Retirement Annuities

Personal Pensions I

A retirement annuity contract is effectively a personal pension. It is the traditional form of pension available to individuals, who are not members of an occupational pension scheme.  It is effectively an investment policy. The retirement annuity contract is a policy issued by an insurance company. It is not possible to invest directly.

It may be taken out by a self-employed person or by employed persons, who are not in pensionable employment (i.e., where there is no occupational pension scheme available). Personal pensions (like PRSAs) are suitable for persons who have a number of sources of income, one or more of which is not pensionable.

A personal pension is by definition, a defined contribution arrangement. Its fund is used on retirement to purchase an annuity, fund an ARF or in, part to pay a lump sum in accordance with the benefit options. Tax relief is given on contributions subject to conditions. The fund accumulates tax free. Tax, usually under the PAYE system is deducted on pension payments from the scheme post retirement.


Personal Pensions II

There are two type of policy/ contract  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 principal (S.784) type of contract provides for benefits on retirement.  The other policy (S.785) which may be a stand alone policy or  subsidiary to the retirement benefits policy, provides for a lump sum or annuity for a spouse and /or dependents in the event of the policyholder’s death.

The S. 784 policy is a savings and investment policy. The S. 784 policy may have risk elements, which are effectively insured.


Alternatives

Personal pension policies / retirement annuity contracts are offered by life assurance companies. It must be issued by a regulated insurance company.The insurer may be a domestic insurer or one established outside the State.

PRSAs are similar to, and provide an alternative to the traditional personal pension contract. The ultimate benefit options are very similar. PRSAs are subject to some differing rules.  They were intended to be more flexible. They allow for contributions by employers and employees.  They may be offered by a range of financial services providers.

A PRSA fund may not be transferred to a personal pension. Since 2002, the proceeds of a personal pension fund may be transferred to a PRSA.  The transfer may be made into a single PRSA or to a series of PRSAs to which, the personal pension holder contributes. The consent of the insurance company as required.


Revenue Approval

The personal pension (retirement annuity) contract must be approved by the Revenue Commissioners.  Revenue will approve the contract only if it complies with certain conditions.  There are published criteria for Revenue approval. Some conditions are mandatory and others are at the discretion of Revenue.

The policy must be entered by an individual with a regulated insurer. Joint policies, even with a jointly assessed spouse are not available. The benefits available must fit within the mandatory or discretionary terms. Certain benefit options must be offered.

There is a range of options which may be approved by Revenue. This is reflected in the  variations in the terms of the policy that are offered by insurers. There are mandatory and discretionary approval terms, both for the retirement benefit policy and the death benefit policy / element.


Eligible Contributors

In order to qualify to contribute to a personal pension policy, the individual must have trading profits (self-employed) or earnings from employment, other than the pensionable employment. Pensionable employment is that where the employee is included in an occupational pension scheme other than a scheme that is limited to spouses or dependent’s pensions or a lump sum benefit on death.

Contributions to a retirement annuity contract/personal pension may be made by the employer or the employee.  Contributions made by the employer would be deemed a benefit in kind to the employee, in the absence of tax relief.  Employer’s contributions may be tax relieved, provided that they fall within the scope of employee’s available tax relief. Revenue may permit payment to be made on a net salary basis so as to avoid the withholding of income tax under the PAYE and subsequent reclaim.

Employees and proprietary directors of investment companies are excluded from entitlement to undertake a personal pension contract. Proprietary directors and employees are those who are directly or indirectly interested in more than 15% of the ordinary share capital of the relevant company.


Tax Relief on Contributions

Tax relief is given on the contributions of premiums. Income and capital gains from the underlying investments accumulate tax-free. The insurance company issues a certificate which enables the person making contributions, to reclaim tax. The contributions reduce the total amount of taxable income and the income subject to PRSI, USC and levies.

The amount of tax relief on contributions is determined by reference to the individual’s net relevant income.  Net relevant income refers to employment and trading income, subject to Irish tax.  Investment income does not qualify.  This is consistent with the principle that that pensions are intended to provide replacement income upon retirement from non-pensionable employment or a trade.

The basic principle is that a person is entitled to tax relief on contributions  to a personal pension contract, up to a certain percentage of his net relevant income The relevant percentage varies with his age at the time of the contribution.


RAC Limits

The same rules apply to the calculation of the maximum permitted contributions for the pension and death benefits. The limits on contributions is as follows,

  • under 30 years; 15% of net earnings;
  • 30-39 years;  20% of net earnings;
  • 40-49 years;  25% of net earnings;
  • 50-54  years;  30% of net earnings;
  • 54-59  years;  35% of net earnings
  • over 60 years; 40% of net earnings.

Earnings are subject to a cap of €115,000 per annum. Earnings above this maximum do not count in the calculation of the maximum annual contribution.


Contributions

Contributions may be made until 31st October (the tax return date) in the year following the tax year in which the earnings were earned.

In the case of self-employed persons, earnings are effectively the taxable trading profits. They are net of losses, tax deductible interests. and capital allowances, which are deducted in the calculation  taxable profits. Similarly, the limited categories of employee deductions for the purpose of taxable earnings, are excluded.

Where contributions paid exceed the contribution limit for tax relief, any unrelieved contributions can be carried forward to the next available tax year until all contributions have been given tax relief or until no source of relevant earnings exists.

Tax relief can be backdated to the previous calendar tax year provided that contributions are paid before 31 October in the current tax year.


Family Law

The family legislation pension provisions are applicable to personal pension/retirement annuity contracts. Family law pension adjustment orders may be made in respect of a personal pension fund / retirement annuity contract for the benefit of spouses or dependents.

A spouse / former spouse may be given an entitlement to part of the other spouse’s personal pension, in the event of judicial separation and/or divorce. In this case, the ownership of the personal pension assets may be split, prior to retirement. A separate benefit may be provided for the spouse by the same insurer.

As with occupational pension schemes, the benefits may remain within the scheme or the policy may be split. The beneficiary spouse may require that the benefit transferred under the pension adjustment order be transferred to a PRSA or to another provider or vehicle. The trustees themselves may elect to make the transfer.


Group Schemes I

Retirement annuity contracts are usually established for the benefit of particular individual beneficiaries. However, trust RACs may be established for the benefit of individuals who are engaged in a particular occupation or group. They may provide retirement annuities for a group of beneficiaries individually, with or without benefits for their family members.  Death benefits may be provided.

Since 2007, group personal pensions may be established as trust retirement annuity contracts, which may be offered by non-life insurance companies. They may be  operated by a range of other regulated financial service providers including stock brokers, banks, building societies and credit unions.

Group Trust RACs must be established under the law of and administered in the State.  They must be established by irrevocable trusts, by a body representing the persons engaged in or connected with an occupation of group of occupations within the State.


Group Schemes II

There are group trust schemes in particular businesses or professions. A number of professional bodies including solicitors, barristers and accountants have organised a group trust scheme through their professional body.

Group trust RACs may invest in unit trust or directly in other assets. They may invest in approved policies with insurers, including group policies. They may be  able to secure better rates than for a single policy. Trust based RACS are within the scope of the IORPs Directive on investment.

Transfer payments can be made to a PRSA, another RAC or a PRSA.


Self-Directed

Self-invested personal pensions or self-directed personal pensions are retirement annuity contracts in which the policyholder may make directions as to the investments to be made.  They are marketed to high net worth individuals and self-employed persons who seek to direct their own schemes.  The investment may be via a third-party financial services provider or manager, such as a stockbroker or other trustees or administrator.


References and Sources

Irish Books

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)

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)