RAC Benefits
Revenue Pensions Manual
21.1 Introduction
The legislation governing retirement annuity contracts (RACs), often referred to as personal pensions, is contained in sections 783, 784, and 785 to 787 of the Taxes Consolidation Act 1997 (TCA). The contract must be between an individual and an insurance company, sometimes referred to as a “life office”. The life office will agree the terms of a standard contract with Revenue and can then offer the contract. Following receipt of a contribution or premium, the insurance company issues an RAC certificate to the individual, who can then claim tax relief.
21.2 Eligibility
To obtain tax relief on contributions to a contract, an individual paying into the contract must have a source of “relevant earnings”, which means income arising in a tax year from a trade or profession or from a non-pensionable employment.
A “non-pensionable employment” is one where either the individual is not included for retirement benefits under an approved occupational pension scheme relating to the employment or where the sole benefit arising is a lump sum payable upon death.
The fact that an individual may have a separate source of pensionable employment does not prevent them claiming tax relief if they have a source of relevant earnings. However, tax relief can only be claimed against the source of relevant earnings.
Only earned income qualifies for tax relief on contributions. Income from an investment company does not qualify.
An individual working abroad on a temporary basis may continue to make contributions provided that the secondment abroad is directly related to their source of earnings prior to the move and is for a period of less than five years with a clear expectation of return following the absence.
In the case of married couples or civil partnerships, each spouse or civil partner must have their own source of relevant earnings to obtain or contribute to a contract. Tax relief is allowable against the individual spouse’s or civil partner’s relevant earnings only.
21.3 Tax relief
As with other pension products, tax relief for premiums paid in respect of RACs is subject to two main limitations.
The first, set out in sections 774 and 776 TCA, is an age-related percentage limit of an individual’s earnings in respect of the office or employment for the year for which the contributions are paid. The maximum amount of pension contributions in respect of which an individual may claim tax relief may not exceed the relevant age-related percentage of the individual’s earnings in any year of assessment.
The age-related percentage limits are:
Under 30 15%
30-39 20%
40-49 25%
50-54 30%
55-60 35%
60 or over 40%
A 30% limit applies below the age of 50 years to certain categories of professional sportspersons.1
The second, set out in section 790A TCA, is an overall upper limit on the amount of earnings that may be taken into account for tax relief purposes. The earnings limit is currently set at
€115,000. This limit applies whether an individual is contributing to one or more than one pension product.
Where an individual is contributing solely to one or more RACs the maximum amount of tax relievable premiums is the relevant age-related percentage of the lower of:
the individual’s net relevant earnings, and
the earnings limit.
Where an individual has two sources or more of income (for example, earnings from employment and profits from self-employment) and is making pension contributions to an occupational pension scheme and to an RAC. the single aggregate earnings limit of €115,000 applies in determining the amount of tax relievable contributions.2
1 The categories are athletes, badminton players, boxers, cricketers, cyclists, footballers, golfers, jockeys, motor racing drivers, rugby players, squash players, swimmers and tennis players – section 787(8A)-(8C) and schedule 23A TCA.
2 Please refer to Chapter 26 for detailed information and examples on tax relief for pension contributions, including contributions to more than one pension product.
Where full relief cannot be given in a year of assessment for premiums paid in that year, the unrelieved amount may be carried forward to the next year or succeeding years and treated as a qualifying premium paid in subsequent years.
If a premium is paid after the end of the year, but on or before 31 October of the following year, relief may be claimed for the previous year provided an election to do so is made by the individual on or before the 31 October of the following year. Taxpayers who file and pay online via the Revenue Online Service (ROS) or myAccount may avail of the extended return filing and payment date to make an election and pay a premium. As the payment of a qualifying premium is a pre-condition to the availability of relief, an election cannot be made in advance of such a payment.
The date for making an election in respect of premiums paid in the year of retirement may be extended to 31 December of that year in certain circumstances (see Appendix III of the Pensions Manual).
Full details of RAC premiums should be included on an individual’s annual Return of Income (Form 11 or Form 12). Employees contributing to an RAC may be given tax relief via the net pay arrangement, as is the case for additional voluntary contributions (AVCs).
Tax relief is not transferable between spouses or civil partners.
The calculation of the respective amounts of net relevant earnings for retirement annuity relief under section 787(8) TCA and of total income for chargeable annual payments to “descendants” under section 792(2) TCA, in circumstances where those provisions interact, gives rise to complex computations. To overcome difficulties in this regard, the calculation of the limits to the reliefs may be made as follows:
• the chargeable annual payments to “descendants” in accordance with section 792 TCA may be computed as 5% of the provisional total income before deducting retirement annuity relief, and
• the retirement annuity relief in accordance with section 787 TCA may be computed as the appropriate age-related percentage limit of net relevant earnings after deducting the amount in respect of chargeable annual payments to “descendants” as computed.
21.4 PRSI and Universal Social Charge
There is no relief from PRSI or the Universal Social Charge (USC) for premiums paid into RACs.
21.5 Benefits on retirement
Benefits may be taken at any time after age 60, even if the individual is still working, but must be taken on or before the individual’s 75th birthday (see Paragraph 21.8 in relation to RAC benefits which are not taken on or before an individual’s 75th birthday). In certain
occupations, benefits may be taken before age 60 but not before age 50, with the prior approval of Revenue. In cases of serious ill-health, benefits may be taken at any age provided the life office has received medical evidence to show that the individual is “permanently incapable through infirmity of mind or body of carrying on his or her own occupation or any occupation of a similar nature for which he or she is trained or fitted” (Section 784(3)(b) TCA).
Up to 25% of the fund may be taken as a tax-free lump sum (see Chapter 27) and the balance used to either purchase an annuity from a life office or to exercise one of the retirement options detailed in Chapter 23 , Approved Retirement Funds (ARFs). All annuity payments are chargeable to tax under Schedule E.
Section 787TA TCA provides for the “encashment option” for individuals with dual private and public sector pension arrangements who meet certain conditions. The provision allows such individuals to encash their private pension rights, in whole or in part, from age 60 (or earlier, where retirement is due to ill health) with a view to eliminating or reducing the chargeable excess that would otherwise arise when their public service pension crystallises. The exercise of this option leads to an income tax charge (which is ring-fenced) at the point of encashment on the full value of the rights at the higher rate of tax in force at that time plus 4% USC. No benefits can be taken from a scheme in respect of which the encashment option has been exercised. Chapter 25 gives information on the circumstances in which a chargeable excess can occur.
Chapter 7.4 outlines the circumstances in which the practice relating to the commutation of trivial pensions may be extended to holders of RACs.
21.6 Death benefits
Where an individual dies before retirement, the value of their pension fund may be used to purchase a spouse’s, civil partner’s or dependant’s pension or, if no pension is purchased, the fund may be paid to the individual’s personal representatives. A contract approved under section 785 provides death benefits only. Total relief for both section 784 and 785 contracts are limited to the age based percentage limits and earnings ceiling detailed above.
Paragraph 21.8 outlines the treatment of cash and other assets in an RAC from which benefits had not been taken on or before the individual’s 75th birthday.
21.7 Group schemes
A representative body may establish, under an irrevocable trust, a group scheme to provide benefits under sections 784 and 785 TCA. The same conditions apply to a group scheme as apply to an individual RAC. A group scheme must be established by a body of persons comprising or representing the majority of the individuals so engaged in the State.
21.8 Retirement benefits not taken on or before age 75
An RAC from which retirement benefits have not commenced on or before the date of an individual’s 75th birthday is treated as becoming a vested RAC (within the meaning of section 787O TCA) on that date. Where the individual was 75 before 25 December 2016 (the date on which Finance Act 2016 was passed), the RAC is deemed to vest on 25 December 2016.
A consequence of an RAC vesting in these circumstances is that the individual cannot access the RAC assets in any form from the date of their 75th birthday. As a transitional measure, the owner of an RAC which is deemed to vest on 25 December 2016 (that is, where the owner was aged 75 years before that date) may, on or before 31 March 2017, take retirement benefits from the RAC in the form of an annuity, a retirement lump sum or under the ARF options.
The vesting of an RAC is a “benefit crystallisation event” (BCE) for the purposes of Part 30, Chapter 2C TCA (see Chapter 25).
Cash and other assets in a vested RAC representing an individual’s rights under the RAC when they die are treated as if they were cash and other assets of an ARF and section 784A(4) TCA applies accordingly (see Chapter 23.10 ).
Similar vesting provisions apply to PRSAs (see Chapter 24) and PEPPs (see Chapter 31).
Reviewed June 2016
CHAPTER 16
Revenue Pensions Manual Group Schemes
1. Group pension schemes for employees of associated employers
Revenue is prepared to exercise its discretion under section 772(4) Taxes Consolidation Act 1997 (TCA) to approve a group scheme in which two or more employers participate, provided that the following conditions are satisfied:
(a) The employers must be sufficiently closely associated to be treated as carrying on a single trade or undertaking. This condition is met if the employers all belong to a group of companies forming a single financial unit – for example, if they are parent and subsidiary, or fellow subsidiaries of the same parent. For this purpose, a company may be regarded as a subsidiary if at least 50% of its equity share capital is owned by the other company, directly or indirectly. However, a company or partnership formed as a joint enterprise by two or more parent companies may participate in a scheme established by any one of those parents, even though that parent has less than a 50% interest in it. Alternatively, even though no parent/ subsidiary relationship exists, there may be enough links between the employers to warrant a group scheme based on close association through permanent community of interest. Such links could be common management or shareholders, inter- changeable or jointly employed staff, or inter-dependent operations (such as one company selling the bulk of the other’s products).
(b) Each employer participating in the scheme must be under an obligation to observe the rules of the scheme.
(c) Each employer should normally contribute in respect of their own employees. Until the passage of Finance Act 2019, relief was confined to contributions paid in respect of individuals employed in the employer’s trading activities (by virtue of section 774(6)(c) TCA). On a concessional basis Revenue had allowed relief for contributions made by an employer in respect of contributions for employees of another employer in certain circumstances – for example, on foot of a legally binding agreement where one party agreed to make up pension deficits for the other party. This was put on a legislative footing in section 17 Finance Act 2019, which amended section 774(6) TCA to allow relief for contributions by one employer for contributions made for the benefit of scheme members who are not its employees where the contributions are made under the terms of a legally binding agreement between the two employers in the following circumstances:
in a group of companies;
under a scheme of reconstruction or amalgamation;
under a merger;
under a division; or
under a joint venture.
A further amendment was made in section 15 Finance Act 2021 to allow tax relief for contributions by a company on behalf of scheme members who are current or former employees of a company which is subject to the agreement, rather than a party to the agreement.
Further details on this provision can be found in Chapter 4 of the Revenue Pensions Manual.
(d) The rules must provide for the withdrawal of an employer who ceases to be sufficiently closely associated with, or related to, the other, or who goes out of business. This usually involves the segregation of an appropriate proportion of the scheme assets and the application of the winding-up rule. If, however, the seceding employer is continuing in business, the segregated assets may form the nucleus of a new scheme or be transferred to another scheme in which the employer has become eligible to participate.
(e) An employer who is not resident in the State may participate in a group scheme if there is a sufficiently close association with the principal employer.
2. Approval
Any proposal to establish a group scheme to admit an employer to participate, or to retain in the scheme an employer who has ceased to satisfy the conditions for participation, should be submitted to Revenue for consideration. This can be done via Revenue’s secure online mail service MyEnquiries which can be accessed through both MyAccount and ROS.
3. Basis for providing benefits
A group scheme may provide benefits based on the employee’s final remuneration where all the participating employers are closely associated. In such a case, the employee’s total service within the group, irrespective of moves from one participating employer to another, is regarded as constituting a single unbroken employment, except where part of his or her service was abroad with a non-resident employer.
4. Employers not related or associated
Even where there is no close relationship or association between the employers, it may be possible to approve a group scheme provided the following conditions are satisfied:
(a) The employees are employees working in a particular industry, in an area or on a nation-wide basis, or are employees of employers who are members of a professional or trade association or similar body and wish to participate in a scheme sponsored by the association or body. In such cases, Revenue must be satisfied not only that the sponsoring body is truly representative of the employers desiring to
participate and actively concerned with such matters as the code of conduct of its members and conditions of employment in the trade or profession, but also that the participating employers together have enough pensionable employees to ensure reasonable continuity in the scheme.
(b) Each employer participating in the scheme must be under an obligation to observe the rules of the scheme.
(c) Each employer must normally contribute in respect of its own employees but can contribute in respect of employees of another employer under a legally binding agreement as provided in section 774(6) TCA as amended by section 17 Finance Act 2019 (discussed in Paragraph 1 above).
(d) The rules must provide for the withdrawal of an employer who ceases to satisfy the conditions of approval or goes out of business.
(e) If any of the participating employers have other schemes in which members of the group scheme also participate, Revenue will require that the group scheme be treated in all such cases as the employer’s basic scheme. It will follow that if any restrictions in members’ benefits are necessary, they will be affected primarily in the other schemes.
5. Basis for providing benefits
An employee who moves from one participating employer to another should not receive greater total benefits than he would if each employer had its own scheme. Accordingly, although each employer may provide benefits by reference to the employee’s final remuneration while in its service, when an employee moves, the benefits attributable to service up to that date must be “frozen” within the maximum approvable for an employee who withdraws from service on a given level of remuneration, and cannot be increased solely because under a subsequent employer the employee is paid more.
6. Refunds to employers
Surplus money in a scheme could arise, for example, when an employee withdraws from service. If surplus monies are payable to an employer, any refund should be made either to the employer with whom the employee was serving at the time, or apportioned between all the employers who had previously contributed in respect of the employee concerned, whichever method is most convenient. Where no refund arises – for example, because there is a trust fund or a controlled funding policy – the excess contributions may be applied to the general purposes of the scheme in any manner desired, except that if the participating employers include one or more non-Irish resident employers, excess contributions derived from non-Irish resident and Irish resident employers respectively should be kept separate.
7. Irish employers associated with overseas employers
An Irish subsidiary or associate company of an overseas company may participate in a scheme established in the State by that overseas company or by another Irish subsidiary or associate of the overseas company. Alternatively, an Irish subsidiary of an overseas company may participate in the parent company’s overseas scheme, provided the part of that scheme applicable to the Irish company is approved here.
8. Change of residence of employer in a group scheme
Where an overseas branch of an Irish employer becomes a separate company resident abroad for tax purposes, or there is any change in the tax residence status of any employer participating in a scheme, the approval of the scheme will need to be reconsidered by Large Cases High Wealth Individuals Division (LCHWID), contact details for which are available at www.revenue.ie/en/contact-us/non-resident-customer-service-contacts/large-cases-high- wealth-individuals-non-resident.aspx.