Fund Taxation

Pension Fund Income Exempt

Occupational pensions schemes  which are registered with the Revenue (and Pensions Authority) are referred  to as exempt approved schemes. Contributions to those scheme may claim and receive tax relief. The general position is that all income of the scheme accumulates tax-free. Tax is paid on benefits received from the scheme, except to the extent that tax-free lump sums are allowed.

Pension schemes, personal pensions and PRSAs are exempt from Irish income tax, capital gains on their investment income provided that they meet certain conditions.  They are not exempt from VAT, stamp duty and property taxes. They are exempted from Deposit Interest Retention Tax.

The Irish-UK double taxation treaty exempts income and capital gains in the other jurisdiction, where the recipient is a superannuation scheme which is entitled to exemption in its home state.  his applies in respect of dividends, rent and capital gains from immovable property.  It applies to conventional pensions structures.


Scheme Exemptions I

Income derived by an exempt approved scheme from investments or deposits held for the purposes of the scheme is exempt from income. Exemption from income tax is also granted in respect of underwriting commissions chargeable to tax and applied for the purposes of the scheme.

The encashement tax payable of life insurace unit linked funds and investment funds does not apply to approved exempt schems. Dealings in financial futures and traded options by exempt approved schemes are deemed investments and therefore exempt from tax

The Capital Gains Tax Acts exempt gains accruing from disposals of investments held by exempt approved schemes.


Scheme Exemption II

Exempt approved schemes are also exempted from Deposit Interest Retention Tax (D.I.R.T.)

The fund is not exempt from VAT, stamp duty and property taxes. VAT does not generally arise in investment gains and transacctions. There is a wide exemption for financaial services services and gains. The onsequencce is that VAT incurred on scheme expenses may not be recovered.

Stamp duties apply on the transfer for property, including  most shares. There is significant exeemptins for some financial services producrs.


Insurers Funds

The pensions fund part of the business of a Life Office is treated as “pension business”. When an exempt approved scheme applies funds as premiums on an insurance policy which qualifies for “pension business” treatment, income from the scheme investments qualifies for the same tax exemptions that apply to occupational pensions schemes.

In order to qualify for pension business treatment, policies taken out by an exempt approved scheme must be so framed that the liabilities undertaken by the insurance company correspond with the liabilities against which the contract is intended to secure for the scheme. The policy need not secure the scheme against all liabilities, but the benefits it does provide must correspond with those payable under the rules of the scheme.

Apart from pension investment, life insurers funds, unit trusts and other funds generally accumulate tax free within the fund. They are subject to encashmet tx on their gain on realisaiton Pension vehicles enjoy and exemption from this tax.


Standard Fund Threshold Limits

The principle of the standard fund threshold was introduced in 2005 at the level of €5,000,000. It was subsequently indexed upwards.  The 2011 Act introduced a reduced the standard fund threshold (SFT) of €2,300,000.  The reduction to €2,300,000 reflected the difficult fiscal position of the State. The Minister for Finance may amend the SFT in subsequent years in line with an earnings adjustment factor.

The provisions operate by imposing a lifetime limit, or ceiling, on the total capital value of pension benefits that an individual can draw in their lifetime from tax relieved pension products where those benefits are taken, or come into payment, for the first time on or after 7 December 2005. Benefits which came into payment prior to that date are ignored. In many cases individual pension funds will be restricted to lower limits reflecting Revenue maximum benefit rules.

On each occasion on or after 7 December 2005 that an affected individual becomes entitled to receive or, in the case of vested RACs or vested PRSAs is treated as having received, a benefit (e.g. a pension, retirement lump sum etc.) under a pension arrangement (referred to in the legislation as a “benefit crystallisation event” or BCE ), they use up part of their SFT or PFT to the extent of the capital value of that benefit.

When the capital value of a BCE (either on its own or when added to BCEs that have been taken since 7 December 2005) exceeds an individual’s SFT or PFT, a “chargeable excess” arises equal to the amount by which the fund threshold is exceeded. The whole of the amount of the chargeable excess is subject to an upfront income tax charge , at the higher rate of income tax for the year in which the BCE occurs. The pension scheme administrator is required to deduct and pay this tax to the Collector-General.


Personal Fund Threshold

A personal fund threshold is an increased maximum tax-relieved pension fund which may apply instead of the SFT where the capital value of an individual’s pension rights on the “specified date”  exceeds the amount of the SFT which applies on that date. Individuals with pension rights whose capital value as at 1 January 2014 exceeded €2m are able to protect that higher capital value (up to an amount not exceeding the previous SFT of €2.3m) by claiming a PFT from the Revenue Commissioners.

A PFT is calculated by taking the sum of the capital values on 1 January 2014 of all of an individual’s  “uncrystallised” pension rights (pension rights that the individual is building up on that date but has not yet become entitled to), and “crystallised” pension rights (pension benefits that an individual has already become entitled to from any pension arrangements since 7 December 2005.)

Where, on 1 January 2014, the overall capital value of an individual’s crystallised and uncrystallised pension rights exceeds the SFT of €2 million, that higher amount will be the individual’s PFT, subject to a maximum PFT of €2.3m (i.e. the previous SFT limit). The only exception to this is where an individual holds a PFT issued in accordance with the legislation as it applied before the relevant legislation (18 December 2013 ). Such an individual retains that earlier PFT and there is no need to make a new application to Revenue.


Valuation of pension rights for PFT purposes I

In the case of uncrystallised rights, the capital value of defined contribution (DC) arrangements for PFT purposes is the value of the assets in the arrangement that represent the member’s accumulated rights on 1 January 2014, i.e. the value of the DC fund on that date.

Where a DB arrangement provides a lump sum commutation option, the amount of a member’s pension rights is the annual amount of the gross pension (i.e. before any  For example, rights under defined benefit (DB) and defined contribution (DC) occupational pension schemes, AVCs, retirement annuity contracts and PRSAs.

Where a DB arrangement provides a separately accrued lump sum entitlement (otherwise than by way of commutation of part of the pension) e.g. public service schemes, the value of the lump sum entitlement (calculated on the same assumptions as in the preceding paragraph) is added to the capital value of the DB pension to arrive at the overall capital value of the member’s pension rights on 1 January 2014.


Valuation of pension rights for PFT purposes II

In the case of crystallised rights, the capital value of the pension benefits from DC arrangements is the value of the cash/assets that were used, for example, to purchase an annuity or that were transferred to an ARF. The value of a retirement lump sum is the amount of the lump sum paid.

For a DB arrangement with a lump sum commutation option, the capital value of the crystallised pension benefits is the gross amount of pension that would have been payable (before any commutation for a lump sum) in the first 12 months (ignoring any adjustments over that period) from the date the individual became entitled to it, multiplied by 20 (the standard capitalisation factor).

Where a DB arrangement provides for a separately accrued lump sum (other than by way of commutation of part of the pension), the capital value of the crystallised pension benefits is the actual annual amount of pension paid in the first 12 months (ignoring any adjustments over that period) from the date the individual became entitled to it multiplied by 20, plus the cash value of the separate pension lump sum paid at that time (disbursements from the lump sum, e.g. for arrears of Spouse’s and Children’s pension, do not reduce its cash value for PFT purposes).


Benefit Crystallisation Events

A Benefit Crystallisation Events (BCEs) BCE occurs on each occasion that, in relation to a “relevant pension arrangement” of which the individual is a member, any of the following takes place:

  • the individual takes a pension, annuity or retirement lump sum;
  • the individual exercises an ARF option;
  • the individual does not elect  to transfer PRSA assets to an ARF and instead retains the assets in a PRSA;
  • a payment or transfer is made to an overseas pension arrangement.

This covers most pensions arrangements, including  occupational pensions schemes, personal pensions and PRSAs as well as public sector pensions.


Payment of death in service benefits or a dependant’s pension is not a BCE.

The following are anti-avoidance BCEs. There is a BCE when there is an increase in a pension which an individual becomes entitled to on or after 7 December 2005 in excess of the “permitted margin” (viz. the greater of 5% p.a. or CPI plus 2%). This measure is designed to prevent commencement of a pension at a low rate in order to bring the capital value of the pension benefit below the SFT, with the pension  subsequently increased at an accelerated rate after the benefit has been valued for BCE purposes.

There is a BCE where a retirement Annuity Contract (RAC) or PRSA becomes vested on the date the owner attains age 75, or on 25 December 2016 if the owner was 75 before that date, where retirement benefits from the RAC or PRSA have not commenced by age 75. This is an anti-avoidance to require commencement of drawdown before that date.


Tax Charged on BCE I

When a BCE arises, a capital value must be attributed to the benefit. In the case of DB pension arrangements, the capital value of pension rights drawn down after 1 January 2014 is determined by multiplying the gross annual pension that would be payable to the individual (before commutation of part of the pension for a lump sum) by the appropriate age-related valuation factor as provided for in the Table to Schedule 23B.

If the DB arrangement provides for a separate lump sum entitlement (otherwise than by way of commutation of part of the pension) e.g. most public service schemes, the value of the lump sum is added to the capital value of the DB pension to arrive at the overall capital value. Where part of a DB pension has been accrued at 1 January 2014 and part after that date, transitional arrangements allow the capital value of the pension at retirement to be calculated by way of a “split” calculation.

For DC pension arrangements, the capital value of pension rights when they are drawn down after 1 January 2014 is the value of the assets in the arrangement that represent the member’s accumulated rights on that date.


Tax Charged on BCE II

In the case of the exercise of an ARF option, or an overseas transfer, the capital value is the actual amount transferred to the ARF or to the overseas arrangement. In the case of an increase in a pension in payment in excess of the “permitted margin”, the value is calculated by applying the appropriate age-related factor as set out in the Table to Schedule 23B to the Taxes Act   to the amount of annual pension which exceeds the “permitted margin”.

In a case involving the retention of assets in a PRSA, the amount crystallised is the aggregate of the retirement lump sum (before excess lump sum tax, if any) and the market value of any assets retained in the PRSA. In the case of an RAC or a PRSA vesting due to the owner not taking benefits on or before age 75, the amount crystallised is the aggregate of the cash sums and the arket value of any assets which represent the owner’s rights under the RAC at the date the owner attains the age of 75 years or, in the case of a PRSA, the aggregate of the cash sums and the market value of the assets in the PRSA at that date.

Where the owner attained the age of 75 years prior to 25 December 2016, the relevant date for establishing the aggregate of the cash sums and the market value of the assets is 25 December 2016.


Pensions Levy

A 0.6% stamp duty tax was applied to the full value of pension funds for each of the four years commencing in 2011. It was proposed as a temporary measure by the new incoming Government, for the purpose of funding a jobs initiative.  The levy applied at the rate of 0.6 percent to the assets of all pre-retirement pension funds for a period of four years.

The levy applied under the Stamp Duties Consolidation Act as a notional stamp duty on the funds of various pension vehicles. It applies to all pre-retirement vehicles, including occupational pension schemes, personal pension schemes, trust retirement annuity contracts, buyout bonds, small self-administered schemes and PRSAs.

The trustees or other administrators were required to deliver a statement setting out the chargeable amount.  They were required to make payment of the tax by the due date. A return was required to be filed and the tax was required to be paid by 25th September in each of the relevant years.


Application of Pensions Levy

The charge applied to occupational pension schemes, PRSA’s, buyout bonds and retirement annuity contracts. It applied to all assets within the scheme. The charge was made on the market value of the assets.

It did not apply to post-retirement vehicles, including

  • approved retirement funds ARFs and AMRFs,
  • vested PRSAs; i.e. where a lump sum has been paid or made available to the contributor;
  • a trust RAC in respect of which a lump sum has been paid to the individual entitled to the annuity;
  • individual retirement annuity contracts, where a lump sum has been paid (usually at normal retirement age);
  • a scheme which is being wound up.

Assets Covered

The levy was applicable, even in the relatively small number of cases, where pensions are paid directly from the scheme funds.  In these cases, the trustees must reduce the level of benefits in order to pay the levy.

The levy applied to all assets held by the pension scheme.  This included investments, cash, insurance contracts and other investments.  There is a very limited category of excluded assets, to which the levy did not apply.

Assets which were held for the benefit of scheme members, whose employment was exercised out of the State were exempt from the levy.  All the assets had to be referable to the foreign service.  There was no provision for apportionment.  If part of the assets related to Irish service, the whole was subject to the levy.


Chargeable Value

The chargeable fund was required to deliver a statement setting out the chargeable amount and make the payment by the due date. The amount due was 0.6 percent of the market value of the assets of the scheme as at the valuation date.  The valuation date was 30th June in each of the relevant years.

The market value was the open market value, which is what would be expected to be obtained on the open market for the assets in question.  The valuation test was that under the Capital Gains Tax Acts.

Where assets had associated borrowing, the value was the net value of the assets less the borrowing.  The borrowing may only reduce the value of the relevant asset(s) to zero, at most.  It cannot be set off against other assets.  The provision applies to real property assets, with permissible borrowing.

In defined benefits schemes and some single member schemes, the administrators could choose an alternative valuation date, being the last day of the accounting period for the scheme in the twelve months prior to the 30th June in that year.


Payment of Levy

The levy was required to be paid by 25th September in each relevant year.  Filing of the return was also required by that date. Interest ran for late filing together with a penalty per day.

The chargeable persons were the trustees or other persons managing the scheme assets.  In the case of insurance based schemes, the insurer was the chargeable person.  If the scheme was an occupational scheme or a trust retirement annuity contract, the trustees and insurer were jointly and separately liable in respect of the levy on the respective pensions assets. The insurers usually paid the liability on the insured elements, and the trustees were liable on other non-insurance assets.

Administrator, trustees and insurers were authorised and directed by the legislation to adjust the current or prospective benefits payable to members, to the extent necessary for paying the levy.  They were empowered to sell scheme assets in order to pay the levy, if necessary. No legal action lay against them for so doing.


 

References and Sources

Irish Books

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)

Website

www.pensionsauthority.ie

UK Books

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)

Statutes

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)