5.0 Introduction.
5.1 Eligibility - Who may be included?
5.2 Scheme Documentation
5.3 Normal Pension Age:
5.4 Pensionable and Final Pensionable Salary
5.5 Pension at Normal Pension Date
5.6 Commutation (Exchange of Pension for Cash)
5.7 Spouses / Dependants' Pensions (Death in Service or Death in Retirement)
5.8 Lump Sum Benefits on Death in Service
5.9 Escalation
5.10 Early Retirement
5.11 Limitations on Early Retirement Benefits in Normal Health
5.12 Late Retirement
5.13 Employee Contributions
5.14 Employers' Contributions
5.15 Leaving Service
A brief note of the maximum benefits approvable by the Revenue Commissioners in normal circumstances is given below. These notes are for guidance only, as it is not possible to deal here with every case that might arise. In general, it should be noted that augmentation of benefits beyond a pension level of 1/60th of final remuneration for each year of service, or a commutation level of 3/80ths for each year of service, requires that non-trivial benefits from previous employments may need to be taken into account. "20% Directors" also require special treatment (these are people who, alone or with other specified people, control more than 20% of the voting rights in a company).
These pages should not be used as a substitute for the Revenue Pensions Manual issued by the Retirement Benefits District of the Revenue Commissioners, which must be consulted in any case of doubt.
What are the "Revenue Limits" and why are they there?
The purpose of having regulation in the first place is to ensure that the generous tax reliefs given to pensions are not abused. The 1972 Finance Act is the legislation under which modern pension schemes receive Revenue approval, which ensure their favourable tax treatment That Act set out the conditions under which approval of a scheme must be given. These conditions are very restricted, and are confined to benefits at a very basic level. Most employers need more flexibility than this, so the Act gave the Revenue Commissioners very wide powers to use their discretion to approve schemes that depart from these basic benefit levels. The Revenue Pensions Manual sets out the levels of benefit that the Revenue Commissioners are, in general, ready to approve under their discretionary powers. It does not contain the answer to every problem, however. Each case should be put to the Revenue on its merits.
It is also worth noting that few, if any, Occupational Pension Schemes can afford to provide the maximum benefits which the Revenue Commissioners will approve. Individuals may receive maximum approvable benefits, particularly if they fund for them by means of additional voluntary contributions. The distribution of surplus assets on the winding up of a scheme is another reason why people might receive benefits up to the Revenue maximum limits. In practice, however, those most often affected by maximum limits are scheme members with short service.
All employees of an employer participating in a pension fund, whether full time, part time, permanent or temporary, can be included. Until recent legislation, it was usual only for full time permanent employees to be included as members but other categories of employee participated in some schemes. Changes, arising mainly from developments in European law, have altered matters, however, for part-time workers and those on fixed term contracts. Discrimination in pensions matters is now illegal on a whole variety of different grounds which were formerly excluded. The important thing to remember is that only those who are taxed under Schedule E (the part of the tax code which covers workers who pay their tax under PAYE) can be included in occupational pension schemes. Agents, consultants, partners and self-employed people who are taxed under Schedule D of the tax code may not be included. Under the Pensions Act, any employee who is not eligible for inclusion in a pension scheme within 6 months of joining service must be offered membership of a Standard PRSA, although the employer is not obliged to contribute to this.
Both the Revenue Commissioners and the Pensions Act require that every employee who has a right to be a member of a scheme must be given details of all its essential features.
Any time between ages 60 and 70. If Normal Pension Age is to be changed, the Retirement Benefits District of the Revenue Commissioners must be advised. It is possible to get approval of a pension age earlier than 60 in special circumstances (such as particularly hazardous occupations), but each case must be put to Revenue separately.
These are regulated by the rules of each scheme, but the maximum benefits permitted by the Revenue Commissioners are expressed in terms of Final Remuneration.
Final remuneration:
All Schedule E income may be pensioned, but items that fluctuate from year to year (bonuses are a good example) must be averaged over 3 years or other suitable period. Final remuneration on which maximum approvable benefits can be based may be any one of the following:-
(a) Salary in any one of the last 5 years before retirement, plus fluctuating emoluments suitably averaged.
(b) The member's total pay averaged over 3 consecutive years or more ending not earlier than 10 years prior to retirement date.
(c) The rate of pay at normal pension date or any point in the final year but this may be restricted in cases where special increases or promotions applied in the 3 years before retirement.
If final remuneration is based on anything other than (c), the income may be "dynamised", i.e., increased by reference to changes in the Consumer Price Index between the dates on which such remuneration applied and the point of retirement. This can be useful where a person's actual income has not kept pace with increases in cost of living.
In most circumstances, a pension of 1/60th of final remuneration for each year of service may be provided, ignoring any benefits arising from previous employments. Where service is less than 5 years, no more than this formula can be provided. Where service exceeds 5 years, there is a sliding scale, from 8/60ths at 6 years of service, and by 8/60 th for each year after that, to 40/60ths for 10 years or more. Proportionate benefits may be added for days of service not being a complete year.
A basic cash amount of 3/80ths of final remuneration for each year of service can be provided. The maximum 120/80ths may be provided for any member with at least 20 years' service at normal pension date. Where service is 8 years or less, a strict basis of 3/80ths of pay per year of service applies. For more than 8 years' service, a sliding scale goes from 30/80ths for 9 years, increasing by 6/80 th for each extra year to 13 years, and by 9/80ths from there on, to 120/80ths for 20 years. Again, proportionate additions may be made for days of service not being a full year. A trivial pension (less than €330 per annum) may always be cashed, but its cash value will in some circumstances be subject to a small tax charge.
A maximum spouse's or dependant's pension equal to the member's own maximum pension could be provided, inclusive of any retained benefits. Additional dependants' pensions can be provided alongside the spouse's benefit, but the total cannot exceed the member's own maximum approvable pension. Children's pensions must cease when the child is no longer dependent. The same limits apply on death in service and death in retirement.
There are some restrictions as to when a pension may become payable to a spouse or other dependant in the event of a member's death after retirement. These depend on any minimum guaranteed period of payment given with the member's own pension.
Pension schemes usually provide a minimum guaranteed period of payment of the pension, whether the pensioner lives or dies. The most common guaranteed period is 5 years but a guarantee up to 10 years can be given. If the guarantee is 5 years or less, its immediate cash value could be paid out as a lump sum, tax free, on the death of the pensioner. If the period of guarantee is more than 5 years, the remaining instalments must be paid as continuing pension and therefore subject to tax. If a spouse's or other dependant's pension is payable in addition, it may begin payment immediately in the case of a 5 year guarantee, but must not commence until the end of the guaranteed period if that is more than 5 years. This condition does not apply if the spouse's or other dependant's pension has been provided by the pensioner surrendering part of his or her pension to make this provision at the time of retirement.
The maximum benefit is 4 times the final remuneration at the date of death, plus member's contributions to the scheme with interest on these. Lump sum benefits emerging from previous employments must be taken into account. Any lump sum provided in excess of these levels must be used to purchase pensions for dependants or other beneficiaries.
In general, the maximum increase which may be given on a pension after retirement is the increase in the Consumer Price Index as applied to the maximum pension which the member could have received. An exception to this is that increases of up to 3% per annum compound may be promised and paid, regardless of the level of inflation. Employers may fund in advance for fixed rates of increase to pensions in payment in excess of 3% per annum, but the actual amounts payable will be restricted by the Consumer Price Index increases. In the public sector, it is common practice to give "parity", which means that pensions increase in line with pay increases for those who are still at work.
The minimum age at which early retirement benefits can be paid to a member in normal health is 50 years. Any departure from this has to be considered on its own merits by the Revenue Commissioners. In the event of retirement due to ill-health, there is no age limit and an employee retiring in ill-health may be given benefits up to the maximum approvable benefits which he or she could have had at normal pension age.
In addition, an employee whose life expectancy is very short at the time of retirement may be permitted in exceptional circumstances to receive all benefits in cash form. Any proposal to use this facility must be referred to the Retirement Benefits District of the Revenue Commissioners.
The maximum pension is either:- 1/60th of final remuneration for each year of service or N/NS x P; where N is actual service, NS is potential service to normal pension date and P is maximum pension at normal pension date based on current salary and total potential service.
However, this maximum is also restricted by the short service formula which applies at normal pension date.This restriction applies only to immediate early retirement benefits, and not to benefits whose payment is deferred to normal pension age on leaving service. Similar formulae apply to commutation (exchange) of pension for cash, but short-service restrictions apply in this case if actual service is less than 20 years.
Example: An employee retires early, having completed 7 years out of a potential 17. The formula is 7/17 x 2/3rds = 27.45% of salary. However, an employee retiring with only 7 years' service at normal pension date could receive only 16/60ths, or 26.67% of salary, so this figure is the most the employee in question could be paid (see paragraph 5, above) .
If a member remains in service after normal pension date and total service at that date is, or exceeds, 40 years, additional benefits may be provided in respect of the service completed after normal pension date, subject to an overall maximum of 45/60ths. The lump sum element can be similarly increased. Alternatively, there can be an actuarial increase in the benefits, to take account of the deferment of payment. As a further alternative, benefits could be provided based on any actual salary increases of the member to the date of retirement, or age 70 if earlier. This is the only option open to a 20% director who retires later than his designated Normal pension date. In such cases, the date of actual retirement is treated as if it were the normal pension date
Benefits can be paid at normal pension date, or on actual retirement. A member deferring retirement until after normal pension date may elect to take his or her lump sum benefit at normal pension date and defer the pension. If the member elects to take a pension at normal pension date, the cash payment must be made at the same time. There is no option to defer the lump sum and take the pension.
Employees may contribute up to a maximum of 15% of gross pay if under age 30; 20% between ages 30 and 39; 25% between 40 and 49, 30% if aged 50 or over, 35% for those aged 55 or over and 40% for those aged 60 or over. An earnings 'cap' of €254,000 applies to contributions by employees. These limits include voluntary, as well as compulsory, contributions. Since 2003, they must also take into account contributions to PRSAs and Retirement Annuities, even if these refer to other simultaneous employments. Voluntary contributions are permitted on condition that they do not result in the maximum benefit in excess of what the Revenue would approve based on the salary and service of the member. Special once-off contributions are allowed for tax purposes in the year of payment, if the relevant percentage limit is not exceeded. Where the limit is exceeded, relief on the balance will be spread forward to the member's normal pension date or, in limited circumstances, back into the previous tax year. Any special contributions must be reported in advance to the Revenue Commissioners.
Employees' ordinary contributions are collected through a 'net pay' arrangement under the PAYE system, and receive relief from tax and PRSI at point of payment. Employers are obliged to remit employee contributions to the trustees within 21 days of the end of the month in which they are deducted.
With effect from 7/12/2005, the maximum allowable pension fund which an individual can accumulate and which can avail of the tax reliefs afforded to pension funds is €5 million.
Employers' ordinary annual contributions for the cost of providing benefits are fully allowable in the year of payment. A special contribution by the employer would be allowed in the year of payment, to a maximum of (a) €6,350 or (b) the amount of the employer's ordinary annual contributions for pension benefits under all schemes of the employer. Where these limits are exceeded, relief will be spread forward, usually by reference to the amount of the normal or annual contributions each year. The maximum spread period is five years, however, so one fifth of any special contribution would be allowed in any event in each relevant year. Special contributions must always be reported to the Revenue Commissioners. Employers may not receive tax relief in any financial year on contributions accrued in their accounts, but not paid over to the scheme at the company's financial year end. Employer contributions to defined contribution schemes and PRSAs are subject to the 21-day requirement that applies to employee contributions.
Revenue rules do not specify any particular benefits to be granted to the employee, whose rights will be governed by the scheme rules exclusively, except as required by the Pensions Act.. In contributory schemes, contributions which are not the subject of preservation under the Pensions Act may be refunded and these are subject to a tax deduction, currently 20%. The facility to receive a refund of contributions does not apply to 20% Directors whose pensionable salary has at any time exceeded €6,350 per annum. A mixture of deferred benefits and a refund of contributions may not apply except in very restricted circumstances.