Defined Benefit Schemes
Question 2.1: At what age is normal retirement pension payable?
Question 2.2: How is my pension calculated?
Question 2.3: Can I receive a cash payment instead of part of my pension?
Question 2.4: How are pension scheme benefits taxed?
Question 2.5: Do pensions increase after retirement?
Question 2.6: How soon may I retire?
Question 2.7: What happens if I retire late?
Question 2.8: I have contributed for 40 years but I have not yet reached normal retirement age. Can I stop my contributions, or even retire now on full benefits?
Question 2.9: What happens if I die before retirement age?
Question 2.10: Who gets my death-in-service benefits?
Question 2.11: What happens if I die after retirement?
Question 2.12: How are my death benefits treated for tax purposes?
Question 2.13: What are my options on leaving service?
Question 2.14: Will a transfer value buy an equivalent period of service in a new scheme?
Question 2.15:
(i) How are my personal contributions calculated?
(ii) Is there tax relief on contributions?
Question 2.16: Have I got scope for Additional Voluntary Contributions?
Normal retirement age under the rules of each scheme is the age at which the benefits specified by the rules will be paid in full. If retirement takes place before that age, a smaller benefit would usually be payable. Conversely, if late retirement is allowed, most schemes would provide a larger benefit.
"Normal Retirement Age" in most Irish pension schemes is 65, because this is the age at which the social welfare system pays pensions to qualified employees and it is common for occupational pension scheme benefits to be designed in a way that takes account of social welfare expectations.
In defined benefit schemes, pension is calculated usually by reference to a member's final pensionable pay and pensionable service. In most schemes, these two factors would be multiplied by a "pension fraction" to arrive at the member's entitlement. An example of this would be as follows:-
Pensionable Pay: €21,000 per year
Pensionable Service: 40 years
Pension Fraction: 1/60th
Pension Entitlement: €21,000 x 40/60 = €14,000
The following should be noted:-
This will be defined in the rules of the scheme. It may be service as an employee, or service as a member of the scheme. It may be expressed in complete years, years and months or even years and days. It may be continuous, or could include periods of broken service. Service with other companies in a group may also be included.
This is the part of your salary which is taken into account for pension purposes. It could be your gross annual pay but is usually something lower than that. The usual starting point for calculating this is basic salary. If the scheme is "integrated" with social welfare benefits (see below), it may be subject to a deduction. Anything included in pensionable pay must be taxable under Schedule E of the tax code and the Revenue Commissioners require that anything which is not a fixed part of pay (such as bonuses, commissions, etc.) must be averaged over 3 years, or any shorter period for which it has actually been paid. What is included in pensionable salary in your case will depend upon the rules of your own scheme.
This will be based on your pensionable salary (see above). It may be that salary taken at the date of your retirement or at some date close to that, or it could be an average over several years.
It is common in Irish pension schemes that the benefits provided under the occupational pension scheme are "integrated" with the benefits paid under the Social Welfare system. In the public sector, this is known as "co-ordination". This can be done in a number of different ways. Sometimes it is done simply by subtracting all or part of the amount of the individual's Social Welfare retirement pension from the pension calculated on the scale or the formula contained in the rules of the scheme. Most commonly, however, it is done by means of a salary "offset". This works by reducing the salary for pension purposes by an amount which is related to the Social Welfare pension currently payable. Members' benefits and contributions would then be based on this lower pensionable salary. The thinking behind this is that the Social Welfare pension is regarded as catering for a person's pension needs in relation to that part of salary, and only the balance of the intended overall pension needs to be provided under the occupational pension scheme.
In most pension schemes, the answer is "yes". The term commutation is used to indicate the right, which members usually have under pension scheme rules, to exchange part of their pension for a lump sum. This lump sum is payable tax free (unlike the part of your pension that you exchange for it). The lump sum paid by any pension scheme will usually be based on the final pensionable salary and pensionable service of a member and the maximum allowed by the Revenue Commissioners is 1.5 times final pay up to a maximum of €1.25million. Exactly what is payable as a tax free lump sum depends upon the rules of your own scheme. One way or the other, the maximum benefit cannot be paid to anyone who has less than 20 years service at normal retirement age. The Revenue Commissioners require smaller amounts to apply to shorter service, and to early retirement. The rate at which the lump sum is then converted into equivalent pension will also vary from scheme to scheme. The most common formula in Ireland is probably €900 cash = €100 annual pension but it will vary from scheme to scheme. In many cases, the exchange rate for women may be higher than that for men, reflecting their longer life expectancy.
In public sector schemes, lump sums are not given by commutation, but are provided separately from each member's pension entitlement.
In Ireland, schemes that have "exempt" approval from the Revenue Commissioners don't pay tax on their investment income. Most schemes are treated in this way. When benefits come to be paid, however, they may be taxable.
Benefits payable in lump sum form on retirement (up to certain limits - see Question 2.3) are not subject to income tax. Benefits payable in pension form are taxed under the PAYE system, just like salary. However, they don't attract full PRSI contributions, but only the Health Contribution. This is PRSI Class K1, currently 2% of the pension.
Similarly, benefits which are allowed to be paid in lump sum form on the death of a member are not subject to income tax, but those paid in pension form are taxable under PAYE. [See Question 2.12]. Death benefits are subject to Inheritance Tax. For the purpose of this tax, they are treated as if they were an inheritance from the member who has died, so the question of tax is governed by the relationship to the member of any beneficiary. Thus, a payment to a husband or wife will be free from this tax. Payments to children and others will fall under the various "classes" set out in the Capital Acquisitions Tax Act.
If you have pension benefits payable from a foreign country, the tax treatment of these benefits when you receive them will vary. In some cases, they will already have been subject to foreign tax and you may be able to get credit for this against your own tax liability here. Benefits payable from the United Kingdom can be exempted from UK tax but you must make proper application for this to be done. Ireland has double taxation agreements with many countries, designed to ensure that you are not taxed twice on the same benefits. In all cases where foreign pensions are payable, you should check with your local tax office.
Where payment of increases in pensions after they start to be paid is provided for in the scheme rules, this is often called "escalation". Some schemes do not provide any such increases. Where increases are provided, the amount of the increase is often a defined percentage figure, or may be related to a suitable index, such as the Consumer Price Index. In some schemes, increases are provided purely at the trustees' discretion. This usually happens where no specific funding is being provided in advance for pension increases.
Sometimes, increases in pensions are paid, not from the pension fund, but purely from the income of the employer. In this case, these increases would be likely to cease if the employer closed down. The Pensions Act Disclosure Regulations require that retiring members are informed if their increases are not guaranteed.
In many Public Sector schemes, it is customary for pensions to be increased in line with any changes which take place in the salary appropriate to the post formerly held by a retired member. This is called 'pay parity'.
Retirement before normal retirement age is usually subject to the consent of the employer and/or the trustees. The Revenue Commissioners will permit a pension to be paid at any age if it is due to ill-health. Otherwise, the minimum age at which a person can receive a pension is normally age 50. A member who retires in advance of normal pension age could expect a reduction in pension benefits and these reductions can be quite large if the period from the date of retirement to normal pension age is long.
The reduction takes place because
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Fewer contributions have been paid and those which have been paid have been invested for a shorter time;
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The payment of the pension starts earlier, the average expectation of life is longer, leading to a longer period of payment of benefits.
If early retirement takes place due to ill-health, sometimes a scheme will give better benefits than would be paid on early retirement in normal health.
Please note, however, that the rules of each scheme will specify the earliest date at which retirement will be allowed under that scheme.
If your retirement is to be postponed beyond normal retirement age, this usually requires the consent of your employer and/or the trustees of the scheme.
What happens then depends very much on the rules of the individual scheme. Revenue rules, and the provisions of most pension schemes give the option to take all of your benefits at normal retirement age. Alternatively, you may have an option to take the cash element (see "commutation" above) and defer receiving your pension until you actually do retire. The third option is to defer your benefits altogether until you eventually retire. If that option is taken, death in service cover may continue to be provided until you actually retire, although it would be unusual for this provision to continue after age 70.
If you defer your benefits beyond normal retirement age, it is usual for these benefits to increase, to reflect the fact that their value continues to be invested in the fund, and that average life expectancy will be shorter from a later age, so fewer instalments of pension will be payable overall.
The answer to the first part of the question depends on the rules of your scheme. Some schemes will permit members to stop contributing after 40 years of contributions but most schemes require people to continue to contribute up to normal pension age, even if this means that they would have contributed for longer than the maximum period of service credited for pension purposes.
If you want to take your benefits before the normal retirement age specified in the scheme rules, this is a case of early retirement and your benefits in those circumstances would be subject to whatever reduction the scheme would usually require for benefits paid before normal retirement age.
Almost all pension schemes provide some sort of death in service benefit designed to provide for the dependants of members who die before reaching pension age. These death-in-service benefits take the following forms:-
Lump sums are payable income tax free and are often expressed as a multiple of salary. The maximum lump sum benefit which the Revenue Commissioners will allow is four times your final pay. However, your own contributions can be refunded in lump sum form in addition, with or without interest, if the rules allow that. This refund of contributions would also be tax free. If the benefit provided in the form of a capital sum exceeds the Revenue limits on cash payments, anything over the limits must be used to provide a pension for a dependant or other beneficiary. Check the rules of your own scheme.
Many schemes provide pensions for dependants in addition to lump sum benefits. These pensions can take the form of spouses' benefits, spouses' and children's benefits, or benefits payable to dependants generally. The total amount of these pensions is regulated by the Revenue Commissioners and the total cannot exceed the maximum pension which you could have had, based on your final pay and the service you would have completed if you had lived to normal retirement age.
If you have left employment since the 1st January 1993 and are entitled to preserved benefits under the Pensions Act, the value of these benefits must be paid to your estate in the event of your death. Alternatively, the trustees of your Pension Scheme may have chosen the option to pay a dependant's pension instead. The notification of your benefits on leaving service must specify what is payable in the event of your death, and in what manner. Beneficiaries may be liable to Inheritance Tax on these benefits (see question 2.12).
Benefits payable after the death of a pensioner in retirement vary considerably from scheme to scheme. It is quite unusual for any benefit to be paid in lump sum form when death occurs more than 5 years after retirement. See Question 2.10.
Beneficiaries may be liable to Inheritance Tax on these benefits. See Question 2.12.
The rules of the majority of pension schemes specify that the lump sum death in service benefits are payable to a broad category of "dependants". These will normally include a member's wife or husband and children under 18. Often, in addition, the category of dependants will include those over 18 who are still receiving education or who are mentally or physically handicapped, and any person who was ordinarily dependent on the member for the necessaries of life. Remember, the definition of dependants can vary considerably from scheme to scheme and you should check your scheme booklet or other explanatory documents.
In most schemes, the trustees will have a fairly wide discretion to decide who gets these benefits. In some schemes, apart from "dependants" as outlined above, there might also be a broader category of eligible beneficiaries whom the trustees can choose to pay. You cannot direct the trustees in the way they exercise these discretionary powers (but see next paragraph).
The trustees may give you the option of completing a form of nomination of dependants, often known as a "wishes letter" or "expression of wishes". The purpose of this is to specify your own wishes in the disposal of your death benefit. Such a letter or expression of wishes cannot bind the trustees but they will normally try to give effect to your wishes. They will not do so, however, where your wishes are in conflict with the obligations imposed by law on trustees.
If the dependants' pensions are expressed as "spouses' pensions" in the scheme rules, they can be paid only to the lawful spouse of the member.
The majority of pension schemes do not provide for payment of your death benefit to your estate except, perhaps, where there are no dependants. However, the Pensions Act does require the value of any compulsory Preserved Benefits under that Act to be paid to your estate. Any moneys due under a Pensions Adjustment Order made at the time of divorce or separation would also be paid to your estate. Any amount paid to your estate will be disposed of in accordance with your will, or in accordance with the rules on intestacy if you don't make a will. Every pension scheme member is strongly advised to make a will.
You can leave your death benefits to someone else by means of your will only if the death benefit is paid into your estate. In most pension schemes, this does not happen immediately, because the death benefits are usually expressed as something payable to dependants. Generally, payment to your estate will take place only if you have no dependants (except in the case of certain benefits mentioned in the previous paragraph). Therefore, in most cases, your will can have absolutely no effect on who becomes entitled to the benefits payable under the rules of the pension scheme on your death. You should also note that benefits payable to dependants or other beneficiaries under the rules of the scheme can be paid fairly quickly after the death of the scheme member. Benefits that have to be paid to your estate could not be paid until the estate has been submitted to probate (or until letters of administration have been granted, if there is no will).
There are a few circumstances in which death benefits will be paid automatically to your estate: lump sum death benefits under public sector schemes are always payable to the member's Legal Personal Representatives; the acturial value of preserved benefits under the Pensions Act must also be paid in this way (unless the Trustees choose to pay dependants' pensions instead); and the value of pension benefits that may be due to you as a result of a Pensions Adjustment Order will go to your estate as well.
Benefits payable after the death of a pensioner in retirement vary considerably frin scheme to scheme. It is quite unusual for any benefit to be paid in lump sum form when death occurs more than 5years after retirement.
Death in retirement benefits can be any one or more of the following:-
Many pension schemes provide a guaranteed minimum period for payment of your benefits, whether you live or die. This period can be up to 10 years. However, if it is 5 years or less, then the remaining instalments payable under this guarantee can be translated into a lump sum payable to your dependants or estate instead. Pensions payable to dependants may commence within the 5-year guarantee period. If the guarantee is more than 5 years, the outstanding instalments must be taken in pension form, and no benefit payable to dependants may commence until after the period of the guarantee has expired.
Many pension schemes give a retiring employee the option to give up some of his or her own personal pension to provide for a continuing pension to be paid to a dependant on death after retirement. This is an option that has to be exercised before you actually retire. The cost to you in terms of a reduction in your own benefits will depend on the age and sex of your dependant, relative to your own age and sex. The older the dependant, the less of your own pension you will have to give up to make this sort of provision. As women generally have a longer life expectancy than men, it would cost more to provide for a female dependant than for a male.
Sometimes the scheme rules will provide for specific dependants' pensions to be paid on your death after retirement, without any need for you to give up any part of your own pension. These benefits may be payable immediately on the death of a pensioner, even though a 5 year guarantee might still be in force, or they may begin payment after the guarantee expires.
Generally speaking, pension schemes which provide spouses' pensions on death after retirement cater only for the spouse to which the pensioner was married at the time retirement took place. The same usually applies in the case of other nominated dependants - payment will be confined to the dependant/s nominated at the point of retirement. However, you should check the rules of your own scheme for precise information in this area.
As has already been stated (see question 2.4) benefits are taken into account for tax only when they come into payment. Any benefits which the Revenue Commissioners allow to be paid as lump sums in normal circumstances are not taxed. Benefits payable in pension form are subject to tax under the PAYE system, so the tax payable on them will be determined by the individual tax position of whoever is receiving the payment.
There is another tax to which death benefits can be exposed. Benefits paid on death are regarded as part of your estate for the purposes of Inheritance Tax, even though you cannot normally control who gets these benefits by means of your will.
For the purposes of inheritance tax, death benefits are treated like every other inheritance. The amount of tax payable (if any) depends on who is receiving the benefit and the relationship to you. For example, if the only beneficiary is your husband or wife, no inheritance tax would be payable. If a child or children receive the benefit, anything they get from the pension scheme will be added to whatever else they have inherited for the purpose of calculating whether they are liable to tax or not. The thresholds for relatives other than children are low and, for non-relatives, even lower still. In summary, therefore, if your death benefit is inherited by anyone except your lawful spouse, there is at least a possibility that inheritance tax will be payable. Non-relatives, such as a dependant who is not legally married to you, are the most likely people to pay substantial amounts of inheritance tax. The trustees will want to satisfy themselves that the liability for inheritance tax has been taken care of before they pay out the full death benefit, as they could be held liable for payment of the tax otherwise.
Under the Pensions Act, your pension scheme trustees have an obligation to let you have a detailed note of the full options available to you on leaving service. The following may help you to understand what these options mean:-
This is a term used to describe a right which a pension scheme member acquires to a benefit on leaving service. This is provided for in the rules of the scheme. Many scheme rules giving vested rights are now overrideen by the provisions of the Pensions Act, which confers rights to preserved benefits. The Pensions Act does not premit schemes to give leaving-service rights which are less than those provided for under the Act. However it is possible for schemes to exceed these statutory preserved benefits. A "vested rights" rule may apply automatically on leaving service, usually after a certain minimum period of service regardless of the circumstances in which you leave. It is quite common for vested rights to apply only if you leave through no fault of your own, such as through redundancy. Vested rights should not be confused with the right to preserved benefits under the Pensions Act. In practice, most vested rights riles have been superseded, because preservation under the Act is compulsory after two years in the scheme.
Preserved benefits are benefits "earned" during service as a member of a pension scheme. The Pensions Act 1990 originally provided only for preservation of benefits earned after the 1st January 1991, the date on which the Act came into operation. They were available to those who left service after the 1st January 1993, and who had been at least 5 years in the pension scheme, in any other scheme of the same employer or in any pension scheme from which rights have been transferred to your present scheme. The pensions (Amendment) Act, 2002 extended preservation to all benefits, regardless of when they were earned, provided only that you have been a scheme member for two years or more. In defined benefit schemes, these benefits will be subject to "revaluation" (see Glossary) between 1996 (or later date of leaving service) and the time you collect your benefits.
This term is explained in the Glossary section of this website.
If you are entitled to a preserved benefit (see above) under the Pensions Act, you will have no right to take a refund of your own contributions. This also applies to voluntary contributions. If, however, you have not completed enough service (two years as a member of the scheme, or any scheme of the employer, or any scheme from which rights have been transferred) to acquire rights to a preserved pension, you can take a refund of all your own contributions, subject to whatever the rules of your scheme provide. Interest may or may not be payable, depending on the detailed rules of your own scheme. The tax currently payable on a refund of contributions is 20%.
You can never take a refund of the contributions made by your employer to the scheme on leaving service. Also, certain industry-wide schemes that provide for transferibility between participating employers do not allow contribution refunds at all.
In general terms, the answer to this is "no". It is usually up to the trustees of the receiving scheme to decide what credit you are given in the new scheme in return for any transfer value paid in. This decision will generally be made on the advice of the scheme actuary. No two schemes are the same in every detail but, even if they were, the benefits which you take from the first scheme are likely to be calculated on your pay at the time you leave service, not on the pay you will be receiving when you retire from the service of the second employer. If you are considering asking for a transfer payment, you should obtain detailed information on what it is likely to buy for you in the new scheme before you ask for the money to be transferred. If the transfer value will not replace all of your service, you may be able to make up some or all of the difference by making Additional Voluntary Contributions (AVCs).
The rules of your scheme will contain a formula, normally expressing your contributions as a percentage of pensionable salary. If your scheme is "integrated" with social welfare, you may have a pensionable salary that is lower than your actual salary. (See the explanations of these terms in the glossary). If your pensionable salary is calculated by subtracting from your basic salary in order to calculate your pay for pension purposes, the contribution you pay would be based on the adjusted figure. Sometimes earnings other than basic pay may be counted for pension purposes. Only the detailed rules of your own scheme will provide an accurate answer to this question.
Yes. Contributions which you make, including additional voluntary contributions, up to maximum limits that vary with age, from 15% to 40% of your gross earnings, will receive income tax relief. An earnings 'cap' of €254,000 applies to contributions by employees. The relief will be given at your marginal rate of tax. Since contributions are normally deducted from your pay before tax is calculated, you will also receive relief from PRSI on these contributions. However, the maximum allowable contribution by you is subject to the condition that the employer must have paid a substantial contribution to the total cost of your benefits. In other words, tax relief would not be available on a defined benefits scheme which was funded solely by contributions from members. Since the Finance Act of 2003, contributions to all forms of pension provision - occupational pensions, PRSAs and Retirement Annuities or 'personal pensions' are added together in computing the contribution limits and the earnings cap.
Whether or not you have scope for additional voluntary contributions will depend on the extent to which there is a gap between the maximum benefits permitted by the Revenue Commissioners and the benefits actually being provided in the scheme. The scope for additional voluntary contributions generally arises where:
(i) not all pay is pensioned: For example, if your scheme is "integrated" with social welfare or if you have non-pensioned pay, such as overtime, bonuses or benefits in kind.
(ii) the scheme does not provide for the absolute maximum benefit that the Revenue would approve. Very few schemes can afford to give maximum approvable benefits.
(iii) your service with your present employer is short, so that your service-related pension falls short of what you would receive for a full career with the same employer.
The scope to make voluntary contributions may be limited by the amount of your employer's contributions to the scheme (see 2.15 (b)) and by having to take retained benefits (see Glossary) into account.
You should be aware that you cannot make voluntary contributions at all unless the rules of the pension scheme permit this, or there is a separate scheme in existence designed to cater for them. The Pensions Act requires that, if the scheme does not offer an AVC facility, the employer must grant access to a Standard PRSA that can be used for this purpose.
The Revenue Commissioners treat a separate AVC scheme as if it were part of the main pension scheme, because an AVC arrangement cannot exist on its own. Therefore, the benefits of an AVC scheme must be dealt with in the same way as the benefits emerging from the main scheme - for example, if one is transferred to a new employer's scheme, they will require both to be transferred. The only time AVCs can be treated differently is at retirement, when they can be used to invest in Approved Retirement Funds.
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