Assurance

In addition to providing for a pension, it is also possible to provide for death in service and disability benefit within your retirement benefit plan.

We would be delighted to assist you in choosing the most appropriate benefit package and securing the most competitive premiums.

Pensions

The Finance Act 1999 has confirmed major changes for tax relief on pensions taken out by the self-employed and others. Anomalies that have arisen have been addressed by the Finance Act 2000.

• 1: Self-employed.
• 2: Contribution to employer's Revenue-approved pension fund.
• 3: Non-pensionable employment.
• 4: Owner-Director. plus commentary.

Major Pension Changes click here to read about other major changes in pensions for the self-employed and owner-directors.

You are able to have your earnings reduced for the purposes of calculating your income tax and PRSI by the amount you contribute to your pension scheme up to the following limits which are age related:

1998/1999

1999/2000*

* An earnings ceiling of €253,948 will apply from 6 April 1999.

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There are no changes as a result of the December 2002 budget (confirmed in the Finance Act 2003) to a person who is self employed.

You are entitled to have your salary reduced for the purposes of calculating your income tax and PRSI by the amount you contribute up to 15% (20% if aged 55+) of net relevant earnings for 2003 and 2004.

You may be allowed to invest more into your employers scheme; but once you cross the 15%(or 20%) limit the amount above 15% (or 20%) will not qualify for tax relief. Check that you are using up the full 15% (or 20%) which qualifies for relief. If your employer makes all the contributions on your behalf, make sure you are aware of any conditions attaching to the pension fund. For example, it may be the case that, while you do not have to dip into your own pocket, for you to keep the fund you may have to stay with the organization for a certain amount of time.

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The limits which apply to the self-employed also apply to you. You are able to have your earnings reduced for the purposes of calculating your income tax and PRSI by the amount you contribute to your pension scheme up to the following limits which are age related:

1998/1999

1999/2000*

* An earnings ceiling of €253,948 will apply from 6 April 1999.

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The 15% (20% if aged 55+) income limit applies to you still. There are no changes in the December 2002 budget.

However, you still hold the advantage that you can get your company to make a contribution to your pension scheme, for which it will claim a corporation tax deduction.

Other Pension Changes for Self-employed and Owner-Directors

What happens on retirement?  

The pension holder can now retain ownership of a portion of the fund on retirement and therefore not be tied into an annuity at a low rate of interest. 25% of the fund may be taken tax-free on retirement. €63,487 must be kept in either an Approved Minimum Retirement Fund (AMRF) unless:

a) an annuity of equal value is taken out or

b) the holder has a guaranteed income of €12,700 pa for life

The holder will be free to invest the remaining money in an Approved Retirement Fund (ARF), which will effectively be financial products such as funds and bonds operated by financial institutions. Note that any income arising from the money which the holder invests will be subject to income tax.

Ceiling
An earnings ceiling of €253,948 now applies to the % limit which can be taken tax free.

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Pension Changes for Propriety Directors

1. Position pre 1999 Finance Act for Company Pension Plans
2. Position post 1999 Finance Act for Company Pension Plans
3. Principal Considerations for Proprietary Directors
4. Should the Proprietary Director avail of the 'New Option'?
5. Table 1 Revenue Maximum Retirement Benefits under Company Pension Plans
6. Table 2 Retirement Benefit Options available under 1999 Finance Act

1. Position pre 1999 Finance Act for Company Pension Plans

The changes in Pensions Legislation in the 1999 Finance Act related primarily to Self Employed/Personal Pension Plans. The 1999 Finance Act also introduced significant changes in Pensions Legislation for Proprietary Directors.

A Proprietary Director is a person who is, or at any time within three years of the specified Normal Retirement Date, the beneficial owner of shares carrying more than 20% of the voting rights in the Company providing the Retirement Benefits (or in a Company controlling that Company). In applying the test it is necessary to include with the Directors own shareholding any shares held by his/her Spouse or any minor children or by the Trustees of any settlement to which a Director or his Spouse has transferred any assets.

Position pre 1999 Finance Act for Company Pension Plans Contributions can be paid by both the Company and the Proprietary Director. The company must pay at least 1/6th of the total cost of the Plan. There is no direct limitation on the Company Contributions to a Plan - the contributions must however, be reasonable to the extent that they are not at a level which will provide Retirement Benefits in excess of the maximum benefits permissible by Revenue under the relevant Pensions Legislation. Tax Reliefs are applied to both Company and Member Contributions. Company Contributions qualify as an expense against Corporate Tax. Member Contributions, subject to a maximum of 15% of Taxable Salary from the Company, qualify as an expense against Income Tax and PRSI. Retirement Benefits depend upon the value of one?s Retirement Fund, Company Service and Final Pensionable Salary - Revenue maximum approvable Retirement Benefits are set out in Table 1. Where the Proprietary Director is a member of an Insured Pension Plan, Pensions Legislation demands that Members/Dependents Pensions be secured by purchasing an annuity from an Insurance Company. There is a greater degree of flexibility available to Proprietary Directors who are members of Small Self Administered Pension Funds.

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2. Position post 1999 Finance Act for Company Pension Plans

There is no change in the position post 1999 Finance Act for Company Pension Plans Contributions.

Tax Reliefs - No Change.

Retirement Benefits - A Proprietary Director can elect to avail of the Retirement Benefit Options permitted under the new Pensions Legislation (see Table 2), rather than the legislation governing the administration of Company Pension Plans.

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3. Principal Considerations for Proprietary Directors

Where the Proprietary Director avails of the 'New Option' he will be entitled to receive a Tax Free Cash Benefit of 25% of his Retirement Fund, rather than 150% x Final Pensionable Salary (provided he has 20 years service with his Company) - Company Service is not an issue under the 'New Option'. A Proprietary Director has the option to commute the balance of his Retirement Fund for a cash sum subject to tax and PRSI. A Proprietary Director is not obliged to purchase an annuity to secure Members / Dependents Pensions and could provide these benefits through an Approved Minimum Retirement Fund (AMRF) and Approved Retirement Fund (ARF). A Proprietary Director retains ownership of his Retirement Fund.

Pension Legislation stipulates that the Trust Documentation and Rules of an existing Company Pension Plan must first be amended to include the provisions in the 1999 Finance Act before the 'New Option' can be offered to and selected by the Proprietary Director.

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4 Should the Proprietary Director avail of the 'New Option'?

Proprietary Directors will have to give careful consideration to their individual circumstances to establish the better option for providing their Retirement Benefits. Whilst most will be attracted to the retention of ownership available under the 'New Option' one should not automatically assume that the 'New Option' will always prove to be in the best interests of the Proprietary Director.

Key issues will be:

• Final Pensionable Salary
• Company Service.
• Size of Retirement Fund.
• Health and Age Expectancy.
• Dependency (Spouse / Minor Children).
• Financial Commitments.
• Investment Philosophy and Risk tolerance.
• Improvements in the design of Annuity Products and prevailing Annuity Rates.

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5. Table 1 - Revenue Maximum Retirement Benefits under Company Pension Plans

Revenue Maximum Retirement Benefits under Company Pension Plans Member's Pension
-
2/3rds
X
Final Pensionable Salary provided the member has completed 10 years service with his/her Company.

Tax-Free Cash Option at Retirement
-
Forego part of Member's Pension for a Tax-Free Cash Sum not exceeding 1.5
X
Final Pensionable Salary, provided the member has completed 20 years service with his/her Company.

Dependents Pensions
-
2/3rds
X
Member's Pension.

Maximum Retirement Benefits can be paid at any age between 60/70. Early retirement is permissible at any time due to ill-health, or from age 50 in which event Retirement Benefits must be reduced accordingly. Late retirement is permissible at any age, in which case one can increase Retirement Benefits. Pensionable Salary may include all earnings from the Company taxable under Schedule E. In the case of fluctuating emoluments these must be averaged over three consecutive years. Final Pensionable Salary must be average Pensionable Salary over three consecutive years for Proprietary Directors. The aggregate of the pensions payable to each of the members dependents should not exceed 100% of the Member?s Pension. These benefits may be additional to any benefits the member and his/her dependents may be entitled to under the Social Welfare Acts.

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6. Table 2 - Retirement Benefit Options available under 1999 Finance Act

The compulsory requirement to purchase an annuity to secure Retirement Benefits has been abolished. Legislation provides for Retirement Benefits to be provided from an AMRF and/or an ARF. A minimum of €63,487 of the balance of one?s Retirement Fund or the lesser amount if the balance remaining is less than €63,487 (once the tax free lump sum has been taken), must be set aside and placed in an AMRF unless an annuity of equivalent value is taken out, or unless the pensioner has already a guaranteed pension or a guaranteed annual income for life from either a state pension, annuity or occupational pension amounting in total to at least €12,700 p.a.

The balance in this AMRF must not by way of draw down be allowed to fall below €63,487 (or the initial amount where this is less than €63,487), until the individual reaches 75 years of age. On reaching age 75, he/she can drawn down an income or lump sum from the ARMF in partial payments or one payment. An AMRF is regarded as the personal property of the individual. The investment return on the AMRF is taxed within the fund and not on the individual. An individual can opt to:

(i) take the balance of his Retirement Fund available (after setting aside €63,487 into an AMRF, or buying an annuity with €63,487 if the individual does not have a guaranteed income for life of €12,700 p.a.) or

(ii) invest it in an ARF.

If the individual takes all or part of the fund, or assigns the fund for the benefit of another person, he/she will pay tax at his/her marginal rate on the amount of the fund which has been taken or assigned. Where the individual invests the balance of his Retirement Fund available in the ARF, the investment return on same is subject to tax, which is deducted from the fund, rather than from the individual The same tax treatment and investment rules apply to AMRF's and ARF's. Income drawn down is deemed to be taken firstly from the 'income and gains account' of the ARF/AMRF. Any amounts in excess of 'the income and gains account' are then drawn from 'the residue account' (i.e. the original capital lump sum invested in the ARF/AMRF).

Income drawn from the 'income and gains account' is not subject to income tax, as tax has already been deducted at source from this account. Income drawn from the 'residue account' is subject to income tax at the individual's relevant marginal rate. An individual must declare this income in his/her tax returns. Financial institutions will also be obliged to inform the Revenue Commissioners of any draw down or movement from the AMRF/ARF. AMRF's and ARF's can be managed by a 'Qualifying Fund Manager' as specified in the Finance Act.

Certain rules will be set out and these investments must be kept separate from other investments. An individual must deal directly with the regulated financial institution or investment body. On the death of the retiree there is provision for a spouse to 'step into the shoes' of the deceased. There are also special provisions applying where children under 21 inherit the AMRF/ARF.

The pension provisions as enacted by the F.A. 1999 are complex and therefore it is beyond the scope of this article to discuss each provision in detail. Seek our advice before you make a decision.

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