Personal Pensions

Rules

Most personal pensions policies are insurance policies. Unlike other insurance policies, the contributions attract tax relief if various conditions are met.

The traditional personal pension arrangement was that you invested your money - usually on an annual basis - with an insurance company. The premiums you paid were then invested by the insurance company in an investment fund. You could not remove your funds and invest them with another company. When you reached the age specified in the policy, you were obliged to use your accumulated funds to buy an annuity.

Since 1999, you are no longer obliged to buy an annuity and you also have considerable flexibility about moving between different funds.

Tax relief on contributions

You may get tax relief on contributions to approved personal pension arrangements. This relief is more generous as you get older. Since 1 January 2011 you pay PRSI and the Universal Social Charge on your pension contributions.

The maximum amount also applies to people in certain occupations and professions, irrespective of age where there is a limited earnings span. These occupations include professional athletes.

There is a limit on the earnings that may be taken into account. The limit is €115,000 in 2011.

You no longer have to buy an annuity with the proceeds of your pension policy, however, you may do so if you wish. This option does not apply in general to occupational pensions, but it may apply to the Additional Voluntary Contributions (AVCs) paid by people in occupational pension schemes.

Limit on overall value of fund

The Finance Act 2006 introduced a limit on the value of an individual's pension fund which may attract tax relief and this may vary from year to year. From 7 December 2010 the maximum allowable pension fund on retirement for tax purposes is €2.3 million. If the fund is greater than the limit then tax at 41% will be charged on the excess when it is drawn down from the fund.

Taxation of lump sum

Since 1 January 2011 there is a limit of €200,000 on the amount of the tax-free retirement lump sum. Lump sum payments above that limit will be taxed as follows:

Transfer between funds

You do not have to remain in the same pension fund. You may transfer funds accumulated with one insurer to another fund with another insurer. Of course, there may be costs involved in doing this.

When you retire, you may opt for the existing annuity arrangements or for the new arrangements. The new arrangements mean that the accumulated fund is your property. You must take your pension not later than your 75th birthday (the previous upper limit was 70).

Approved Minimum Retirement Fund

You may take up to 25% of the fund as a lump sum (tax-free). Then you must set aside at least €119,800 of the fund and place it in an Approved Minimum Retirement Fund (AMRF). This fund may not be drawn down to less than €119,800 until you reach 75. This obligation to invest in an AMRF will not be imposed if you have a guaranteed pension or income for life from a state pension, annuity or occupational pension of at least €18,000 per annum (this is called the minimum income requirement).

Approved Retirement Fund

After investing in the AMRF, you can then simply take the balance of the funds or you may invest them in an Approved Retirement Fund (ARF) or a number of such funds. If you take the funds, you will, of course, have to pay tax on them. An ARF can be any fund, including a bank account, in a regulated financial institution. Income tax is payable if you draw down these funds.

You also have to pay a tax on those parts of the fund which are not drawn down. Since 1 January 2011 this tax is 5% (was 3%) in respect of asset values at 31 December 2010 and future years. In Budget 2012 it was announced that the tax on the value of assets in an ARF at 31 December each year is being increased from 5% to 6% for ARFs with asset values of over 2 million euro. It is also proposed to apply a higher final tax liability of 30% to the transfer of assets on the death of an ARF owner to a child of the owner aged over 21. These changes are not yet in force and are subject to legislation.

After death

If you die before taking any benefit from your fund, the accumulated funds form part of your estate and are distributed accordingly. Capital Acquisitions Tax (CAT) may apply.

If you die after taking benefit and you have invested in an ARF, the remaining funds form part of your estate but are regarded as your income in the year of death. Tax at your marginal rate is deducted and the remaining amount is distributed in the normal way. There is no CAT liability. However, if your spouse or civil partner inherits the funds, no income tax is payable. Effectively, your spouse or civil partner steps into your shoes as owner of the fund and when he/she dies, a 20% rate of income tax may be payable and there is no CAT liability. This is the case unless the funds are inherited by children over 21 - in this case, the amount they get is taxable as the child's income in that year, but taxed at a flat rate of 20% rather than at the child's marginal tax rate.

Levy on private pension funds

There is a levy of 0.6% on the market value of assets which are managed in pension funds and pension plans approved under Irish tax legislation. (These include occupational pension schemes, Retirement Annuity Contracts and Personal Retirement Savings Accounts). You can find out more about the pension levy on the Department of Finance's website.