In general, large employers in Ireland have occupational pension schemes, but many smaller employers throughout the country do not.
Each pension scheme has its own set of rules. Pension schemes nationally are generally regulated by the Pensions Authority. Members of schemes have certain rights in respect of such matters as information. Contibutions to approved occupational pension schemes may attract tax relief. Regulation for tax purposes is supervised by the Revenue Commissioners.
There is no legal obligation on employers to provide occupational pension schemes for employees. However, more and more employers are putting schemes in place and there is positive government encouragement to do so.
An occupational pension is one that is provided by an employer. They are also known as company or employers’ pension plans. Occupational pension schemes provide a regular income after retirement. Some also provide a lump sum payment on retirement.
Types of occupational pensions
Occupational pension schemes may be contributory or non-contributory, funded or unfunded, defined benefit, defined contribution or hybrid of both defined benefit and defined contribution.
In contributory schemes, both you and your employer pay contributions towards the scheme.
In non-contributory schemes, you do not contribute but your employer does.
Virtually all occupational schemes are funded - the contributions are put into a designated fund and the benefits are paid from that fund. The most notable exception is the public service pension arrangement where there is no fund and benefits are paid out of current government funds.
A National Pensions Reserve Fund (NPRF) has been established to provide a fund that can be drawn upon for future payments of public service and social welfare pensions. This is different from funded pension schemes. In a funded scheme, you are a member of the scheme and you have a direct interest in the fund. You have no direct claim on the NPRF.
Defined benefit schemes
A defined benefit scheme is one where the benefit entitlement is defined in some way by reference to your earnings, your length of service, an index or a fixed amount. So, you know in advance that your pension will be, for example, half of your final salary if you have 40 years service or that it will be a certain amount each week. In defined benefit schemes, the contributions may have to be varied from time to time in order to make sure that the fund can meet the level of benefits. Some schemes have provisions for the employer to top up the fund if necessary.
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. This is called the Standard Fund Threshold. From 1 January 2014 the absolute value of the Standard Fund Threshold has been €2 million. If the fund is greater than the limit then tax at 40% will be charged on the excess when it is drawn down from the fund.
Rules on wind-up of defined benefit schemes
Since December 2013 the rules about the distribution of assets in defined benefit pension schemes which are being wound up have changed. When a defined benefit pension scheme is being wound up, its assets are distributed in a specific order of priority. If the scheme is fully funded then all liabilities are met. If the pension scheme is underfunded or insolvent, then people with a lower order of priority do not get what they expected from the scheme.
The rules which apply to the winding up of schemes since December 2013 reduce the rights of current pensioners and improve the priority given to future pensioners. These new rules differ depending on whether or not the employer is solvent.
Single insolvency order - If the employer is solvent
This order applies to cases where the pension scheme is insolvent but the employer is solvent. The first priority is additional voluntary contributions and defined contribution benefits.
The second priority is the pensions payable to current pensioners but there are now limits on the amounts to which priority is attached as follows:
- The first €12,000 annually of pension
- 90% of pensions between €12,000 and €60,000 with a minimum of €12,000
- 80% of pensions over €60,000 with a minimum of €54,000
The next priority is 50% of the pensions of future pensioners. After that, the priority is:
- The remaining pension of current pensioners
- Remaining pensions of future pensioners
- Any other remaining benefits
This means that existing pensioners could have their current pensions reduced. Pensions under €12,000 may not be reduced. The maximum reduction is then 10% of pensions under €60,000 (but they cannot be reduced to less than €12,000) and 20% of pensions over €60,000.
Double insolvency order - Employer insolvent
The priority in the winding up of a defined benefit pension scheme in cases where the employer is insolvent is as follows:
- Additional Voluntary Contributions (AVCs) and defined contribution benefits
- 50% of current pensioner and future pensioner benefits
- Pensioner benefits up to €12,000 a year
- Remaining benefits for current pensioners
- Remaining benefits for future pensioners
Where the scheme does not have enough funds to pay 50% of pensioner and future pensioner benefits and pensioner benefits up to €12,000 a year, the Minister for Finance must provide the necessary funding.
Defined contribution scheme
A defined contribution scheme is one where the contribution is fixed by agreement but the benefits are based on the value of the fund built up from the contributions. The value of the fund may vary over time. This means that you do not know what level of pension you will get.
Both you and your employer must pay regular contributions, normally set at a fixed percentage of your salary (for example, 4%). This money creates a pension fund, which is normally invested to ensure that its real value is not reduced by inflation.
Your pension fund at retirement may be worth less than the total value of your contributions, because:
- Investment performance may fall as well as rise
- Management fees are payable to the person or company managing the pension fund
Occupational pension schemes can offer aspects of both defined benefit and defined contribution schemes. This means that you can predict a certain amount of income, as in a defined benefit scheme, whereas the remainder will vary as it will be subject to defined contribution rules.
Occupational pensions and social welfare pensions
Occupational and personal pensions operate independently of the social welfare pension system (Social welfare pensions include contributory and non-contributory pensions) and there is no statutory link between the two. However, it is common for occupational pensions to take into account the level of social welfare pension received in calculating the level of benefit. For example, some schemes provide for a benefit, which, together with the social welfare pension, will give you a half or two-thirds of your final salary. This may be done when you start to receive your pension but your occupational pension may not be subsequently reduced because your social welfare pension is increased.
Such schemes are sometimes called integrated or co-ordinated schemes.
You may prefer not to join an occupational pension scheme, or you may not have the option to do so (for example, if you are self-employed or your employer does not offer such a scheme). In these cases, you can save for retirement by choosing a different type of pension plan. These are normally known as personal pension plans or private pension plans and are managed by a life assurance or investment company.
The two main types of personal pension plan are Personal Retirement Savings Account (PRSA) and Retirement Annuity Contract (RAC).
If your employer offers a PRSA rather than an occupational pension, they must deduct contributions from your salary and send these payments to the PRSA provider. The employer may also contribute to the PRSA but has no obligation to do so.
You can be a member of an occupational pension scheme and also arrange a personal pension. However, it may not be possible to avail of the tax benefits in respect of both. You can not contribute to an occupational pension scheme and a personal pension arrangement at the same time in relation to the same employment. However, you can make a personal pension arrangement in respect of earnings from another employment or from self-employment.
Tax relief on pension contributions
If you are a member of an approved pension scheme, you can get tax relief at your highest rate on your contributions to the scheme. There are various rules that pension schemes must meet in order to get the tax relief and there is a limit to the amount of the relief. However, you pay PRSI and the Universal Social Charge on your pension contributions.
The maximum pension contributions, in any one year, for which you are entitled to tax relief, is related to your age and is expressed as a percentage of your gross income. The maximum gross income figure for relief purposes is €115,000. The percentage relief limits are:
|under 30 years||15% of *net relevant earnings|
|30-39 years||20% of *net relevant earnings|
|40-49 years||25% of *net relevant earnings|
|50-54 years||30% of *net relevant earnings|
|55-59 years||35% of *net relevant earnings|
|60 years plus||40% of *net relevant earnings|
*For employees, earnings means gross pay for tax purposes. For the self-employed, earnings means net relevant earnings, that is, earnings less allowable expenses.
You pay tax on the pension when you receive it.
Tax payable on lump sums at retirement
When you retire, you can usually take part of your pension fund as a tax-free lump sum. The amount you can take depends on the type of pension plan you have and how much you have taken in tax-free lump sums from other pension plans.
There is a limit of €200,000 on the amount of the tax-free retirement lump sum. Lump sum payments are taxed as follows:
|Amount of lump sum||Income tax rate|
|Up to €200,000||0%|
|€200,001 - €500,000||20%|
|Over €500,000||Taxpayer's marginal rate|
The maximum tax-free lump sum payment from an occupational pension is 1½ times your final salary and this amount is dependent on having a certain number of years’ service. The maximum that can be taken as a tax-free lump sum from an RAC or PRSA is 25% of the fund.
Tax payable on regular pension income
In general, regular income arising from pensions in Ireland is subject to taxation. For more information on the way in which pension income is taxed see our document on taxation of pensions.
The Pensions Authority
The Pensions Authority is the regulatory body for occupational pensions. Occupational pension schemes are obliged to register with the Authority. You can find more information in our document on the Pensions Authority.
Financial Services and Pensions Ombudsman
The Financial Services and Pensions Ombudsman is the body responsible for dealing with complaints against pension providers and regulated financial service providers.
For more information read our document on making a complaint about your pension.
Your rights as a pension scheme member
The Pensions Authority has produced a number of leaflets on the operation of the Pensions Act. It provides information to members of pension schemes about their rights under the legislation. If you have a complaint, the Authority will advise you about your rights.
If necessary, the Authority has extensive powers to inspect the scheme's books and records, to enter premises and to require people to give explanations. It may apply to the High Court to have pension scheme trustees replaced in order to protect the interests of the members.
Among the more important rights you have as a member of a pension scheme are:
The right to information
The trustees of the scheme must provide information to members, prospective members, their spouses, people entitled or prospectively entitled to benefits under the scheme and to representatives of trade unions.
You are entitled to get information about the scheme, about how it is administered, what rights you have and what obligations you have. The trustees are obliged to tell you if more than 5% of the scheme's assets are invested in the employer's business or in any one investment.
The right to be involved in the scheme
In certain cases, you are entitled to be involved in the selection of trustees. This is the case if your scheme has 50 or more qualified members or 12 or more qualified members of a directly invested scheme. A qualified member is a member of the scheme currently in employment or a pensioner, but does not include a member who is covered only for death in service or a non-member (e.g. a dependant) who is receiving benefits from the scheme.
Members can elect half the total number of trustees (excluding the chairperson), subject to a minimum of two.
Rules about pension schemes
Pension schemes can, to a considerable extent, set their own rules about contributions and benefits. There are some rules set out in legislation to which they must adhere.
Preservation and Transfer of Benefits
There are specific rules about what happens if you leave the pension scheme for whatever reason, for example, if you change jobs or you become self-employed or retire early without a pension. Your benefits from the pension scheme may be preserved within the scheme or transferred to another scheme. If you have at least 2 years service, you are entitled to a preserved benefit if you leave before the normal retirement age. A preserved benefit means that you get a pension when you reach the scheme's normal retirement age.
Alternatively, you can ask the trustees to transfer your pension rights to a new pension scheme.
You can find out more about the preservation and transfer of benefits.
The trustees are obliged to meet the minimum standards of funding for funded occupational schemes.
Providing for dependants
Pension schemes usually have benefits for you when you retire and for your widowed spouse and dependent children after your death. Not all schemes have arrangements for dependants.
The maximum benefit that can be provided for a spouse or dependent is now 100% of the pension.
Some schemes may allow you to designate the person who should benefit under the scheme so it is possible, in some cases, to nominate a person other than a spouse.
Occupational pensions in separation and divorce
If you and your spouse separate or divorce, it may affect pension entitlements arising from occupational or personal pension arrangements.
You can find out more in our document on how pensions are assessed during a separation/divorce/dissolution.
How to apply
Information about your own scheme is available from the trustees of the scheme. Information on pensions generally and your rights is available from the Pensions Authority.
Where to apply