Anyone keeping half an ear to the news over the past nine months or so will know that the pension regime in Ireland has been the subject of significant debate and adjustment, both in relation to funding levels and the tax implications arising. Between the National Recovery Plan of the previous government (November 2010), Budget 2011 (December 2010) and three 2011 Finance Acts, it’s hard to be sure of exactly what changes have been made and how they will affect you. Set out below is a summary of the current position and some proposals that are likely to be adopted. If you have any
queries in relation to your pension, please contact your advisor at IMO Financial Services.
Accumulating The Pension Fund
1. Annual Earnings Limit for Individual Pension Contributions
From 1 January 2011, the maximum earnings limit for individual contributions will be €115,000 per annum. This lower threshold relates to payments made during 2011 but will not affect payments made by 31 December 2010, to which the previous threshold of €150,000 will apply. The table below sets out the maximum contributions for 2011 by reference to the contributor’s age:
|To age 30
||15% Net Relevant Earnings
|30 – 39
|40 – 49
|50 – 54
|55 – 59
For those general practitioners in receipt of both GMS and private income, great care must be taken to ensure that tax relief is claimed in respect of GMS income first. If the correct calculation is not prepared, this could result in tax relief being denied for payments made and/or Revenue enquiries.
Tip: To maximise your tax relief, ensure the pension contribution associated with your GMS income is correctly calculated.
2. Effective Tax Rate of Relief
Subject to the restrictions noted above, an individual pension contribution will be taxrelieved at the contributor’s marginal tax rate, i.e. if they suffer tax at the higher income tax rate of 41%, then they will secure tax relief at 41%. The previous government’s National Recovery Plan proposed a phased reduction in the rate of tax relief, commencing 2012 with a 34% rate and falling to 20% in 2014. While this proposal has not taken effect, it is considered highly likely that it is coming down the track.
Tip: Maximise your pension contribution for 2011, to take advantage of higher income tax reliefs.
3. PRSI, Health Levy and Universal Social Charge
From 1 January 2011, employee contributions to AVCs, PRSAs and personal pensions no longer qualify for relief from employee’s PRSI. The Health Levy has been abolished from 2011 forward and replaced with the USC. Similarly, employee contributions made from 1 January 2011 are not exempt from USC.
Up to 31 December 2010, employee contributions to personal pensions were also exempt from employer’s PRSI but this exemption has been reduced by 50%, with effect from 1 January 2011.
4. Pension Fund Levy
A four-year levy of 0.6% per annum has been introduced for the years 2011 to 2014. The levy is calculated by reference to the market value of an individual’s pension fund at 30 June each year. It is deductible directly from the pension fund and payable by the pension provider directly to the Revenue. This levy applies to PRSAs, RACs, Defined Benefit and Defined Contribution group schemes. It does not apply to Approved Retirement Funds (ARFs), Approved Minimum Retirement Funds (AMRFs), vested PRSAs and RACs or annuity policies.
Tip: Where maximum pension rights have already been accumulated, consider retiring to avoid exposure to the pension fund levy.
5. Maximum Pension Fund Value
From a tax relief perspective, the maximum allowable pension fund value has been reduced to €2.3m, with effect from 7 December 2010. While a higher value is possible for an individual whose pension fund was worth more than €2.3m on that December date, the individual was obliged to notify the Revenue of their fund value by 7 June 2011, otherwise the €2.3m maximum will apply. There is an expectation amongst the financial services industry that this maximum fund value will be further reduced in the coming months.
6. Lump Sums Payable on Retirement
The maximum tax-free lump sum from a pension scheme is now reduced to €200,000, with effect from 1 January 2011. Income tax at 20% is payable on the excess over €200,000, up to a value of €575,000, with top rate income tax payable in respect of any excess. Previous pension scheme lump sums may be taken into account when determining if the €200,000 tax-free threshold is breached.
7. AMRF requirements
Finance Act 2011 expanded the minimum fund value and minimum annual income requirements to be met in order to avoid the imposition of an AMRF. From 27 January 2011, the first €120,000 of an individual’s pension fund must be invested in an AMRF (which cannot be accessed until the individual reaches age 75) unless the individual is in receipt of at least €18,000 of an annual income.
8. Imputed Distributions on an ARF
From 2010, ARF holders will be taxable on 5% of their ARF value, irrespective of whether they take a distribution from their fund during the year. This taxable imputed distribution does not arise in respect of an AMRF.
Tip: For those aged less than 75, consider whether it may be better for some of your fund to remain within the AMRF regime, to avoid the taxable annual imputed distribution.
This article has been written by Ms Kerri O’Connell
Kerri O'Connell FCA AITI TEP of HSOC Financial & Business Advisors is a Registered Tax Consultant and Trust & Estate Practitioner. She provides tax-based advice to a wide selection of personal clients, including medical practitioners, in the areas of regular tax compliance, investment and succession planning.
HSOC Financial & Business Advisors is a firm of Chartered Certified Accountants who have acted as auditor to the IMO for more than 15 years. They provide auditing, accounting and payroll services, tax compliance and consultancy services and business development advice to a full range of domestic and foreign clients.