess of Revenue limits. Annual employer contributions are allowable for tax purposes in the accounts year in which they are paid. Special contributions in excess of set limits may need to be spread forward over a period of up to five years.
Tax relief on pension contributions can be claimed by the self-employed and by members of Occupational Pension Schemes (OPS), for self employed individuals the limit applies to Net Relevant earnings NRE and for employees/members of occupational pension schemes the limit applies to earnings; in a single tax year on the following basis:
|Age Limit||Actual Allowed||Contribution l imit|
|Less than 30 years||15%||€17,250|
|Between 30 and 39||20%||€23,000|
|Between 40 and 49||25%||€28,750|
|Between 50 and 54*||30%||€34,500|
|Between 55 and 59||35%||€40,250|
(*The 30% rate also applies to specific individuals under 50 years old who are involved in occupations with a relatively short life span e.g. golfers, athletes).
Any refund of pension contributions during the lifetime of an employee including interest on those contributions, which have been made to an approved scheme will be subject to tax at 20%.
An individual who has relevant earnings from a trade, profession or non-pensionable office or employment is entitled to a deduction in respect of any premiums paid under a retirement annuity contract (“RAC”) and/or to a Personal Retirement Savings Plan (“PRSA”).
The tax deductible amount is limited to a percentage of NRE subject to the €115,000 cap referred to above. NRE includes income from trade, professions and non-pensionable employment less certain deductions e.g. qualifying interest on loans. The earnings of husband and wife are treated separately for the purpose of determining NRE and the relief is available for each spouse with non-pensionable earnings.
A self employed individual may avail of tax relief for the immediately preceding year by making a pension contribution by 31 October following that year.
Contributions to a Revenue approved Occupational Pension Scheme OPS may qualify for tax relief subject to the limits referred to above.
Remuneration means salary, bonuses, taxable share incentive plans and benefits in kind. Relief is available at the employee’s top tax rate.
Where the limits referred to in the table above have not been exceeded by virtue of regular contributions, an additional Annual Voluntary Contribution (AVC) may be made. The contribution may be made up to 31 October following the tax year in which the claim is made.
More generous benefits can be availed of where a business is carried on through a company and the company pays the pension contributions. If the director controls more than 5% of the voting rights of the company, the director can avail of the wider benefits on retirement, which are not available to self-employed contributors. A company can provide for the director’s pension via a Self-Administered Pension Scheme with the director being a Trustee of the scheme and can influence its’ investment policy.
- Use the total retirement fund to purchase a retirement annuity
- Withdraw 25% of the fund as a tax free lump sum and with the remaining 75%;
- Purchase a retirement annuity
- Draw down the balance (subject to the individuals marginal rate of tax)
- Invest in an approved retirement fund, subject to approved minimum retirement fund restrictions.
- Use the fund to purchase an annuity, this is subject to a maximum of 2/3rds of the individuals final salary.
- Take 150% of final slary amount as a tax free lump sum and buy a retirement annuity with the balance of the fund.
Defined Contribution Schemes:
Withdraw 25% of the fund tax free and invest the remaining 75% in an ARF/AMRF (prior to 2011 this was only available to directors with a >5% interest).
Maximum Tax Free Lump sum payments:
- €200,000 (reduced by tax free lump sums taken on or after 7 December 2005).
- The next €375,000 taxed at 20%.
- Excess over €575,000 taxed at marginal rate plus USC.
Access to pension fund before retirement
For a limited period of three years up to 27 March 2016 individuals who have made AVCs may access their AVCs before retirement. The amount that can be accessed is 30% of the accumulated value of the AVCs. This does not apply where the AVC was used to buy notional service. Where the option is exercised, and this may only be done on a once off basis the amount accessed by the individual will be subject to PAYE only (i.e. not subject to PRSI or USC).
Approved Retirement Funds/Approved Minimum Retirement Funds
An ARF basically offers an alternative to buying an annuity on retirement, it can give more flexibility in how pension fund monies are invested, and it can form part of the individual’s estate on death. Income and gains can be rolled up within the fund. However each year an ARF is deemed to distribute 6% of the ARF asset values at 31 December (5% in 2011). The tax applies to an individual with an aggregate asset value greater than €2m at 30 Nov in a tax year. Assets held in a PRSA from which retirement benefits have been taken are also subject to the deemed distribution rule. Prior to Budget 2012 a PRSA was not subject to the deemed distribution rule.
From 1 January 2012 onwards;
A 5% deemed distribution applies to a vested PRSA where the value is<€2m on 30 November in that tax year.
Where the aggregate value of the fund is greater than €2m at 30 /11, the 6% rate applies to the entire fund.
The limit applies cumulatively to all ARFs/vested PRSAs held by an individual.
The imputed distribution is taxed at the individuals marginal tax rate. Actual distributions are deducted from imputed distributions.
Funds invested in an ARF can be withdrawn at any stage and in any amount, either by way of lump sum or regular income. Withdrwals are subject to an individuals top rate of tax.
Where the level of annual guaranteed income at retirement does not equals 1.5 times the maximum annual rate of the State pension i.e. €18,000 an amount must be invested to provide an annuity, the amount invested must equal 10 times the maximum annual rate of the State contributory pension at the time the ARF is being availaed of ;or the remainder of the pension fund after taking the tax –free lump sum in an AMRF.
An AMRF locks away the minimum funds required as outlined above. No notional distribution rules apply.
With effect from 1 January 2015, 4% of the capital value of an AMRF may be withdrawn annually prior to the age of 75, income from an AMRF may be withdrawn subject to IT, the remaining capital may not be withdrawn until 75 years of age.
- Funds may be transferred from one insurer to another.
- Benefits may be accessed from age 60 but must be accessed before age 75 (it is not necessary to retire to access benefits).
- An ARF can form part of an individual’s estate, in which case;
- Payments to a child over the age of 21 at the date of death are charged to Income Tax at the 30% (prior to the passing of the 2012 Finance Act this was taxed at 20%). Full distribution is exempt from CAT if taken under will or intestacy.
- Payments to a child under the age of 21 at the date of death are exempt from Income Tax and Capital Gains Tax, but liable to Capital Acquisitions Tax.
- Transfer to a spouse’s ARF on death is exempt.
The €18,000 limit and 10 times the State pension limit of €119,800 are being set aside for three years to ensure that people impacted by the higher limits were not negatively disadvantaged. Therefore the limits until 2016 are €12,700 and €63,500.
Where, on 27 March 2013, the specified income limits are exceeded then any AMRF owned by those individuals will immediately become an ARF.
Standard Fund Threshold (SFT)
The maximum allowable pension fund on retirement for tax purposes has been set at €2m (€2.3m from 7 December 2010-31 December 2013) (originally €5.418m). An individual may apply for a personal fund threshold where the value of their fund was greater than €2m at 1 January 2014. The relevant maximum will apply to the aggregate value of all pension provisions held by an individual.
Where a fund exceeds the relevant limit, the excess will be liable to a once-off income tax charge of 40% (41% up to 1 January 2015) when the individual becomes entitled to draw down (irrespective of whether or not the fund is drawn down at that point in time); this is referred to as a “benefit crystallisation event”. In addition, where an individual with a PRSA decides when taking pension benefits to leave funds in a PRSA rather than opting to transfer them to an ARF, this will also trigger a “benefit crystallisation event”.
When the net after-tax excess amount is drawn down from the pension scheme, it is taxed further in the hands of the pension scheme member which can increase the effective tax rate to 64% of the gross value of the fund i.e. 40% tax on the benefit crystallisation event plus 40% Income Tax on the net distributable to the individual plus 8% Universal Social Charge.
Up to 1 January 2014 the tax operated by applying a factor of 20 times the annual pension entitlement plus the lump sum; a defined contribution scheme could also rely on an actuarial valuation. However, from 1 January 2014 for benefits accruing after this date an age related valuation factor applies from the ages of 50 to 70 + as follows:
* includes up to 50
As the annual pension amount will also be subject to income tax, a double charge to tax arises.
Tip: It does not make sense to continue funding a pension where the fund will have an excess that is subject to a 40% tax charge. Where the value of a pension fund is likely to exceed the SFT, consideration ought to be given to alternative investments
Certain relief to reduce the immediate tax burden arising when the individual retires and their pension fund exceeds the SFT of €2m applies for public sector pensions.
An annual pension levy of 0.6% on the value of private pension funds has been increased by 0.15% for 2014 to 0.75%. This was due to end in 2014 but has been extended to 2015. The rate that applies in 2015 is 0.15%
- On retirement an individual is entitled to a lump sum of €200k plus an annual pension of €100k. This fund is valued at €2.2m (€100k x 20 + €100k). Tax on benefit crystallization event is nil as the fund is valued at < €2.3m.
- On retirement an individual is entitled to a lump sum of €750k plus an annual pension of €300k. This fund is valued at €6.75m (€300k x 20 + €750k). Tax on benefit crystallisation event €4.45m x 41% = €1.825m, (as the fund value exceeds €2.3m by €4.45m).
The net after tax value of the fund i.e. 4.925m will be subject to tax at the individual’s marginal rate plus a USC of 7% i.e. 2.36m.Total €4.185m on a fund of €6.75m giving an effective rate of 62%.
As the annual pension amount will also be subject to income tax so in effect a double charge to tax arises.
Certain relief from the tax to reduce the immediate tax burden arising when the individual retires and their pension fund exceeds the SFT of €2.3m applies for public sector pensions.
An additional relief applies for certain sportspersons on retirement. It operates as a deduction of 40% against gross receipts from actual participation in the sport (excluding income from sponsorship & advertising) for any 10 of the 15 tax years of assessment prior to retirement (including year of retirement.. Relief is by way of repayment only and cannot be used to create or augment a loss. Repayments will not carry interest. It only applies to “sports” earnings and will be clawed back if the sports activity recommences.
From 1 January 2014 the relief is extended to individuals resident in the EEA or EFTA who have complied with the Income Taxes Acts. Relief must be claimed within 4 years of retirement to include the year of retirement and the fourteen years of assessment immediately pre-ceding the retirement year so there is now a degree of flexibility in specifying the optimum ten years of assessment during the sportspersons career.
Employers are required to provide employees with access to a Personal Retirement Savings Account where they do not provide an occupational pension scheme. This involves an employer providing the facility to have pension contributions deducted from an employees’ salary and transferred to the PRSA provider. Employees may elect to pay PRSA contributions in lieu of AVCs. The retirement benefits are the same as those for RACs with the same overall contributions applying (these include contributions by the employer where applicable).
Tip: There is no requirement for an employer to contribute to the PRSA, however any contribution will be deductible from income tax/corporation tax. Employers contributions will not be subject to employers or employees PRSI.
Tip: It is not necessary for an individual to retire in order to access benefits from RACs and PRSAs.
Benefits are generally accessed from age 60 and must be accessed before age 75.
Employees with PRSAs may retire as early as 50
A company may provide for a director’s pension via a self-administered pension scheme with the director as trustee of the scheme. The director can influence the investment policy, for example the scheme could make an investment solely in property.
Tip: Self-administered pensions are a means by which a pension investment may be managed personally as opposed to through an insurance company and can offer greater flexibility in the type of asset that are invested in e.g. property.
Individuals leaving employment may receive tax free payments. There are three methods of calculating the tax-free amounts:
- €10,160 plus €765 for each complete year of service with the employer.
- The amount calculated at 1) above may be increased by an additional €10,000, provided no claim for relief for increased exemption has been made in the previous 10 years….or
- Average salary for previous three years multiplied by the number of year’s services and divided by fifteen. This is known as Standard Capital Superannuation Benefit (S.C.S.B)
The tax-free amounts under (2) and (3) above are reduced by tax-free amounts received/receivable from the employer’s pension fund.
The exemption available in respect of termination payments is restricted to a lifetime limit of €200,000. From 1 January 2013 this limit also applies to payments on death and disability. Any other payments will be taxable in full.
There are some exemptions from this limit as follows:
- Retraining payments of up to 5,000 (see below)
- Payments made on account of death
- Injury or disability of an employee
There are other exempt payments which can be made on ceasing employment, including statutory redundancy payments payable in accordance with the Redundancy Payments Acts 1967-2003, injury or disability payments for persons who may have to terminate employment early due to their medical condition, and also lump sums paid under approved pension schemes. Certain lump sum payments paid to employees in respect of pay restructuring schemes are also tax exempt (see below).
The entitlement to an employer rebate of statutory redundancy has been removed with effect from 1 January 2013.
In addition to the above, Top Slicing Relief may apply. This seeks to tax the lump sum at the average rate of tax over the preceding 3 years if it is more beneficial than the rate applying in year of termination.
Where the PAYE deducted on the termination payment exceeds this amount, a refund should be claimed from Revenuefter the end of the year in which the employment terminates.
An exemption in respect of a lump-sum payment not exceeding €7,620 plus €255 for each full year of service applies to employees who undergo a pay restructuring where the emoluments of the employees are reduced by at least 10%. For pay reductions higher than 15% the maximum amount is increased.
The relief applies where:
- the restructuring scheme is necessary to ensure the current or future viability of the company and
- at least 50% of the total number of employees are involved in the restructuring scheme or more than 75% of a class of employees provided the number of participating employees in that class comprises 25% of the total number of employees in the company.
An exemption is available where retraining (in the form of a course as opposed to cash) is provided to employees as part of a redundancy package. An exemption of up to €5,000 for each eligible employee is available where an employee has more than two years continuous service. The course must be designed to improve skills in obtaining employment or setting up a business, and it must be completed within six months of the employee being made redundant. The exemption does not apply to the spouse or dependents of the employer.
There is a requirement to report to the Revenue Commissioners any payment made on death, or on account of injury or disability.