Pensions & Retirement Plans In Ireland, 2013

Author:Mr Brian Buggy, Jane McKeever and Deirdre Cummins
Profession:Matheson
 
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Ireland Statutory and regulatory framework

1 What are the main statutes and regulations relating to pensions and retirement plans?

The Pensions Act 1990 (as amended) (the Pensions Act) is the primary pensions legislation in Ireland. The Pensions Act regulates the operation of occupational pension schemes, Personal retirement savings accounts (PRSAs) and trust Retirement annuity contracts (RACs). There are a large number of regulations in place which supplement primary legislation and regulate all aspects of the operation and administration of pension schemes. The legal framework in place in Ireland implements EU Directive 2003/41/EC (commonly called the IORP Directive) and also EU directives relating to pensions and equality issues.

The Taxes Consolidation Act 1997 includes a number of provisions relating to pensions, which set out the basis on which approval of pension arrangements is established. The Revenue Commissioners (Revenue) are responsible for granting a scheme this approval, which results in the scheme having a beneficial tax status. The Taxes Consolidation Act 1997 is supplemented each year by other legislation including the Finance Act (which incorporates the government's annual budget provisions) and is therefore amended on an annual basis.

The Family Law Act 1995, Family Law (Divorce) Act 1996 and Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 are also of relevance in a pensions context where a Pension Adjustment Order has been granted in a judicial separation, divorce or the dissolution of a civil partnership.

2 What are the primary regulatory authorities and how do they enforce the governing laws?

The Pensions Board

The Pensions Board governs the regulation of occupational pension schemes, PRSAs and certain aspects of trust RACs. The Pensions Board is responsible for monitoring and supervising the operation of pensions legislation and developments in the pensions sphere in general, which encompasses the activity of scheme administrators and trustees. In addition, the Board has various powers under the Pensions Act including the power to investigate the conduct of pension schemes or PRSAs, and has the power to prosecute alleged breaches of the Pensions Act. It can also issue fine notices where necessary.

The Pensions Ombudsman

The role of the Pensions Ombudsman is to investigate complaints of financial loss due to maladministration and disputes of fact or law in relation to occupational pension schemes, PRSAs and trust RACs. The Pensions Ombudsman is an independent body and acts as an impartial adjudicator. Decisions of the Pensions Ombudsman are binding, with a right of appeal to the High Court.

Revenue Commissioners

Revenue regulates the tax treatment of pension arrangements in Ireland. To avail of an advantageous tax status, a pension scheme must obtain Revenue approval. Revenue has the sole power to grant, refuse or withdraw approval.

3 What is the framework for taxation of pensions?

To encourage private provision for retirement, a favourable tax environment for pensions exist in Ireland. Revenue regulates the tax treatment of pension arrangements and there are a number of tax incentives available to arrangements which have been approved by Revenue.

The tax treatment of approved occupational pension schemes in Ireland follows the EET system, that is, contributions into the scheme are exempt, investment income and gains are exempt (ie, funds accumulate tax free within the scheme) and benefits paid from the scheme are taxed. By way of exception to the EET model, the Irish government introduced a pensions levy in 2011. The levy is a stamp duty of 0.6 per cent per annum applying to the market value of assets under management in pension schemes established in the state. It is due to come to an end in 2014.

Employer and employee contributions to an occupational pension scheme are treated differently for tax purposes. Apart from Revenue rules that require that a scheme cannot be overfunded, there is otherwise no maximum limit on the amount that an employer can contribute to a pension scheme. In general, employer contributions to an approved occupational pension scheme are treated as a business expense deductible for corporation tax purposes in the employer's accounting period in which the contributions are paid. For employees, tax relief on their contributions is restricted in any year of assessment to an age-related percentage of their remuneration (capped at €115,000) from the employment being pensioned. A contribution made by an employer to provide benefits for an employee is not treated as a benefit in kind for the employee concerned.

At retirement, pension scheme members are entitled to take a tax-free lump sum of up to one-and-a-half times salary (up to a limit of €200,000). Pensions in payment, like salary, are taxed through the PAYE system.

Individuals have a maximum lifetime limit on the amount of their retirement benefits from all sources (other than state pensions). The limit is known as the Standard Fund Threshold and currently stands at €2.3 million (25 per cent of which is the maximum amount an individual can take in tax-relieved cash lump sums). Where an individual exceeds the Standard Fund Threshold, the excess value is taxed upfront at the top rate of income tax and may, in addition, be subject to income tax in payment.

State pension provisions

4 What is the state pension system?

There are essentially two parallel state pension systems in Ireland: a social insurance system and a social assistance system. The State Pension (Contributory) is paid to individuals who have paid the required Pay Related Social Insurance (PRSI) contributions during their working lives. PRSI is a social insurance scheme providing benefits on sickness, unemployment, death and retirement in return for PRSI contributions. The State Pension (Contributory) is currently paid from age 66, however the age from which it is payable is due to increase to 67 from 2021 and to 68 in 2028. It is not means-tested. The State Pension (Non-Contributory) is a means-tested social assistance payment and may be paid to individuals who are living in the state and who do not qualify for the State Pension (Contributory).

The State Pension (Transition) is currently paid from age 65 to individuals who have retired from work and who have paid the required PRSI contributions. At age 66, individuals who qualify for the State Pension (Transition) are transferred to the State Pension (Contributory). The State Pension (Transition) is being phased out and will no longer be paid from 1 January 2014.

There are also widow's and widower's contributory pensions, contributory orphan's allowances and invalidity pensions.

5 How is the state pension calculated and what factors may cause the pension to be enhanced or reduced?

State pensions in Ireland are 'flat-rate' pensions, varying little in amount according to levels of salary at retirement.

The rate of State Pension (Contributory) payable to people who qualify for pensions from 1 September 2012 is based on the yearly average PRSI contributions paid, with the maximum personal rate standing at €230.30 per week. Various increases on the maximum personal rate may be payable depending on the individual circumstances. For example, increases may be payable where the individual is living alone or has adult or child dependants. An automatic increase of €10 per week is paid when the individual reaches 80 years of age.

The maximum personal rate of the State Pension (Non- Contributory) in 2013 is €219 per week with increases payable in respect of those with adult or child dependants and individuals over 80 years. As the State Pension (Non-Contributory) is means-tested, the rate payable may be reduced where the individual is deemed to have some means to support themselves.

6 Is the state pension designed to provide a certain level of replacement income to workers who have worked continuously until retirement age?

The State Pension (Contributory) is designed in this way; however, the State Pension (Non-Contributory) is paid to those who do not qualify for the State Pension (Contributory) based on their PRSI contribution record. The State Pension (Non-Contributory) is a social assistance payment paid to those whose income is below a certain level and is intended to ensure that individuals are provided with a basic level of income in retirement.

7 Is the state pension system under pressure to reduce benefits or otherwise change its current structure in any way on account of current fiscal realities?

In common with many European countries, the Irish state pension system is coming under increasing pressure in relation to issues such as population changes and the sustainability of government finances. The state pension system operates on a pay-as-you-go basis. The National Pensions Reserve Fund (NPRF) was established in 2000 with the aim of pre-funding in part the future cost of social welfare and public service pensions. The government was tasked with paying a sum of approximately 1 per cent of gross national product into the NPRF from 2001 to 2055. A large proportion of this fund was used to recapitalise the banks during the banking crisis and much of the amount remaining is earmarked for economic stimulus.

From 1 January 2014, the state pension age is increasing to 66. From 1 January 2021, the state pension age will increase to 67 and from 1 January 2028 it will increase to 68. This is being done in an effort to deal with the additional costs associated with the increasing longevity of an ageing population.

Plan features and operation

8 What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

The majority of pension arrangements, provided to a broad base of employees in Ireland, exist in the form of occupational pension schemes. These schemes are sponsored by employers and can be in the form of a defined...

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