Saturday, Dec 21, 2024

16:48

PENSIONS - The Position at Retirement

Posted on: Thursday, November 27, 2014

WHAT HAPPENS TO THE PENSION ON RETIREMENT?

Most approved pension schemes have been established with what is termed a “Normal Retirement Date” which is the earliest or first date on which the individual can access his/her pension funds.

How they access the pension fund depends on the type of fund they have contributed to and the options include the following:

1. Taking a Tax Free Lump Sum based on 25% of the value of the fund
2. Purchasing an annuity with the balance i.e. 75% of the fund OR
3. Transferring the balance to an Approved Retirement Fund (ARF) OR
4. Transferring the balance to an Approved Minimum Retirement Fund (ARMF) 


Let’s look at the Tax Free Lump Sum option first

The individual is entitled to receive a lump sum based on 25% of the value of the fund, however, the following rules must be observed:

1. The first €200,000 will be exempt from tax.  It is important to remember that this is a lifetime CAP and that when calculating this CAP you must include all pension lump sums received by the individual since 7th December 2005.
2. The next €375,000 will be liable to tax at a rate of 20%.  Please be aware that personal allowances, deductions and charges CANNOT reduce the 20% tax payable.
3. All sums received in excess of €575,000 (i.e. 25% of €2.3m threshold amount) will be liable to tax under Schedule E – i.e. liable to marginal rate of income tax PLUS Universal Social Charge.


What happens if the pension fund calculated on maturity is in excess of the €2.3m threshold amount?

This “chargeable excess” will be liable to Income Tax under Schedule D, Case IV at 41%.


If it’s liable to tax under the Income Tax System and not the PAYE system or through payroll then who collects and pays it to Revenue?

The Pension Fund Administrator is responsible for collection and paying the tax to Revenue.

It is also essential to remember that the individual who is entitled to the pension fund is jointly and severally liable as well.



Occupational Pension Schemes

The benefits provided by an Occupational Pension Scheme at normal retirement age (i.e. 60 – 70 years) depend on whether or not the scheme is a defined benefit or a defined contribution scheme.

Defined Benefit Scheme

The options on retirement are:
• Take a Pension or
• Take a Tax Free lump sum AND a reduced pension


Points to remember:
1. The pension cannot exceed 2/3rds (1/60 *40) of the employee’s final remuneration.
2. The tax free lump sum payable under a defined benefit scheme cannot exceed 150% (3/80 *40) of the employee’s final remuneration up to a maximum of €200,000 tax free.


Defined Contribution Schemes

The options on retirement are as follows:
• Take a Pension or
• Take a Tax Free lump sum up to 25% of the fund subject to a maximum €200,000 tax free and a reduced pension which can be transferred to an Approved Retirement Fund (ARF) which is similar to entitlements on retirement to Proprietary Directors (i.e. with an entitlement to >5%).

For non proprietary members of Defined Contribution Schemes if they do not exercise the ARF option and instead take a pension, they may only be paid up to a maximum pension of up to 2/3rds of their final remuneration. 

This restriction DOES NOT apply to proprietary directors.

The employee may make AVCs into an occupational pension scheme or AVC PRSA in addition to the payments deducted directly from his/her salary. 


How is the AVC element of the fund used?

The AVC element of the occupational pension fund can be used to:

1. Fund the tax free lump sum
2. Purchase an additional annuity pension
3. Transfer to an ARF


PRSAs

The benefits provided by PRSAs at normal retirement age are:

1. A pension or
2. A tax free lump sum of 25% of the value of the assets in the PRSA at that time up to a maximum of €200,000 tax free.
3. The remaining 75% can be used to fund
(a) a reduced pension or
(b) a transfer to a ARF/AMRF or
(c) a taxable lump sum (subject to AMRF requirements).


Important Points to note

A different maximum tax free lump sum applies to AVC PRSAs that are limed to a defined benefit occupational pension scheme.

The maximum tax free amount in such circumstances is calculated as up to 1.5 times the final remuneration rather than 25% of the fund value on retirement.


RACs

The benefits provided by an RAC at normal retirement age are:

1. A pension or
2. A tax free lump sum of 25% of the value of the annuity payable up to a maximum of €200,000 and a reduced pension

On retirement the RAC contributions can also be transferred into an ARF arrangement if the individual opts for this prior to retirement.



ARFs

The most important points to remember about Approved Retirement Funds are:

1. An ARF is only available at retirement age.

2. A lump sum is paid at retirement into an ARF from any of the following pensions
(a) RAC
(b) PRSA
(c) AVCs made under an occupational pension scheme
(d) an occupational pension scheme where the member is a proprietary director (i.e. a director with a minimum shareholding of >5% and
(e) a defined contribution occupational pension scheme which has a significant legislative change.

3. An ARF gives the individual an alternative to buying an annuity or taking a pension from the above schemes on retirement.

4. The main advantage to an ARF is that it gives the individual more control over his/her pension fund and allows it to form part of his/her estate on death. An annuity, on the other hand, generally dies with the person entitled to it.

5. The main disadvantages of an ARF is that
(a) the funds must be managed and
(b) are subject to fluctuation based on investment performance as opposed to an annuity which is fixed.

6. An individual can make a withdrawal of any amount from an ARF if he/she wishes or leave the funds to grow/increase in retirement.

7. Unlike pension funds, the funds in an ARF are deemed to be beneficially owned by the individual and can be held in his/her name.  The fund can be used according to the individual’s wishes.

8. Income and chargeable gains within an ARF are exempt from Income Tax and CGT.

9. Any withdrawals from the ARF by the individual are treated as income and PAYE under Schedule E (as emoluments) is operated by the Fund Manager.

10. If an individual decides to gift an ARF during his/her lifetime, the funds withdrawn from the ARF will be liable to income tax at the individual’s marginal rate on this fund.

11. The beneficiaries of the ARF will be treated as receiving a cash benefit from the owner of the ARF of the net proceeds (i.e. after income tax has been levied).  This sum/benefit is then liable to Capital Acquisition Tax.



AMRFs

The most important points to remember about Approved Minimum Retirement Funds are as follows:

1. Sometimes an individual who wishes to transfer funds to an ARF must also transfer some funds to an AMRF unless they have a certain level of pension income from other sources.

2. Unless the person has an income of at least €12,700 including the state old age pension, €63,500 must be transferred from the ARF to the AMRF.

3. €63,500 cannot be withdrawn from the AMRF until the individual reaches the age of 75 years or on death at which time any AMRF becomes an ARF

4. An AMRF is like an ARF except no withdrawals can be made from the capital until the individual is aged 75 years. 

5. Income and chargeable gains within an ARF are exempt from Income Tax and CGT.

6. Before the age of 75 years, withdrawals can only be made from accumulated investment income or gains.

7. The earnings on the AMRF which are withdrawn at age 75 are subject to PAYE.