How Pension Schemes Work
A pension scheme is quite simply an arrangement that provides for payments to be made to a worker on retirement from paid work, or to his or her dependants in the event of death. The most universal kind of pension scheme in Ireland is that provided for by the Social Welfare Acts, which cover the provision of retirement and old age pensions to the employed and the self-employed and spouses' pensions to their surviving marriage partners. Occupational pension schemes is the name given to employer-sponsored schemes for employees approved by the Revenue Commissioners under various Finance and Income Tax Acts. Under the Family Law Acts, the definition is widened to include pensions for the self-employed, annuities and buyout policies and any sort of pension promise, whether or not it is funded.
This information is concerned with occupational pension schemes and those which apply to the self-employed.
The Pensions Act, 1990 recognises two distinct types of scheme:-
A Defined Benefit Scheme, in which the pensions and other benefits are clearly stated in the rules of the scheme and promised to members and their dependants;
A Defined Contribution Scheme (also known as a Money Purchase Scheme), where the benefits payable are determined solely by reference to the contributions paid into the scheme and the investment return earned on those contributions - there is no specific promise or guarantee of particular benefit levels, except perhaps on death.
Many of the questions contained here on these pages have answers that are common to both types of scheme. Because of the differences between the two types of scheme and how they work, the questions dealing with the two types have been dealt with separately. It is important for readers to be clear what kind of scheme they participate in. It is worth noting that, even where the main pension scheme is a defined benefit scheme, a scheme or section of a scheme designed to accept additional voluntary contributions (AVCs) will often be set up on a defined contribution basis. The pensions of the self-employed and those in non-pensionable employment are always defined contribution arrangements, although the Pensions Act does not apply to them. PRSAs are also defined contribution arrangements.
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