Personal pensions mean pensions that are organised individually by self-employed people or employed people who do not have an occupational pension scheme.
The rules governing personal pensions have changed very considerably in recent years. Personal pensions are not subject to the regulation of the Pensions Authority. Instead, personal pensions are subject to tax law and financial services legislation (including the general law on insurance).
Tax relief is available for contributions to personal pensions and the amount of the relief is age-related.
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.
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.
|Age||Amount which qualifies for tax relief|
|Under 30 years||15% of net relevant earnings|
|30 to 39 years||20%|
|40 to 49 years||25%|
|50 to 54 years:||30%|
|55 to 59 years||35%|
|60 and over||40%|
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.
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.
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. This is called the Standard Fund Threshold. From 7 December 2010 to 31 December 2013 the maximum allowable pension fund on retirement for tax purposes was €2.3 million. If the fund is greater than the limit then tax at the higher rate (40% in 2015) will be charged on the excess when it is drawn down from the fund. From 1 January 2014 the absolute value of the Standard Fund Threshold reduced to €2 million. From the same date the value of a defined benefit differs depending on the age at which the pension is drawn down. You can read more about the new formula used to value pension rights on Revenue's website (pdf).
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 (in 2014 and 2015):
|Amount of lump sum||Income tax rate|
|Up to €200,000||0%|
|€200,001 - €500,000||20%|
|Over €500,000||Taxpayer's marginal rate|
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).
In 2011, the rules about investing in Approved Retirement Funds (ARFs) were changed. The Finance Act 2013 provides that these changes have been rescinded until 2016.
The 2011 rules provided that you may place your accumulated pension money in an Approved Retirement Fund (ARF) if you are aged over 75 or if you have a guaranteed income of at least 1.5 times the level of the State Pension (Contributory) – €18,000 at present. Before 2011, the required minimum income was €12,700.
If you do not have this guaranteed minimum income and are aged under 75, you must invest your accumulated pension money in an Approved Minimum Retirement Fund (AMRF). The 2011 rules provided that you must set aside 10 times the maximum rate of the State Pension (Contributory) – €119,800 at present – or a lesser amount if less is available in your pension fund in the AMRF. The pre-2011 rules provided that you must set aside €63,500.
If you do invest in an AMRF, you do not get access to the capital in the fund until you reach the age of 75. At that stage the AMRF is converted to an ARF. The AMRF may be converted to an ARF at an earlier stage if you meet the minimum income requirements.
The pre-2011 rules are temporarily reinstated by the Finance Act 2013. This will remain the case until 2016 when it is intended that the 2011 rules will come into effect again.
Those people who were affected by the higher limits (that applied from 6 February 2011 until the date the Finance Act 2013 was passed – 27 March 2013), may now convert any AMRF into an ARF provided they have a minimum income of at least €12,700. If they have minimum income of less than this but have more than €63,500 in an AMRF, the excess amount now becomes an ARF.
Similar arrangements are made for people who have invested in a vested Personal Retirement Savings Account (PRSA).
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 30% rather than at the child's marginal tax rate.
There was 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). This levy applied until the end of 2014. In 2014 an extra levy of 0.15% was introduced. This meant that the total pension levy in 2014 was 0.75% and the levy in 2015 is 0.15%. It was announced in Budget 2016 that this levy will be abolished.
If you have a question relating to this topic you can contact the Citizens Information Phone Service on 0761 07 4000. The Phone Service will operate Monday to Friday, 9am to 6pm during January 2017. You can also visit your local Citizens Information Centre.