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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 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:
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* |
| Under 30 |
15 |
| 30-39 |
20 |
| 40-49 |
25 |
| 50
and over |
30 |
| *
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 30% 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 isl 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 liklihood 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 iindividuals 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 2001 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 by 31 October in the following tax year.
OPTIONS AVAILABLE ON RETIREMENT
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 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.
Theoptions 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
€63,487 if less, transferred to an AMRF or used to purchase an annuity payable to yourself, immediately. Any balance over
€63,487 can be put into an ARF.If you have a guaranteed pension or annuity of at least
€12,697 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.
€63,487 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(£100,000). You can take 25% of this amount i.e. €31,743(£25,000) as a 'tax free' lump sum.How is the balance of €95,230(£75,000) dealt with ?If you have a pension income of €12,697(£10,000) per annum or you are over 75 years, you can invest the balance i.e. €95,230(£75,000) 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 €12,697(£10,000) per annum then you must place €63,487(£50,000) 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(£25,000) in an ARF.
Return
to Top
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
€12,697 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 €12,697 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 £10,000 per annum then you must place
€63,487 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
42%).
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.
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 wil arise
Summary of
treatment following death
Qualifying Fund Managers:
Banks
Building Societies
Credit Unions
The Post Office Savings Bank
Life Assurance companies
Certain bodies which are authorised to raise funds from the public for collective investment, such as unit trusts,
UCITS, authorised investment companies etc.
Authorised members of the Irish Stock Exchange ormember 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, authorised 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.
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