• Company Pension Schemes (Employees and Directors)
• Level of Allowable Contributions
• Refund of Contributions
• Retirement Annuities
• Directors Contributions
• Entitlements on Retirement
• Income Tax charge on pension funds
• Approved Retirement Funds (ARFs)
• Relief on Retirement for Sports Persons
• PRSA
• 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

Company Pension Schemes (Employees and Directors)

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  For 2011 onwards 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).

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 is 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.

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Level of Allowable Contributions

Allowance for contributions for employees of company schemes and Retirement Annuities is subject to certain limits depending on age:

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
Over 60	40%	€46,000

(*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).

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Refund of Contributions

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%.

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Retirement Annuities

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. The tax-deductible amount is limited to a percentage of Net Relevant Earnings (NRE). NRE includes income from trade, professions and non-pensionable employment less certain deductions e.g. qualifying interest on loans. Individuals can claim tax relief on contributions on their NRE subject to an earnings cap of €115,000. The cap does not apply to employer’s contributions. The earnings of husband and wife are treated separately for the purpose of determining net relative earnings. The relief is available for each spouse with non-pensionable earnings. Personal contributions may be made through payroll and relief from PRSI and levies may also be available.

The limit applies to the amount of relief available and not to the amount that may be contributed to/invested in a pension fund.

There is a facility to carry back annuities where agreements were already in place pre 6 February 2003 under which members had been offered an option to purchase additional years service in respect of actual service in the employment before the individual entered the pension scheme.

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Directors Contributions

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.

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Entitlements on Retirement

Annual pension: 2/3rds the final remuneration, provided a minimum of 10 years service at retirement.

Tax free Lump Sum: 1 ½ times final remuneration where twenty years service has been completed at normal retirement age. This interacts with the pension to reduce the maximum amount of pension available. The tax free lump sum is subject to a cap of €200,000 (previously set at €1,354,521). The €200,000 is an overall lifetime limit. In addition, any tax-free lump sums taken on or after 7 December 2005 will be aggregated in determining the tax treatment of lump sums paid on or after 1 January 2011. Any excess pension lump sum over €200,000 will be taxed as follows:

 

Next    €375,000      20%

Balance         @        48% (41% income tax + 7% 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 5% of the ARF asset values at 31 December (prior to 31 December 2010 this deemed distribution amount was 3%).

Prior to 1 January 2011, only personal pension plans, AVC contributions, and occupational pension schemes set up by a company for Directors who owned more than 5% of A Company could be transferred to an ARF. With effect from x January 2011 (date ACT PASSED) it is possible for members of defined contribution schemes to avail of this option. The features of an ARF are as follows:

• A maximum of 25% of the fund (subject to a limit of €200,000 taking into account the provisions of any pension adjustment orders) may be taken tax free, alternatively;
• An individual may decide to put his accumulated pension fund into an Approved Retirement Fund’ (ARF) or purchase a life annuity.
• At least €120,000 (previously €63,500) must be put into an ‘Approved Minimum Retirement Fund’ (AMRF) and must remain there until the individual reaches 75 years unless the individual has a guaranteed annual income of €18,000 (previously €12,700 per year). Both of these amounts are variable as they are dependent on the rate of State Contributory pension payable at the time the ARF is exercised.
• For individuals who retired before ——- (date act passed) they have the option of exercising the ARF option within one month of the date the Act passed i.e. —if they do this the previous €12,700 and €63,500 limit applies for a three year period, after which time they must fund to the higher limits.
• The individual may decide to take the balance of the fund as a taxable lump sum (excluding the aforementioned €120,000) or invest it in an ‘Approved Retirement Fund’ (ARF).
• An individual may choose to continue making contributions or to let the fund accumulate until he reaches 75 years. He cannot, however, take a lump sum and let the pension fund remain.
• Income and gains arising on an AMF/AMRF are exempt from tax so long as they are held within the fund, subject to the 5% deemed distribution rule outlined above. Any payments out will be taxable under PAYE as if it were a normal pension payments
• 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 standard rate. Full distribution is exempt from Inheritance Tax 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.

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Income Tax charge on pension funds

Standard Fund Threshold (SFT)

The maximum allowable pension fund on retirement for tax purposes has been set at €2.3million with effect from 7 December 2010 (previously  €5,418,085) or, an amount between €2.3m and €5.4m may apply if the sum of the capital value of pension benefits which the individual has become entitled to since 7 December 2005, and the capital value of the un crystallized pension rights of an individual on 7 December 2010 (i.e. the total pension fund that the individual had built up  to that point) was greater than €2.3m) For the higher fund figure to apply, written notification must have been made to the Revenue by 6 June 2011. The relevant maximum will apply to the aggregate value of all pension provisions held by an individual.

 In addition, where an individual with a personal retirement savings account decides when taking pension benefits to leave funds in a PRSA rather than opting to transfer them to an Approved Retirement Fund this will also trigger a “Benefit Crystallization 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 62% of the gross value of the fund i.e. 41% tax on the benefit crystallization event plus 41% on the net distributable to the individual plus a 7% universal social charge.

The tax operates in practice by applying a factor of 20 times the annual pension entitlement plus the lump sum, a defined contribution scheme may rely on an actuarial valuation; for example:

Example 1

• 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.

 

 Example 2

• 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.

Tip: It does not make sense to continue funding a pension where the fund will have an excess that is subject to a 41% tax charge. Where the value of a pension fund is likely to exceed the SFT, consideration ought to be given to alternative investments

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Approved Retirement Funds (ARFs)

In order to discourage ARFs being treated as a savings vehicle, an annual 5% (previously 3%) imputed distribution (with a deduction for actual distributions) will apply to the value of assets in an ARF at 31 December each year and will be taxable at the individual’s marginal income tax rate. The charge will apply to ARFs created on or after 6 April 2000. This provision does not apply to AMRF’s or ARF’s held by individuals under 60.

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Relief on Retirement for Sports Persons

An additional relief applies for certain sports persons 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 tax years of assessment for which he was tax resident in, and paid tax in Ireland In respect of that sporting activity since 6 April 1990. 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.

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PRSA

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).

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Self Administered Pension Funds

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.

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Lump Sum Payments

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Retirement – Termination Lump Sum Payments

Individuals leaving employment may receive tax free payments. There are three methods of calculating the tax-free amounts:

1. €10,160 plus €765 for each complete year of service with the employer.
2. 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
3. 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.

From 1 January 2011 onwards, the exemption available in respect of termination payments is restricted to a lifetime limit of €200,000.

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).

Employers are entitled to a 60% rebate of statutory redundancy payments.

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Top Slicing Relief

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 the tax office after the end of the year in which the employment terminates.

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Lump-Sum Payment to Employees on Company Restructuring

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.

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Retraining Exemption

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.

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Reporting Requirement

There is a requirement to report to the Revenue Commissioners any payment made on death, or on account of injury or disability.

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