PERSONAL PENSIONS

In the Finance Act 1999, the Minister for Finance introduced significant changes to a) the tax rules applying to pension contributions by self-employed persons and employees without a company pension, and b) the options available at the time of retirement.

In the Finance Act 2000, the Minister extended the benefits of the new system beyond individuals with retirement annuities or directors who controlled more than 20% of the voting rights in their company to:

 

  • directors who control more than 5% of the voting rights in their company
  • employees who make additional voluntary contributions (AVC's) to their pension scheme.

Increased tax deduction for pension contributions

If you are a self-employed person, a director (a director of a family company or a director who controls more than 5% of the voting rights of company) or an employee who is not in an occupational pension scheme, the percentage of your earnings* which can be set aside each year as pension contributions -and be fully tax deductible - is set out on the chart below.

Age
% of Earnings*
Up to 30 15
30 to 39 20
40 to 49 25
50-54 30
54-59 35
60 and over 40
* ie earnings from self-employment or non-pensionable employment after deducting any losses or capital allowance

If your income comes wholly or mainly from specified sporting activities i.e. athletes, badminton players, boxers, cyclists, footballers, golfers, jockeys, rugby players, squash players, swimmers or tennis players, you will be able to contribute 40% of your earnings each year, irrespective of your age.

In all cases tax deductible contributions are calculated by reference to a maximum earnings figure of €253,947 for a tax year, where actual income in any year exceeds this amount. You will be able to make contributions to your pension scheme until you reach the age of 75 (previously 70).

Finance Act 2002 Changes

In the Finance Act 2002, the Minister for Finance provided for a significant improvement in the taxation relief* for members of occupational pension schemes and a change in the rules applying when an individual with a personal pension joins an occupational pension scheme.

Where a self-employed person who is in a RAC (Retirement Annuity Contract-see below) scheme joins an occupational pension scheme, he/she is no longer obliged to terminate his/her RAC scheme but can continue contributing to the RAC or take out a further RAC but without any tax relief in respect of these continuing or further contributions and without notifying the employer as is required for an AVC.

More options for drawing down pension benefits

When you come to receive your pension benefits you are now given new choices as to the benefits you can get from your pension contributions. These choices are also being made available to proprietary directors in pensionable employment.

You are no longer obliged to purchase an annuity and are now able to choose between purchasing an annuity or placing the accumulated fund in an "approved retirement fund" (ARF) or having the accumulated fund paid to you. Use of the ARF will not only give you greater control over how your pension scheme is run but will also allow you to retain ownership of the fund and to pass on any balance remaining in the fund to your beneficiaries following your death.

Annuities

An annuity is a type of insurance policy that pays a regular income for life in return for the payment of a lump sum at the outset. The annuity is generally arranged with a life insurance company. Annuity prices are linked to long-dated gilts, Government bonds which pay out interest annually. As with interest rates, annuity levels can rise and fall. If interest rates are low, the value of your annuity will be low, and vice versa. The Minister for Finance's 1999 measures which ended the requirement that individuals with personal pensions had to buy an annuity on retirement, coincided with a period of the lowest interest rates in 40 years and consequently the Minister saved many individuals from being locked into poor value annuity contracts. 
The following are a number of factors which influence the amount of income which annuities provide.

  • · Age: the older you are when you buy an annuity the higher your income will be.
  • Sex: women normally receive lower annuity payments than men of the same age because they live longer.
  • Single or joint life: you can opt for an annuity which ceases when you die or you can buy one which continues to pay out to your spouse or partner after your death.
  • Guarantee period: annuity payments normally stop on death but if you are worried about dying prematurely you can buy a guarantee that payments will continue for a minimum period, typically five or ten years.

An impaired life annuity is one which provides for a higher payout, based on the likelihood that the person covered is unlikely to live for a long period.

What tax relief can I get?

If you are self-employed, or a proprietary director or an employee in non-pensionable employment you can provide for your pension/retirement income by taking out a Revenue approved Retirement Annuity Contract.

Is an Annuity the same as a Retirement Annuity Contract?

No. A Retirement Annuity Contract (RAC) is the arrangement that is put in place for the individuals covered by personal pension schemes to enable them to accumulate funds to provide for their retirement.

Tax Relief On Life and Pension Cover for Self-Employed

The Finance Act 2001 provides that self-employed persons can claim total life and pensions cover relief* up to the limits of 15-30% of net relevant earnings (See chart above). The life cover/pension contribution breakdown, subject to the limits, is up to the individual.

Is there a ceiling on earnings*?

From the year 2002 the maximum earnings* on which allowable contributions are calculated is €253,947. If your relevant earnings* exceed this amount relief will be calculated on €253,947.

Example: -
If your earnings* for the year 2006 were €253,947, your allowable pension contributions would be calculated by reference to €253,947. Assuming you were over 50 at some time during the year, you would get tax relief for contributions of up to €76,184 - €253,947 @ 30%]

When do I get tax relief?
Premiums paid during the tax year are allowed as tax relief in that tax year. You can opt to claim, for a particular year, for premiums paid between the end of the tax year, i.e. 31 December, and the date on which you are required to make your tax return for that tax year. Currently this date is 31 January.

Example:-
For the year 2006/2007, a self-employed person could claim for premiums paid in the year ended 5 April 2006 as well as for amounts paid in the period from 6 April 2005 to 31 January 2007 - the date by which the person's return for 2006/2007 is due. The premium paid in the period 6 April 2006 to 31 January 2007 cannot be claimed again for the tax year 2006 (6 April-31 December 2006).

What happens to any excess over the allowable amount?

Any contributions in a tax year which are over the limits set out on the chart above, can be carried forward and allowed, subject to the overall annual limits, in following years.

Example:-
If your earnings* for the year 2007 will be €350,000, your allowable pension contributions would be calculated by reference to €253,947. Assume you are over 50 and paid pension contributions of 90,000 in the year 2005 (ignoring for this example the one-off 9 month tax year). The maximum tax relief is €76,184 and the balance i.e. €13,816 is carried forward to the next tax year and treated as a pension contribution in that year.

* i.e. earnings from self-employment or non-pensionable employment after deducting any losses or capital allowance

From 6 April 1999 three options have been available. These are:

  • ·Take a 'tax free' lump sum and invest the balance in an "approved minimum retirement fund" (AMRF) or in an "approved retirement fund" (ARF)
  • Withdraw all the capital in your pension fund in cash.
  • Take a 'tax free' lump sum and invest the balance in an annuity.

What is an ARF and an AMRF?

These are funds managed by qualifying fund managers in which you can invest the proceeds of your pension fund. Your pension fund is the proceeds of Retirement Annuity Contracts as they mature. For a proprietary director, the pension fund will be the value of the pension entitlement.

The choice of investments offered within a fund will vary from one qualifying fund manager to another. They can range from bank accounts to unit linked funds in a specified financial institution or investment body. You are free to withdraw the money invested in an ARF. The capital invested in an AMRF may not be withdrawn until you reach 75. However, income or gains made on your investment in the AMRF may be withdrawn. If you die before reaching 75 the AMRF becomes an ARF and your personal representatives are free to withdraw the money invested in it.

The new options give you more control and flexibility about how your pension fund is used to meet your needs.

Proprietary directors, who are in an occupational pension scheme, are also entitled to the new options.
The new options apply to all Revenue approved contracts made on or after 6 April 1999. If your contract was approved before that date you can avail of these new options with the agreement of your pension provider.

Proprietary Director

For pension fund options, a Proprietary Director is one who controls more than 5% of the voting rights in a company or in a company's parent company. Shares which are held by the director's spouse or minor children are taken into account. Shares held by trustees of a settlement to which the director or the director's spouse had transferred shares are also included.

A proprietary director in a pensionable office who takes one of the options is allowed to take a tax-free lump sum of up to 25% of the value of the pension fund. This replaces the former system where the amount was calculated on the basis of years in employment.

If you do not exercise one of the new options, the tax free lump sum will continue to be calculated by reference to years in employment.

Option 1 - Take a 'tax free' lump sum, invest the balance in an ARF

With this option you can:

  • · Continue to have up to 25% of the value of your pension fund transferred to you as a tax-free lump 
    and
  • Have the remainder of the pension fund, or €63,500 if less, transferred to an AMRF or used to purchase an annuity payable to yourself, immediately. Any balance over €63,500 can be put into an ARF.

If you have a guaranteed pension or annuity of at least €12,700 a year for life (all of your pensions and annuities including Social Welfare Pension can be taken into account for this purpose) or are over 75 years you need not invest in an AMRF. The sum invested in an AMRF i.e. €63,500 or less in certain circumstances) cannot be withdrawn until you reach 75 years or if you die before reaching that age.

Example:-
On retirement the accumulated capital in your pension fund amounts to €126,974. You can take 25% of this amount i.e. €31,743 as a 'tax free' lump sum.
How is the balance of €95,230 dealt with?
If you have a pension income of €12,800 per annum or you are over 75 years, you can invest the balance i.e. €95,230 in an ARF or purchase an annuity payable to yourself, immediately. This is taxable in the normal way.
If you are under 75 years and do not have a guaranteed pension or annuity for life of €12,700 per annum then you must place €63,500 in an AMRF or use the amount to purchase an annuity payable to yourself, immediately. You can then invest the remaining balance i.e. €31,743 in an ARF.


Option 2 - Withdraw all in cash
With this option you can:

  • Have up to 25% of the value of your pension fund paid to you as a 'tax free' lump sum.
  • Take the balance in cash. This will be treated as part of your income and you will be liable to pay tax on it.

However, where you do not have a guaranteed pension or annuity for life of at least €12,800 per year (all your pensions and annuities, including Social Welfare pension, can be added together for this purpose) you must invest at least €39,378 of the balance (or the total of the remainder, if less) in an AMRF or in an annuity payable to you immediately. The sum invested in the AMRF cannot be withdrawn until you reach 75 years or if you die before reaching that age.

Important Note

When you opt for either options 1 and/or 2 any money invested or accumulated is your property and on death belongs to your estate.

Any earnings from the money invested in an ARF or an AMRF or any amount of the original capital withdrawn are liable to tax in the normal way i.e. as if you earned the income yourself.

Example:-
On retirement the accumulated capital in your pension fund amounts to €126,974. You can take 25% of this amount (i.e. €31,743 as a 'tax free' lump sum.
How is the balance of €95,230 dealt with?
If you have a pension income of €12,700 per annum or you are over 75 years you can take the balance i.e. €95,230 in cash which will be taxable, or use this amount to purchase an annuity payable to yourself, with immediate effect. 
If you are under 75 years and do not have a pension income of €12,700 per annum then you must place €63,500 in an AMRF, or use that amount to purchase an annuity payable to yourself, immediately. You can then take the remaining balance i.e. €31,743 in cash

Option 3 - Take a 'tax free' lump sum and invest the balance in an annuity

With this option you can:

  • · Have up to 25% of the value of your pension fund paid to you as a 'tax free' lump sum 
    and
  • Use the balance, after the lump sum, to purchase an annuity payable to yourself, immediately. This is liable to income tax in the normal way.

While this option was available prior to 6 April 1999 it has been amended so that you can now contribute to your pension fund up to the age of 75.

Example:-
On retirement the accumulated capital in your pension fund amounts to €126,974.
You can take 25% of this amount i.e. €31,743 as a 'tax free' lump sum. The balance i.e. €95,230, is used to purchase an annuity which will pay you income for life. This annuity is liable to income tax in the normal way.

Changes in taxation of ARF's/AMRF's opened on or after 6 April 2000

In the case of existing ARF's/AMRF's, income and gains were taxable in the hands of the ARF/AMRF holder as they arose. Distributions of the original pension fund were also chargeable to tax in the hands of the ARF's/AMRF's holder.

Where the ARF/AMRF is opened on or after 6 April 2000 a new scheme of taxation, known as 'gross roll-up' applies. This means that as long as income or gains are allowed to remain in the ARF's/AMRF's, there is no tax liability.

Where funds are withdrawn, whether these withdrawals come from income or gains or from the original pension fund, they are taxed under PAYE as the income of the ARF's/AMRF's holder for the year in which the withdrawal is made. Where the qualifying fund manager has not received a Tax Free Allowance certificate, tax must be deducted at the higher rate (currently 41%).

What happens to the AMRF at age 75?

Once you reach 75, you are no longer obliged to keep funds in an AMRF. The AMRF becomes and ARF at that stage.

  • You can withdraw all the funds from the ARF - you will be taxable on the amount withdrawn from the original capital invested.

    You can use the funds in the ARF to purchase an annuity payable to yourself. 


- the images are from the Revenue's 1999 publication New Pension Options and the currency illustrations are in Euros.

Tax Treatment of ARF/ AMRF's following Death

Special rules apply to withdrawals from an ARF/AMRF following the death of the holder.

  • Generally the amount distributed is treated as the income of the deceased ARF/AMRF holder for the year of death.
  • But where the distribution is made to an ARF/AMRF in the name of the ARF/AMRF holder's spouse or to a child of the ARF/AMRF holder who is under 21 at the date of death of the ARF/AMRF holder, no income tax liability will\par arise
  • Where the distribution is made from the ARF/AMRF following the death of the surviving spouse or to a child of the ARF/AMRF holder who is 21 or over at the date of death of the ARF/AMRF holder, tax will be deducted at the standard rate for the year in which the distribution is made. No further tax liability will\par arise in respect of such a payment.

Summary of treatment following death

Qualifying Fund Managers, Appendix 1

Qualifying Fund Managers

Banks

Building Societies

Credit Unions

The Post Office Savings Bank

Life Assurance companies

Certain bodies which are authorized to raise funds from the public for collective investment, such as unit trusts,

UCITS, authorized investment companies etc.

Authorised members of the Irish Stock Exchange or member firms, which carry on business in the State of a Stock Exchange of another EU member State, who have notified the Revenue Commissioners of their intention to act as qualifying fund managers

Banks licensed in other EU States

Insurance companies licensed in other EU States, who are carrying on life assurance business in the State

Investment Intermediaries, authorized either in the State or in another EU State, to hold client money other than a Restricted Activity Investment Product Intermediary.

A qualifying fund manager who is not resident in the State must appoint a resident agent who will be responsible for the discharge of all duties and obligations regarding the ARF's/AMRF's managed by that qualifying fund manager.

Other persons approved by the Minister for Finance

Contact us for a personal pension advice report and quotation.

*Note: Tax Relief outlined are those currently applying as at 01/06/2009.

Warning: The value of your investment may go down as well as up.

 

Contact Details

Telephone 01 - 8038105 / 8038106  Mobile: 087 258 9894
43 The Dunes,
Portmarnock,
Co. Dublin,
Ireland
 
© Ellison Financial Consultants 2018 - All Rights Reserved
  Privacy Policy | Terms of Service  Dr Gary Ellison t/a Ellison Financial Consultants is regulated by the Central Bank of Ireland.
Member of Brokers Ireland.