Benefits limits apply. The maximum retirement benefit may not exceed one sixtieth of the final remuneration for each year of service, up to 40 years under the mandatory approval provisions. Final remuneration is the average remuneration of the last three years’ service.
Under the discretionary basis, the maximum retirement fund (funding 2/3 final salary) may be available for individuals with much less than 40 years’ service. They allow for the accumulation of full benefits within 10 and 20 years of normal retirement age or on earlier incapacity. They allow for the return of contributions under certain circumstances.
Benefits may commence on retirement between the ages of 60 and 70 years. The lump sums payable to a spouse, children, dependents, or personal representative on death before retirement is not to exceed four times final remuneration. Benefits on death may consist of a pension that does not exceed 100% of the pension that could hypothetically have been paid to the employee.
No pension can be surrendered for a cash sum except in the case of commutation of a lump sum not exceeding three-eighths final remuneration for each year of service up to 40 years. This is available on more favourable terms on the discretionary basis. This long-standing option to take up to one-quarter of the fund tax-free has been severely restricted in recent Finance Acts.
Under the strict conditions (which are modified by Revenue Practice)
- benefits must not exceed 1/60th of final salary for each year of service to a maximum of 40 years;
- normal retirement age must be between 60 and 70 years;
- the maximum pension payable to spouse or dependents must not exceed that payable to the employee /member;
- lump sums paid before retirement must not exceed four times final salary;
- benefits for spouses and dependents may not exceed those payable to the employee;
- there must be no surrender or commutation except for a lump sum on retirement, not exceeding 3/80th of final remuneration for each year of service up to 40 years.
There are other less onerous conditions which the Revenue allow in schemes, as a matter of well-established practice and concession.
Until the financial crisis, the holders of PRSAs, RACs and AVCs could take up to 25% of the fund as a tax-free lump sum A 20% director could take up to 25% of his pension fund as a tax-free lump sum. If they had an income of less than €12,700 p/a (€18,000 p/a), up to €63,500 (€80,000) must be transferred to an AMRF. Caps have been imposed on the lump sum that may be taken tax free.
Revenue must individually approve each pension scheme. Any alterations to a scheme must be approved by Revenue in the same manner as the initial approval. Revenue will examine the trust deed or letter of exchange and rules to vouch that they comply with the revenue pension requirements. Commonly, an interim trust deed is submitted to Revenue with an undertaking to produce a more detailed, definitive trust deed within a period afterwards.
Revenue will require the full details of the scheme, including particulars of the financial aspects, announcement letters, explanatory booklets and details of any previous scheme or other schemes. Where the benefits are provided under an insurance policy Revenue will require certain confirmations that they are acceptable. Where benefits are fully insured, Revenue operate a streamlined approval procedure
In the cases of a scheme with multiple employers, Revenue will require that they are sufficiently closely associated. Associated employers must be sufficiently closely associated, so as to be treated as carrying on a single enterprise. Joint ventures or group companies will usually suffice. It may also suffice, where companies are not strictly in a group but are under common control. Revenue also permits industry-wide groups.
Standard Concessionary Terms
The Revenue Pension manual sets out the terms on which the Revenue will approve pension schemes. These conditions are applicable to most pension schemes. They are more generous than the strict “legal” basis, set out above, upon which Revenue must grant approval. The Revenue’s grant of approval / recognition is likely to constitute a legitimate expectation and will normally be available.
The maximum pension is two-thirds of final remuneration, at normal retirement age provided that the employer has at least ten years’ service. This maximum pension amount is reduced proportionately, for lesser periods.
Normal retirement age will vary from business to business. It will generally be 65 years for men but may be earlier or later in some businesses. Retirement is allowed before 60 years in some industries, where this is traditional on occupational health grounds.
A tax-free lump sum may be taken. After 20 years’ service, a maximum of one and a half times final remuneration may be taken. This is now subject to caps.
Any lump sum taken on retirement reduces the fund otherwise available to fund the maximum (two-thirds of final remuneration) pension annuity (or take an ARF, where available). The dependents’ pensions are similarly limited. The annuity can guarantee increases to the rate of the consumer price index. Alternatively, a flat 3% is allowed.
The fund must be no more in value than will pay the above benefits. If the fund is excessive, its tax-free status may be restricted, and contributions may have to cease temporarily.
Calculating the Limits
Final remuneration has a particular meaning in the pensions context. Generally, it is the final year’s remuneration. The final remuneration may be averaged over the last three years, where there are fluctuating elements. Generally, the last year or the basic rate of pay plus average fluctuating elements may be selected.
If remuneration was higher in previous years, other options may be available. The salary in any of the last five years uplifted may be allowed to be selected. 20% directors must use the average of 3 consecutive years ending not earlier than 10 years before retirement.
Under the so-called uplifted scale, available under Revenue practice, the following percentages of final salary are allowable as a maximum:
- Years 1 to 5 years’ service prior to retirement; 1/60 for each year;
- 6 years’ service prior to retirement; 8/60
- 7 years’ service prior to retirement; 16/60,
- 8 years’ service prior to retirement; 24/ 60,
- 9 years’ service prior to retirement; 32/ 60,
- 10 years’ service prior to retirement; 40/60
Tax-Free Lump Sum
Whether there is a right take a cash free sum, depends on the terms of the pension deed. The fund available to purchase a pension is reduced or “commuted” when a lump sum is taken. If an approved scheme permits a retiring employee to commute the pension up to the maximum amount required to provide the lump sum within the permitted maximum, the reduction in pension must be commensurate with the amount of the lump sum.
The relationship between lump sum and pension may be calculated on any one of a number of different bases. If it is desired that the relationship between lump sum and pension should not vary with age or sex or take into account any other considerations, the rules may provide for a prescribed fixed relationship e.g. €1 of pension may be commuted for a lump sum of €9. A scheme may use a table that is subject to actuarial review at intervals. A scheme may provide for individual calculation by a qualified actuary for every commutation.
Concession / Uplifted Lump Sum
Lump sum benefits greater than the strict statutory limit of 3/80ths of final remuneration for each year of service may be given on retirement at the pensioner’s normal retirement age in accordance with the table set out below. This is provided that the aggregate of the value of non-pension retirement benefits in respect of service with the current employer and any retained benefits does not exceed 1.5 times final remuneration.
- 1 to 8 years of service; 3/80 of final remuneration,
- 9 years of service; 30/80 of final remuneration,
- 10 years of service; 36/80 of final remuneration,
- 11 years of service; 42/80 of final remuneration,
- 12 years of service; 48/80 of final remuneration,
- 13 years of service; 54/80 of final remuneration,
- 14 years of service; 63/80 of final remuneration,
- 15 years of service; 72/80 of final remuneration,
- 16 years of service; 81/80 of final remuneration,
- 17 years of service; 90/80 of final remuneration,
- 18 years of service; 99/80 of final remuneration,
- 19 years of service; 108/80 of final remuneration,
- 20 years of service; 120/80 of final remuneration
The maximum lump sum is the total lump sum from all benefits that may be taken. If there is lump sum available from another source, this must be aggregated with all lump sum benefits, up to the maximum.
Under very limited circumstances, the entire pension can be exchanged for cash.
- where the pension does not exceed €330 per annum;
- where the total fund does not exceed €15,000 taking into account equivalent benefits from all sources;
- where the person is in serious ill health and his life expectancy is short.
In the last case, full commutation may be allowed based on medical evidence of illness. In this case, the tax is charged at 10% of the amount by which the lump sum exceeds the maximum lump sum that would be available from the scheme.
A company director with an interest of at least 5% in the company, may transfer his fund to an approved retirement fund. Up to one-quarter of the fund can be taken tax-free, subject to the standard conditions that apply to ARFs. This maximum has been restricted by later legislation.
Where an employee leaves service prior to retirement age, other than by way of early retirement, certain options may arise. Where no refund is taken, there are a number of options. The benefits may be retained in the scheme. They may be required by the rules to be taken out in accordance with one of the options for so doing e.g. to another fund, PRSA or buy out bond.
There can be a deferred pension, based on 1/60th of final remuneration for each year of service or the equivalent on a more favourable formula (N/NS x P). The formula is based on the number of year service (N), the total number of service years to retirement (NS) times the maximum final pension (P).
Deferred benefits must be taken into account in computing overall maximum benefits under later schemes. This includes amounts in PRSAs, retirement annuity policies, buy-out bonds, pensions commuted for lump sums and the annuity value of lump sums.
A deferred pension may be commuted at the retirement date to provide a lump sum benefit of 3/80ths of final remuneration for each year of service or, if this is more favourable, an amount calculated by the formula N x LS.
If the scheme rules provide for an independent lump sum, this lump sum may be provided under the same formula with the corresponding reduction in the permissible pension. The restrictions for employees with less than 20 years’ service apply only if the deferred benefit is taken before NRA
The deferred pension can be increased by the consumer price index. Alternatively, a flat rate of 3% may apply.
CPI increases may be applied to the maximum deferred lump sum (as calculated at withdrawal) during the period of deferment. These increases must not cause the maximum lump sum expressed as a proportion of the actuarial value of the member’s total deferred benefits, to exceed the corresponding proportion as determined at the date of withdrawal.
If the deferred lump sum becomes payable after NRA under the scheme providing it, an actuarial increase may be allowed in lieu of CPI increases in respect of the period after NRA.
In the case of persons who have (or together with connected others) have more than 20% shareholding of the employer, there are certain restrictions. A refund of contributions is not permitted. Final remuneration must be averaged over 3 years not earlier than 10 years before hand. On retirement, 20% directors must sever their links from the business including their holding of shares. This may be waived exceptionally.
Option to buy Annuity Elsewhere
The trustees have the right to buy the annuity from another life office. This has been a mandatory requirement for many years. Older policies were constituted so that significant charges applied on switching out and surrendering the policy.
ARF / AMRF Fund Management
An approved retirement fund must be held and managed by a qualifies fund manager. This may be an insurance company or other financial services provider. The following qualifying entities may administer an ARF; a building society, bank, credit union, collective investment company, life insurance company, stock exchange member, post office savings bank, regulated investment firm.
There are restrictions on the permitted investments of an ARF or AMRF. They are broadly similar to those which apply to an SSAP. They include
- no acquisition of properties from the holder or certain connected persons;
- no sale of assets to the holder or connected persons;
- no acquisition of property for personal use;
- no investment with privately owned companies;
- no investment in movable property
Investment returns within the ARF and AMRF are tax-free. Withdrawals are taxed at the pensioner’s marginal rate of income tax. The ARF manager must withhold tax and account to Revenue to it.
On death, the remaining ARF assets pass to the pensioner’s beneficiaries. The transfer to a spouse who takes the fund intact is tax exempt. Withdrawals are subject to income tax.
Where the fund assets transfer to a child under 21 years old, inheritance tax liability applies. Where they transfer to children over 21 years old, income tax applies at a specified / standard rate. Inheritance tax is not payable. If the fund passes to the spouse and subsequently passes to children, income tax is payable at the standard rate.
Approved Retirement Funds
Approved retirement funds (ARFs) are available as options in the certain cases. They are an alternative to the mandatory purchase of an annuity. The ARF assets are owned by the pension beneficiary. The pensioner is free to draw from the fund as required. Tax is payable, as the fund is drawn. ARF providers must withhold income tax and pay it to Revenue. If the pensioner dies, then the scheme assets which are owned, pass to his successors.
Approved retirement funds were originally available to proprietary director members of occupational pension schemes. They are directors holding a minimum 20% stake in the employer company. Access to ARFs is also available as an option to the holders of approved retirement annuity contracts (personal pensions), PRSAs and in respect of additional voluntary contributions.
The pension beneficiary must have an income of at least €12,700 (€18,000) per annum. If not, he must transfer at least €63,500 (€80,000) to an approved minimum retirement fund, before any funds can be transferred to an ARF. The AMRF cannot be drawn down until the pensioner reaches the the age of 75 years. The AMRF investments can be used alternatively to buy an annuity.
Protection from Disposition
Unnder general law, prospective pension benefits may be charged, taken in benefit, forfeited or be subject to a lien as an asset. This is not generally permissible under pensions legislation.
In the case of bankruptcy or an attempted charge or assignment, the trustees may, if the rules permit, pay the benefit to another person so permitted under the pension rules, at their discretion.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005)
Pensions; Revenue Law and Practice (ITI) McLoughlin, Dolan et al (2013)
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)