The rules of an coccupational pension scheme must comply with Revenue requirements before they can qualify for tax exempt status for contributions and investments. Revenue requires the establishment of a trust. The trust must be irrevocable. Its principal purpose must be the provision of certain categories of long service and other benefits, as provided for under tax legislation.
The scheme may be based in part on employer and employee contributions, employer contributions only or largely on employee contributions with some input by the employer. If employee contributions are made, there must be an authorithy for deduction from payroll for the purpose of the Payment of Wages legislation.
It is a minimum Revenue requirement that the employer makes some contribution to the scheme. It must be meaningful in the circumstances, in the context of the establishment and operation of the scheme.
There should be provision for winding up of the scheme, either on termination or on restructuring. There may be provision for transfer payments on winding up.
Statutory provisions apply to early leavers. Leaving members may transfer contributions to another scheme, a buyout bond or may keep benefits within the scheme on a frozen basis. The right to take a refund of contributions, which formerly applied has been severely limited
Trust deeds or pension rules usually provide that the assignment of pension assets is prohibited. This includes purported assignments by the pension beneficiary, assignments in bankruptcy or transfers for the benefit of creditors.
Approval / Registrations
Occupational pension schemes are set up by employers for the benefit of employees. A critical aspect is the taxation benefits which arise from being an “exempt approved scheme”. The Taxes Act and Revenue Commissioners guidance set out the detailed terms and conditions under which a pension scheme will qualify as an exempt approved scheme.
Specific Revenue Commissioners’ approval is required to confirm the status of an occupational pension scheme as an exempt approved scheme. The statutory rules are supplemented by Revenue practice, which is more generous than the strict legal position. If a scheme is not approved, then the entire benefits are taxable in the hands of the employee as a benefit in kind.
Occupational pension schemes must also be registered with the Pensions Board. It supervises certain aspects of pensions in the public interest. It does not deal with the Revenue requirements.
Mandatory and Discretionary Terms
Revenue must approve so-called mandatory schemes, which contain the strict or narrow terms and conditions, in particular in relation to the accrual of benefits, set out in the Taxes Acts. They may and usually do approve wider and more liberal terms in accordance with published Revenue Pension rules.
In strict terms, terms the latter category are approved in accordance with Revenue’s discretion. However, the Revenue Pension Manual rules, while concessionary in nature are well established. To some extent, they create legitimate expectations which may limit their withdrawal or the application of discriminatory restrictions.
In practice, the vast majority of pension schemes are approved under the discretionary revenue approval criteria. These discretionary criteria are well-established and are much more generous in terms of potential benefits, that the mandatory rules.
Schemes must be established for the bona fide purpose of providing benefits in respect of service as an employee. The benefits may be payable to the employee, widows, children or dependents. Certain benefits must be promised. The must be an AVC option.
In order to qualify for mandatory Revenue recognition, an occupational pension scheme must comply with certain conditions.
- It must be established bona fide for providing benefits to employees, their spouses, children or dependents.
- recognized by the employer and employees to whom it applies,
- the persons responsible for administration are established in the State
- the employer contributes to the scheme
- the scheme is in connection with a trade or business carried on in the State by a person or corporate resident in the State
- employees’ contributions cannot be repaid.
In effect, Revenue law allows for a tax-free roll up of income within the scheme, with the postponement of income payment and income tax until retirement. This is subject to the now reduced possibility of a tax-free lump sum on retirement. Once approved, the pension scheme enjoys considerable benefits and advantages.
Contributions are subject to very favourable tax treatment. Scheme income derived from investments is exempt from income tax, capital gains tax and other taxes.
The employer’s contributions to the scheme are deductible as an expense in the year in which they are actually paid. The contributions to the scheme by an employee are allowed as a deduction from tax of between 15% and 40% of remuneration depending on age. The contributions made by the employer on behalf of the employee are completely exempt from taxation in the hands of the employee, notwithstanding that they are a benefit.
The pension itself, payable in retirement is taxable as income of the pension beneficiary PAYE must be withheld on it in the same way as with employment income. A lump sum benefit may be taken on retirement without tax. Formerly, one-quarter of the fund can be taken tax-free. This is now subject to a cap. The balance of the pension is paid as an annuity on retirement and is subject to income tax in the normal way.
Normal Retirement Age
It is a condition of approval that the rules of the scheme shall specify the age at which members normally retire (NRA). Any age within the range of 60 years to 70 years is usually acceptable. The NRA may differ for categories of member. It may also be agreed on an individual basis. Revenue may be prepared to accept an NRA outside the above range for exceptional occupations. Submissions should be made on an individual basis. 20% directors must retire within the 60 years to 70 years age range. All schemes/arrangements in respect of the same employment that provide benefits for an individual must have the same NRA.
There may be a number of alternatives in relation to how and when pension benefits may be taken under the pension rules. The pension benefit may be taken at normal retirement date with or without a lump sum. The pension may be postponed, with an immediate drawing of the lump sum. The lump sum and retirement benefits may be deferred until the actual date of retirement.
In the case of deferral, the benefits are calculated as if the actual later date of retirement is the normal retirement date. The discretionary (so-called uplifted scale) may be available where there is sufficient completed service available. If the 40/60 is available, up to a further 5/60 may be available, if the actual retirement date is postponed for up to 5 years.
In certain circumstances employees can retire before their normal retirement date. Employees may retire on the grounds of incapacity. An incapacitated employee may be entitled to a pension on the basis that he has notionally remained in service until retirement. The incapacity must be a serious physical or mental incapacity, which prevents the individual from carrying out his normal occupation or seriously impairs him in employment.
Earlier retirement than normal retirement age may be available, subject to conditions and restrictions. An employee may be eligible to retire early if he is over 50 years. In this case, the maximum pension is the potential final pension, in the proportion that the number of years’ service bears to the number of years’ service to normal retirement date. Alternatively, the strict 1/60th basis may be used if this yields a higher sum. Benefits from earlier service must be taken into account in some cases.
Ill Health Benefits
Revenue rules allow retirement benefits to be paid early, on the grounds of ill health, in certain limited circumstances. In these cases, the same benefits are allowed, that would have been allowed to be paid after retirement age. This may include recurring payments and lump sums. The option to transfer to an Approved Retirement Fund may be available.
Permanent health insurance is the subject of a separate scheme of tax relief. Permanent health insurance provides income until retirement, in the event that the insured event occurs. Retirement pension contributions themselves may be funded from the permanent health insurance scheme.
If a person is compelled to retire early because of ill health under a defined contribution scheme, his benefits are likely to be limited to the extent of funds available. Some pension schemes may include insurance cover against ill health early retirement. A defined benefit scheme may provide for early retirement benefits in excess of fund value. This is may be insured or self-insured benefits, which become available in the event of a contingency such as ill health.
Ill-health early retirement provisions usually require physical or mental deterioration, which is serious enough to prevent the member from following his normal employment or which very seriously impairs his earning capacity. In contrast, many permanent health insurance policies require the beneficiary to be unable to carry out any occupation, before the benefits arise.
Revenue rules allow a pension scheme to provide for full commutation of a pension if a member is affected by exceptional and critical ill health. This usually covers cases where the member’s life expectation is very short. The entire accumulated fund may be paid. Part of the lump sum is tax exempt, and the remainder is taxed at a reduced rate. The exempt part is calculated on a similar basis to the standard basis.
The pension scheme may provide life insurance benefits or pension benefit for an employee who dies during service. This can take the form of a lump sum and / or a pension to spouse and children. The maximum lump sum is 4 times the final remuneration. A refund of contributions with or without interest is also allowed.
The lump sum can be payable to anyone. The pension must be paid only to dependents, meaning spouses, children under 18 years, or persons who are in fact substantially dependent. The maximum spouse or dependent’s pension is that which could have been received by the employee at retirement age. If pensions are payable to several dependents, the overall maximum cannot be exceeded.
The spouse’s pension can continue for life or until remarriage. It may be paid on the spouse’s death to surviving until the age of 18 years or while they are in full-time education.
If the pensioner dies in retirement, the scheme may provide for the payment of a spouse’s pension. The maximum that can be paid to the spouse is the maximum pension that could have been permitted for the member. It may also be paid to the spouse and to dependents. If there are multiple pensions, the maximum, is that which could have been paid to the employee / member.
Normally an annuity will end with the death of the member. It is possible to provide a minimum guarantee period of up to 10 years. In this case, the balance will be paid as a lump sum or continue to be paid as a pension to a spouse or the other successors. It is possible to have this guarantee overlap or non-overlapping with the spouse’s pension.
Cross Border Pension Schemes I
The purpose of the IORPs Directive is to facilitate cross-border pension schemes within the EU. The Directive applies to legal structures established on a funded basis, separately from the employer and its trade, for the purpose of providing retirement benefits in the context of an occupation / employment, on the basis of an agreement or contract (described as Institutions for Occupational Retirement Provision).
Employers may fund IORPS regulated and approved in other members states. Correspondingly, pension vehicles / institutions established in the State may accept contributions from employers and others in other member states. Prior authorisation/ registration is required in order to accept contributions from an employer located in another EU State.
The pension scheme must furnish certain information must be furnished to the domestic regulator. The Pensions Authority / Pensions Board is the regulator in Ireland. Provided the home state is satisfied with the qualifications, competence, good repute, financial status of the retirement pension entity, it communicate the particulars to the host state and informs the trustees.
Cross Border Pension Schemes II
Before trustees commence to operate a scheme for an employer in another state, the host State must notify the authorities of the home State of the requirements of social and labour law applicable to occupational pension schemes, by which the scheme must operate in the host State. If no further communication is received from the home state, the trustees may undertake the scheme under the host state’s social and labour law requirements in the area concerned.
The authorities of the host state are to notify the authorities of the home state of any significant changes in the relevant legislation, which may impact upon the scheme. The scheme is subject to supervision by the host state in relation to compliance with pension law requirements. If non-compliance is detected, the host state is to inform the home state, who in coordination with the host state is to take necessary measures to remedy the breach. The host state may take unilateral action to prevent further breaches, if the measures taken by the home state are insufficient.
Occupational schemes and PRSAs may transfer to another EU state under the IORPs Directive. The providers or trustees must be satisfy the Pensions Authority that the retirement benefits under the overseas arrangement, qualify as retirement benefits. They must obtain confirmation from the trustees or administrators of the overseas scheme, which must itself be an entity the relevant regulatory authority overseas. The overseas scheme must be operated under the IORPs Directive and established within the EU.
Transfers outside the EU may not be made unless the pension beneficiary is employed in the state of transfer.
Cross Border Issues
Migrant workers may be given Irish tax relief on contributions to overseas pension schemes. Migrant workers are persons resident in Ireland, who were previously resident outside Ireland for at least three years in another EU State prior to coming to Ireland.
The employee must procure that the administrator of the foreign funds furnish certain information to the Revenue. They must have made pension contributions to an arrangement equivalent to a domestic occupational pension scheme or personal pension in that state, which was tax-deductible in that other EU State.
The foreign employment income must be pensionable employment in order to qualify. Non-residents who have taxable employment or trading income in Ireland, may receive tax deductions for pensions contributions to the foreign scheme.
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)