Pensions in Ireland

Pensions in Ireland describes the types of pensions a citizen of Ireland may receive.

There are different types of pensions that you may be entitled to on retirement from employment in Ireland. Depending on how many social insurance contributions you made or depending on your financial situation you may be entitled to a pension from the state.

The Irish pension system can be divided into three pillars:


 * State welfare pensions
 * Occupational pensions
 * Private pensions

The State provides flat-rate welfare pensions, the aim of which is to act as a safety net to keep retirees’ incomes from falling below a certain threshold. State pensions are the most important source of income among older people in Ireland and make up around two-thirds of gross income for those aged 65 and over with around 26% depending on state transfers as their sole source of income. Irish State pensions are either contributory or non-contributory. Entitlements to the first of these are built up over the career of an individual through the accumulation of Pay-Related Social Insurance (PRSI) contributions and credits.

Occupational and private pensions make up the remaining two pillars.

Occupational pensions are common in the public sector and in large private sector firms.

Private pension schemes make up the third pillar of the Irish system. Private pension schemes are voluntary and include Retirement Annuity Contracts (RACs), which are commonly used by the self-employed, and Personal Retirement Savings Accounts (PRSAs), which were introduced in 2002.

Many employers operate pension schemes for their employees, Occupational Pensions.

You can also organise your own personal pension account.

State pensions
There are 2 different types of state pension: one is based on the amount of social insurance contributions you have paid, State Pension – (Contributory) and one is based on a means test, State Pension – (Non-Contributory).

State pension (contributory)
The Contributory State Pension is payable to people in Ireland from the age of 66 who have enough social insurance contributions. It is not means tested and you may also have income. You may have to pay some tax on this pension.

State pension (non-contributory)
The Non-Contributory State Pension is a means-tested payment for people aged 66 or over who do not qualify for the Contributory State Pension based on their social insurance record.

Occupational pension schemes
An employer or occupational pension scheme is one that is set up by an employer to provide pension and other benefits for employees. The main advantage of this type of scheme is that your employer must make a contribution to it even if the contribution is small, however if you are paying into a Personal Retirement Savings Account (PRSA), your employer does not have to make a contribution,

Your employer usually sets up the rules of the pension scheme and appoints people called “trustees” to look after it. You don’t pay tax on your contributions. Your employer automatically takes your contributions from your salary, before working out income tax on your remaining income.

The income you get when you retire depends on whether your employer scheme is a defined benefit scheme or a defined contribution scheme. 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 Board.

Special schemes called PRSAs (Personal Retirement Savings Accounts) were introduced to be used instead of occupational pension schemes by employers who do not wish to sponsor such schemes

Defined benefit scheme
With a defined benefit scheme, the pension income and/or lump sum you get when you retire is related to your final salary and years of service with that employer. For example, you might get a maximum of half your salary or two-thirds of your salary after 40 years’ service, including the state pension.

With this type of scheme, you can predict your pension income, based on your salary and years of service. However, there is no guarantee that your defined benefit scheme will not be changed to a defined contribution scheme by your employer in the future and this would affect the benefits you will get.

Defined contribution scheme
With a defined contribution scheme, you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you retire and the annuity rates at the time. The value of your pension fund depends on:


 * value of the contributions paid in by you and your employer
 * investment performance, or gains and losses, of the pension fund
 * amount of fees and charges the pension investment company applies

Most employer schemes and all personal pension plans and PRSAs are now set up as defined contribution plans. So the final value of your pension can only be estimated. When you retire, your pension may be less than you expected. So you need to examine the benefit statement that you receive each year from the trustees and regularly review your contributions.

PRSA
A PRSA is a low-cost, easy-access private pension savings account. It is designed to allow you save for retirement. You are entitled to invest in a PRSA regardless of your employment status. PRSAs are transferable from job to job and they are available from a variety of providers.

PRSAs are provided by private banks or life assurance companies.

ARF
An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money invested after retirement, as a lump sum. You can withdraw from it regularly to give yourself an income, on which you pay income tax, PRSI and Universal Social Charge (USC). Any money left in the fund after your death can be left to your next of kin.

AVC's
Additional Voluntary Contributions (AVCs) are contributions you make to your employer pension scheme to build up an additional retirement fund. When you retire, this AVC fund can be used to top up your employer pension benefits, within Revenue limits.

Pension costs
Life insurance and investment companies are the main providers of pension plans in Ireland. They employ fund managers to invest your contributions in one or more pension funds.

There are generally two types of charges:


 * Initial charges to set up your plan, such as the allocation rate (This is the percentage of your money that is used to buy units in a pension or other type of investment fund. For example, an allocation rate of 97% means that for every €100 you invest, €97 is actually used to buy units. So in effect you pay €3 (or 3%) as a charge to the firm you invest with). Another charge is the entry charge (This is a charge for setting up your pension plan or investment).
 * Ongoing charges to manage your pension plan. These can include a monthly policy fee (generally reasonably low), bid-offer spread and a yearly fund management charge (This is a charge for setting up your pension plan or investment. A typical fund management charge could be around 1%, this would be higher if the bid/offer spread is low).

These charges can have a significant effect on the value of your pension at retirement, especially the ongoing yearly charges, which are calculated as a percentage of the value of your fund. As your pension fund grows, the charges also increase.

There can be a big difference in the charges for different pension plans. Pensions with higher charges may or may not perform better than similar pensions with lower charges.

NSP
If you are a member of the civil service or a public sector pension scheme and are likely to have less than 40 years’ service by your minimum retirement age, you can top up your benefits through NSP (Notional Service Purchase). This means buying back missing years of service by lump sum or a regular payment which would be a percentage of your salary.

SSAPS
A SSAPS (Small self-administered pension schemes) is a corporate pension scheme with less than 12 members. It can be used where family members work and own a business together or for groups of company directors.

The scheme is self-administered, which means that you decide yourself what the pension fund will be invested in.

Under Revenue rules, all SSAPSs must have a Revenue-approved “Pensioneer Trustee”. This will be a person or a company who is independent of the business and who is a professional pension trustee. This person or company will have experience in dealing with and setting up pensions.

This person acts as your pension administrator, shows you how to get started and tells you what rules and regulations you need to follow. A list of pensioner trustees is available from Revenue on request.

The difference between this type of pension and any other pension is that instead of giving your money to a life insurance or investment company for them to invest, you keep the money and invest it yourself. There are some restrictions on how you can invest the money. A sample of some of those restrictions is below:


 * If you are investing in a property investment, the person selling or letting the property cannot be connected to the SSAPS
 * You can’t use the pension fund to purchase a holiday home. There are also strict rules regarding the purchase of overseas property
 * You cannot purchase shares in a company that you own, or are a director of Personal items cannot be bought, for example, art, jewellery, vintage cars etc.
 * Investments in private companies which are not listed on the stock exchange can only be a maximum of 5% of the pension’s assets and a maximum of 10% of the private company’s share capital

Pension regulation
Pensions are regulated by The Pensions Authority.


 * The Pensions Authority
 * Verschoyle House,
 * 28-30 Lower Mount Street,
 * Dublin 2.
 * Telephone: 01 6131900
 * Lo-call: 1890 656 565
 * Website: www.pensionsauthority.ie

Taxation of pensions
In general, all income arising from pensions in Ireland is subject to taxation. You are given tax relief up to certain limits on pension contributions you make. Occupational pensions are taxable. Many pensioners do not actually have to pay tax, because their income is too low.

Occupational pensions are subject to tax under the PAYE system (the 'Pay-As-You-Earn' System) so the process is the same as that applied when you were being paid your salary. If you have both an occupational pension and a social welfare pension, you may have to pay tax on both.

Occupational pensions are not subject to social insurance contributions (PRSI) but if you are aged under 66, you may have to pay PRSI on other income. Occupational pensions are subject to the Universal Social Charge (USC).

Tax Relief

You can get Income Tax (IT) relief against earnings from your employment for your pension contributions (including Additional Voluntary Contributions (AVCs). Pension contributions to these types of pension plans:


 * occupational pension schemes
 * Personal Retirement Savings Accounts (PRSAs)
 * Retirement Annuity Contracts (RACs)
 * qualifying overseas plans.

This is subject to certain limits. There is no relief from Universal Social Charge (USC) or Pay Related Social Insurance (PRSI) for employee pension contributions.

Advantages of pension contributions

There are some significant positives in contributing to a pension:


 * Income tax relief is available at the higher rate of 41% on contributions
 * Investment gains can grow tax free within the pension
 * A Tax Free Lump Sum (TFLS) of 25% of the retirement fund is available at retirement (€200,000 maximum)
 * The balance of the retirement fund (after the TFLS has been withdrawn) is unlikely to be subject to the higher rate of tax over the full draw-down period
 * There is no obvious tax efficient wealth accumulation alternative to a pension for retirement funding

Double taxation agreements
Double Taxation Agreements generally make a distinction between pensions payable by governments to former employees and pensions payable by private employers. There are some variations between the agreements and not all agreements make this distinction and they vary in other ways so you would need to check how exactly you are affected.

Most of them provide that pensions for non-governmental employees are taxed in the country of residence. So, if you are living in Ireland and getting an occupational pension from another country, you should generally receive it gross and then pay Irish tax on it.

The opposite is the case for pensions for former Government employees - generally they are taxable only in the country where they are paid. So, if you are a former employee of the US government now living in Ireland, you pay tax on your occupational pension in the USA only. In some cases, this applies to pensions from local authorities or other political sub-divisions - again, the particular agreement needs to be checked.

Pay-Related Social Insurance (PRSI)
If you are over 66, you are not liable to pay PRSI contributions at all.

If you are under 66 and are employed or self-employed, you pay PRSI on your income from that employment or self-employment. You do not pay it on your occupational or social welfare pension.

Universal Social Charge (USC)
The Universal Social Charge (USC) replaced the health contribution and the income levy from 1 January 2011. All social welfare payments including pensions are exempt from the USC. However, occupational pensions are subject to the USC. The rate you pay varies depending on your age and on whether you hold a full medical card.