Personal Pensions Conditions
A personal pension contract / retirement annuity contract must be effected by an individual. It is principally for the benefit of the individual who enters the contract. A personal pension contract must be taken out with a life insurance company. It may be effected with any insurance company authorised in the European Union.
There are two types of policy which may stand alone or may be integrated. The retirement income policy is approved under S. 784 of the Taxes Consolidation Act. The death benefits policy / element is approved under S. 785. They are commonly referred to respectively as S.784 and S, 785 policies.
The terms and conditions of approved retirement annuity contracts (personal pensions) are laid down by Revenue legislation and practice. The Revenue may and usually will, approve contracts with certain additional options and provisions to those provided for in the legislation. These concessionary provisions are published in the Revenue Pensions Manual and have a quasi-legal status. There are separate legal and concessionary terms for S. 784 and S. 785 policies.
Timing of Benefits
Personal pension policies must provide benefits to the policyholder at and near retirement. Generally, the payments may not commence before normal retirement age for the beneficiary. The benefits must usually become payable between the ages of 60 and 75 years. Payment is not necessarily linked to actual retirement.
Revenue may approve retirement annuity contracts which provide for retirement and payment of an annuity under the age of 60 years if this is customary or necessary in a particular occupation. The Revenue publishes a list of occupations which are eligible for this treatment. This reduced retirement age may be available to professional sportsmen and women.
Early retirement may be allowed on ill health grounds. An annuity may commence earlier than the age of 60 if the pension beneficiary becomes permanently incapable of carrying out his own or certain other occupations for mental or physical reasons. The Revenue may approve early retirement on ill health grounds through permanent incapacity, mental or physical incapacity for their occupation.
There may be a life insurance element for death in service under a S. 785 policy. This may provide a lump sum or annuity for the spouse commencing in the policyholder’s death prior to retirement.
Principal Benefit Types
Tax legislation provides for two parallel types of policy and benefit. There may be a pension benefit and a death benefit. Each may stand alone. Commonly, there is a pension benefit policy with an ancillary death benefit. There may be stand-alone death benefits (S.785) which enjoy a separate lower maximum aged based contribution.
The principal benefit from the proceeds of the policy is an annuity which ordinarily commences between the ages of 60 and 75. Where an annuity is purchased, it must be for the lifetime of the pension beneficiary. In most cases, the alternative option of a transfer to an approved retirement fund or a vested PRSA is available.
The benefit of the policy must not be capable of realisation in any other way, such as be assignment, commutations, surrender or charge. Correspondingly, it is generally immune from execution by creditors, at until the point when it becomes available to the pensions beneficiary as a benefit.
Up to a quarter of the value of the fund can be taken as a cash free lump sum on retirement. This will reduce the element available to finance the annuity or for transfer to an ARF / AMRF or a vested PRSA. The amount that can be taken tax-free is now subject to caps. Formerly, the sum that might be taken tax-free was potentially unlimited.
A number of caps were introduced on pension funds during the financial crisis. The tax-free lump sum was capped at €200,000. On lump sums, up to [€575,000], the standard rate of tax applies to the lump sum. Above this, the marginal rate tax applies to any lump sum withdrawal on retirement.
The RAC fund may be transferred to a PRSA prior to retirement. Similar rules apply, and the fund remains in the PRSA, on much the same terms, until retirement. There is a greater degree of flexibility in relation to Praslin had been contemplated that PRSAs would wholly replace personal pensions, but this has not occurred in practice or by law.
The RAC policyholder has a right to transfer the personal pension / RAC fund to another insurer for the purpose of purchase of an annuity. This is a mandatory requirement for personal pensions approved after 1999. Pensions approved prior to 1999 may have a contractual right allowing this option. This is a so-called open market option.
The policyholder may transfer the fund or the fund, net of the permitted lump sum to an approved retirement fund. If his income is less than a designated annual amount, the fund or part of the fund must be transferred to an approved minimum retirement fund, to which access is restricted before the age of 75 years.
A retirement annuity contract may provide that if no annuity becomes payable to either the pension beneficiary or his spouse or dependents, that its value may be returned to the estate. Apart from this, all payments must be by way of permitted lump sum, annuity or transfer to a PRSA.
Death in Service Benefits
The death benefit provisions of the personal pension / RAC must accord with Revenue requirements and be approved by them. Retirement annuity contracts may provide for benefits for the surviving spouse and/or dependents in the event of death. The Revenue may approve a condition that the annuity is to be paid on death to a dependent other than the spouse.
The death benefits may be integrated into the RAC contract, or they may stand alone. The retirement income policy is approved under S. 784 of the Taxes Consolidation Act. The death benefits policy / element is approved under S. 785. They are commonly referred to respectively as S.784 and S, 785 policies.
The contract must be taken out by the individual whose life is insured. It must be taken out with a life insurance company established in Ireland or which provides services in Ireland under EU passport or cross-border rights. There may be a stand-alone death benefit policy, which qualifies for similar favourable tax treatment.
S. 785 Death Benefits
There are two principal types of death benefit which may apply to death” in service” prior to retirement (or retirement benefits becoming payable). In one type, the principal benefit is an annuity for the benefit of the spouse or dependents of the policyholder. In the other type, the sole benefit is a lump sum, payable to policy holder’s estate. The death in service benefits may be risk-based and “insured”.
Any annuity payable to the policyholder must be ancillary under this type of (S. 785) policy. This contrasts with a S. 784 policy. It must become payable between the age of 60 and 75. It may commence later, where the spouse for whose benefit is primarily made, dies.
The annuity benefit for the benefit of a spouse or dependants must commence on the policyholder’s death. The policy may provide that if no annuity becomes payable to the policyholder, the policyholder’s spouse or dependent, that the value of the contract may be returned as a lump sum to the estate.
Annuities may be approved by Revenue which have a guaranteed minimum length of 10 years, irrespective of the death of the policyholder. The residual part of the annuity passes to the deceased’s estate and may be transferred by will or pass on intestacy. The guarantee may apply to both the principal pension/annuity and the spouse’s pension and annuity.
An annuity may be provided which pays or continues to pay benefits on the death of the policyholder to his spouse or dependents. The dependent must be an actual dependent. This usually covers minor children. It may also cover other individuals who were, in fact, dependent, such as a common law spouse, dependent parents and others. The provision of additional benefits will reduce the level of annuity available to fund retirement benefits for the individual.
If no benefits are payable to either the policyholder or his spouse, the contract value may be returned to the deceased’s estate.
Approved Retirement Funds
The beneficiary of a personal pension policy /retirement annuity contract has the option of transferring benefits at retirement age to an approved retirement fund (ARF) and/or approved minimum retirement fund (AMRF), instead of the purchase of an annuity. This is a Revenue requirement for approval of a personal pension policy.
Approved Retirement Fund on an Approved Minimum Retirement funds may be managed by a range of financial service providers, including banks, building societies, stockbrokers, unit trusts, credit unions, and certain other investment providers. It is a mandatory condition for approval of a retirement annuity contract that the fund may be transferred to an Approved Retirement Fund or to another personal pension vehicle.
The pension beneficiary may elect to transfer the fund to an ARF on retirement. If a pension beneficiary’s guaranteed income is less than €18,000, a fund of up to €119,800 must be transferred to an AMRF. Guaranteed income, includes the State social welfare pension. The AMRF cannot be drawn until the beneficiary reaches the age of 75 or dies before that time.
If the pension beneficiary’s annual income does not exceed €18,700 (adjusted from time to time), part of the fund to at least the sum of €119,800 (adjusted from time to time) must be transferred to an Approved Minimum Retirement Fund. This cannot be drawn down until the beneficiary reaches 75 years of age. The minimum income includes social welfare pensions. These provisions have been recently altered and no longer apply.
Death in Retirement
Death in retirement benefits are fundamentally different in nature to death in service benefits. Life assurance would be very expensive after retirement age, and would not usually be good value for money. In effect, any benefits after death in retirement must be funded from the accumulated fund represented by the RAC personal pension fund.
The annuity which is purchased by the principal policyholder may be guaranteed for a fixed pension. It may provide or a continuing annuity for a surviving spouse or dependents. These benefits are calculated on an actuarial basis, and the level of benefits available is wholly based on the available fund. The annuity available to the principal policyholder is reduced actuarially if there are survivor benefits.
If the retirement fund is taken into an ARF or AMRF, then the spouse, dependent or another beneficiary can succeed directly to it. The spouse may take the fund and continue to pay income tax on withdrawals. Other beneficiaries are subject to taxation of the entire fund, the basis of which depends on their age and relationship to the deceased.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005) Ch.6
Pensions; Revenue Law and Practice (ITI) Dolan, Murray, Reynolds, McLoughlin (2013) Ch.2
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury
Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)
Occupational Pensions (Subscription) Lexis Nexis
Pensions Law and Practice with Precedents (Subscription) Sweet & Maxwell
Sweet & Maxwell’s Law of Pension Schemes (Subscription)
The Guide for Pension Trustees World Economics Ltd
The Guide for Pension Trustees website, you can:
Tolley’s Pensions Law Looseleaf Service (Subscription)
Pensions Act, 1990
Pensions (Amendment) Act, 1996
Pensions (Amendment) Act, 2002
Pensions (Amendment) Act, 2006
Social Welfare and Pensions Act, 2005 (Part 3)
Social Welfare Reform and Pensions Act 2006
Social Welfare and Pensions Act 2007
Social Welfare and Pensions Act 2008
Social Welfare (Miscellaneous Provisions) Act 2008
Social Welfare and Pensions Act 2009
Social Welfare and Pensions (No. 2) Act 2009
Social Welfare (Miscellaneous Provisions) Act 2010
Social Welfare and Pensions Act 2010
Social Welfare and Pensions Act 2011
Social Welfare and Pensions Act 2012
Social Welfare and Pensions (Miscellaneous Provisions) Act 2013
Social Welfare and Pensions Act 2013
Social Welfare and Pensions (No. 2) Act 2013 49/2013
Social Welfare and Pensions Act 2014
Social Welfare and Pensions (No. 2) Act 2014 41/2014
Social Welfare (Miscellaneous Provisions) Act 2015 12/2015
Social Welfare and Pensions Act 2015 (Part 3)