Pension Planning
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Different Types Of Pensions
A brief outline of the types of pensions available on the market.
For further help and advice, please feel free to get in touch with us for a consultation.
PRSA Pension
Personal Retirement Saving Account.
Director or Company Pensions
Aimed at directors and employees.
SSAP Pension
Small Self-Administered Pension.
AVC Pension
Additional Voluntary Contributions.
Personal Retirement Bond
Otherwise known as a ‘Buy Out Bond’.
Transferring UK Pensions
Retirement bond approved by HMRC.
Defined Benefit Pension
Providing a monthly payment.
Group Pension Scheme
Enhance employee satisfaction.
ARF Pension
More control over your retirement fund.
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PRSA (Personal Retirement Savings Account)
This is a personally owned pension that lets you save for retirement. It’s a simple flexible pension which you can take out, regardless of your employment status. You are eligible for a PRSA if you’re self-employed or working in non-pensionable employment.
The maximum amount you can contribute depends on your age the same as a personal pension noted above. One of it’s best features is its portability, if you move jobs, or even take a career break, you can take your PRSA with you.
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Directors – Company Pensions
This is designed to help company directors and employees save for their retirement. Both employers and employees can avail of tax relief on their contributions. Some of its best features are its flexibility, you can make regular or one-off contributions, at any stage.
The employee’s contributions are restricted to the same age-related max contribution scale as the Personal pensions. The permitted employers pension payments are far more generous, this is of particular advantage to Company Directors.
It is one of the most tax efficient ways to transfer company profits into personal assets
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SSAP (Small Self-Administered Pension)
A SSAP is a form of corporate pension scheme, it is established under trust by your employer, for your benefit. It is mainly used by Company Directors, however it is available to employees at the employer’s discretion. It is a tax-efficient investment scheme which allows you to enjoy control over the direction of your investments.
You are the Member Trustee of the SSAP. The Trustees are responsible for and control all aspects of the SSAP’s investment strategy and payment of retirement benefits. The Pensioneer Trustee is an individual or company and is approved by the Revenue Commissioners.
You can invest in individual company shares, Exchange Traded Funds, or buy your own Direct Property, which is the most appealing and most commonly used. There are specific Revenue rules as to what you can invest in, the term “at arm’s length” is a useful guide. We have outlined using your pension to purchase a property in more detail below.
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Allows an investor to identify and acquire specific investments including property
Pension Rules allow the use of retirement funds for the purchase of real property assets in individual, co-ownership, or syndicated funds.
Properties held fall under the categories of residential, commercial, industrial, or may be a combination of each of these held within syndicated funds.
Reasons to invest pension in property:
- You can pick the property you wish to purchase with your pension, residential, commercial, and industrial or a combination of each can be held with the fund.
- Income tax relief on contributions made to fund the purchase are at the higher rate of tax.
- There is no income tax on the rental income and no Capital Gains Tax (CGT) on the eventual sale of the property.
- Upon retirement, you can take 25% of the value of the pension fund as a lump sum, of which €200,000 is tax free. The property can transfer in specie to a self- administered Retirement Fund (ARF) and the rental income can contribute to your income in retirement (retirement income is subject to PAYE).
- You have control over every aspect of your pension.
- Gearing (Borrowing money from a lender) can be used to assist in purchasing the property.
- If you are purchasing a Commercial Property, the fund can be registered for VAT if required.
Are there restrictions buying property through pension?
Yes, but they are not too onerous and include:
- The vendor must not be related to you, your employer, it’s directors and associated companies.
- The property cannot be sold or let to relatives, your employer or its directors and associated companies.
- Personal use of the property is prohibited.
- The development of a property with a view to its disposal is not allowed.
Can I borrow to fund the purchase?
Yes, but the loan must comply with certain rules including:
- “Limited Recourse” – the lender can take security over the property only.
- Maximum loan term of 15 years or NRA if sooner.
- Subject to bank’s lending criteria.
- The pension scheme cannot borrow retrospectively
Disadvantages of Investing pension in property
- You cannot use the property – it must be for investment only.
- Risk – Gearing significantly increases the risk profile of the investment.
- It is an illiquid asset.
- The property will tend to be Irish based limiting the investment choice.
- Your risk exposure is concentrated in Ireland, with no exposure to Global Assets
Advantages of Investing pension in property
- Generous tax reliefs on funds to purchase property.
- All purchase costs are met by the pension.
- Rental income is exempt from income tax, PRSI and USC.
- There is no Capital Gains Tax on the sale of the property.
- You can transfer the property in specie into your Approved Retirement Fund (ARF) at retirement
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AVCs (Additional Voluntary Contributions)
This is additional payments to an existing pension scheme, to build up additional retirement funds. AVCs give you the opportunity to grow your pension ahead of retirement, on your own terms. AVC’s are tax efficient as you can claim tax relief against contributions, subject to revenue limits.
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Personal Retirement Bond – Buy Out Bond
A Personal Retirement Bond (PRB) is a personal policy that is set up by trustees of a pension scheme to provide retirement benefits for a former member of the scheme. It basically means that if you leave a pension scheme, you can bring your pension benefits with you by having the value of your fund invested in a bond.
When you retire you can decide how you would like to benefit from your PRB. Subject to revenue rules at the time, you may decide to receive part as a lump sum. The remainder of your fund can then be invested in an Annuity or Approved (Minimum) Retirement Fund A(M)RF.
If you’re planning to leave the company you currently work for, and you’re part of the group pension plan, a PRB could be a great option for you. A PRB will also be suitable if you decide to leave a company pension scheme for any other reason, or if the scheme is winding down.
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Transferring UK Pensions
QROPS is a Personal Retirement Bond approved by HMRC. (UK Authorities) QROPS Personal Retirement Bond can accept transfers from UK Occupational Pension Scheme’s (DB or DC), UK Personal pensions and UK Section 32 Buy Out Bonds.
There are several criteria that need to be considered as part of this process. Transfers may seem daunting and complicated but once the necessary steps to avoid any negative tax consequences are taken, the process is quite simple. It is essentially the transfer of benefits from one insurer to another.
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Defined Benefit Pension
Defined benefit (DB) pension schemes were originally created to provide retired employees with a monthly payment for life. That payment was based on the employees’ level of service and a percentage of salary. So, after 40 years of service an employee would get a pension up to two-thirds of their salary.
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So why the decline of DB schemes?
Firstly, we are living a lot longer, according to the Central Statistics Office life expectancy in 2012 had increased to age 81.
Of course, this is good news for most people who can look forward to a long and healthy retirement, but for the companies responsible for paying their pensions it’s a massive financial burden.
Other factors which have contributed to a continual decline in DB schemes, include recent investment market crashes, low bond yields, increased regulation and accounting requirements, combined with the general rise in salaries during the boom years.
At this stage, many companies have come to the obvious conclusion, that they cost too much, and those costs are loaded with uncertainty.
According to the Pensions Authority the number of DB schemes in Ireland fell from 2,557 in 1991 to approx. 598 in 2018, with only 388 of them being active schemes. Today, many people are wondering whether their pension scheme will still be there when they retire.
The level of protection in place for members of DB schemes is also relatively weak in Ireland compared to our closest neighbours.
What’s the alternative?
A great number of people with retained benefits in defined benefit pensions are reviewing the option to take a transfer value from their plan, to gain ownership of the capital value and manage their own retirement income.
For some, this decision will be as a result of the uncertainty outlined above, moreover people are also focusing on the positives of moving to a defined contribution arrangement:
- Potential to pass on wealth to the next generation (DB pensions end with the current generation)
- Income flexibility
- Potentially a larger tax efficient lump sum payment
More employers are also “topping up” transfer values called enhanced transfers, to incentivise members to exit DB schemes and ultimately reduce the cost and risks of maintaining a DB scheme.
Areas that give people reservations.
Areas that give people reservations, during these conversations are:
- “What if I live too long and my fund runs out”
- “What if there is a market correction or recession”.
Areas to consider when assessing a DB transfer option and what factors need to be weighed up?
1. The Quality of the Promise
On first impressions, a Defined Benefit pension scheme is the best type of pension you can have – the “Rolls Royce” Pension. However, this depends on the scheme’s ability to fund its’ pension obligations for all members going forward.
Benefits under Defined Benefit Schemes are not guaranteed. If a scheme’s assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall (and is NOT obliged to), the pension promised to you may have to be reduced.
Consideration therefore needs to be given to the financial health of the Scheme and the future financial health of your former employer – in so far as this can be determined.
2. The Hurdle Rate
This is all about calculating the assumed level of investment growth required on the transfer value, to provide you with the same level of benefits that the Defined Benefit Scheme promised to pay.
3. Cashflow Position
By retaining ownership of the pension capital value, you retain greater flexibility to structure future income streams, and aim to stay within the 20% income tax rate.
In this context savings and/or the Tax Free Lump Sum can be used to complement income levels.
4. Legacy
With a Pension transfer the balance of your unused fund value will be retained by your family. Under a DB arrangement, depending on the scheme terms your spouse or children up to a certain age, may receive a % of your promised income, normally 50%.
Having ill health or reduced life expectancy makes the decision to take the transfer option more compelling for most.
5. The Lump Sum
An additional advantage in taking a transfer payment to a Defined Contribution arrangement relates to the options available at retirement.
Defined Benefit Schemes only offer the option of an annual pension and/or a lump sum at retirement. Lump Sums are calculated by a formula relating to final salary and service, with a maximum lump sum payable of 1.5 times final salary.
This Lump Sum is normally required to be commuted from your quoted annual pension, usually at a rate of 9:1, therefore reducing your annual pension and spouses’ pension.
All Defined Contribution arrangements (including Personal Retirement Bonds) now have access to an additional set of options.
In addition to the option of an annual pension, Defined Contribution pensions can pay Lump Sums of 25% of the accumulated fund at retirement and invest the remainder in an Approved (Minimum) Retirement Fund (A(M)RF) post retirement. An A(M)RF is a personal asset.
6. Investment
The long-term expected return on equities and property is unknown but it is common to project on the basis of a 5% p.a. (the Society of Actuaries in Ireland) return before charges. We generally expect Alternative Assets to generate a return somewhere between cash/bonds and equities/property over the long-term.
As part of our overall risk assessment process we assess your capacity to take measured risk, your attitude to risk and through our Fact find and discussions, your overall asset profile i.e. (current savings & Investments – 25% Pension tax free).
If you take the transfer value, you will carry the investment risk. Our Investment strategy helps to avoid “sequence risk” (investment underperforms in the short term relative to expectations) , the 5-year income plan (held in the Cash Fund), provides a buffer to market volatility.
7. Health
We have seen an increase in requests for an additional Health Declaration form by the Trustees of DB schemes. This form is required to be completed by the pension holders GP to confirm members health status.
The reason for this is that some DB Trustees are not willing to allow any member with ill health or impaired life expectancy to take their transfer value.
The view of the Trustees is that permitting such transfers is not in the interest of the remaining members. It would be reasonable to suggest that the transfer option from DB schemes may not continue to be available for everyone in the future.
The next steps...
As mentioned earlier, this is a complex and important decision. If you have a substantial DB pension, it is likely to make up a significant portion, if not the majority of your wealth in retirement, so your next steps are vital. Here are some suggestions:
1. Request up-to-date pension statements and information
2. Engage a specialist in this area – one of the team at D Moloney Financial Services will be happy to help.
3. Bring your family into the discussion.
4. Take your time and consider all your options.
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GROUP Pension Scheme
Offering your employees Death in Service, Income protection and Pensions benefits will help retain staff and enhance employee satisfaction. One of the main challenges for businesses is to attract and retain good staff. Having a comprehensive employee benefit package, such as pension, death-in-service, and income protection benefits, can really put you ahead of the competition.
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Proposition
At D Moloney Financial Services we have the track record and experience to ensure the management of the Pension Scheme runs smoothly for your Business, the Management team and Employees.
We will arrange an initial comprehensive presentation followed by periodic presentations to Scheme members to explain how their pension plan works, their investment options and the other employee benefits provided by your Business.
The key elements in the delivery of this service are proposed as follows:
Employee / Member engagement
We will design an engagement plan which will include the following advisory services:
- Employee Benefit Package – we will actively promote the Pension Scheme and associated benefits to all members of staff through group presentations, video calls and one to one meetings. We will help members to engage and understand their retirement planning process to enable them to better prepare for their retirement.
- Pension Funding Review– we can analyse members pension position, by looking at member target pension, contribution level and pension investment performance.
- Financial Wellbeing / Personal Financial Reviews – when requested by the members, we will advise on their day to day personal financial arrangements to ensure their goals will be achieved. This includes, pensions benefits accrued from previous employment, Life & Serious Illness cover, Mortgages and Savings/Investments.
- Joining the Pension Scheme – when new members are joining the pension scheme we will engage with and advise the member as to how the scheme works and the benefits.
- AVC Investment– we will advise and encourage Additional Voluntary Contributions (AVC’s), in addition to member pension scheme contributions. Illustrations on how AVC payments can enhance member retirement benefits will be explained.
- Leaving Service Options– when leaving service, we will advise on member leaving service options.
- Retirement Advice – when members have reached their retirement age, we will engage with them on the retirement options available to them, maximising their Tax-Free Lump Sum, advantages/disadvantages of Annuities v’s Retirement Funds. The purpose here is to cut through the jargon, to empower the member to choose the best option for them based on their circumstances.
- Risk Benefits – these benefits are generally undervalued and misunderstood by employees until they are needed (family benefits on death and disability).
It is important that we assist employee understanding of the pre and post retirement planning issues with pensions. It will contribute to the feeling of financial wellbeing.
New or Existing Schemes
Issues to consider when setting up or accessing existing schemes:
- Vesting Rights
- Employment Categories
- Risk Benefits
- Trusteeship
- Pension Pricing
- Bundled 0r Unbundled
- Provider Assessment
- Emerging Legislative Obligations – IORP II, (Auto Enrolment)
- Group Risk
Employers can provide Group Risk Benefits to their employees under three heading:
1. Group Life Insurance (Death-in-Service) ensures that an employee’s family or dependents will be financially provided for in the event of the employee’s death. Payment to the employee’s dependents can be made via Lump Sum, Spouse’s Pension or Children’s Pension.
2. Group Income Protection, (Permanent Health Insurance – PHI) protects your employees from loss of income due to long-term illness or injury. Income Protection is designed to provide an income for employees if they are unable to work for a prolonged period of time due to illness or injury. Payment begins once a predetermined period called the “deferred period” has passed since the onset of the condition leading to the claim.
3. Group Serious Illness Cover pays a lump sum to employees if they are diagnosed with one of a number of specified serious illnesses. A serious illness payment will be made only once. It provides a lump sum (and, sometimes, a dependent’s pension benefit) on the death of a member of a scheme.
Why would an employer set up Group Cover for their employees?
- As an employer you can write off the full cost of providing the benefits against corporation tax.
- Recruitment and Retention of employees
- It is an attractive benefit to offer current and future employees.
- The underwriting requirements for group life assurance are much less stringent than for individual life assurance cover.
- Some employees who may not qualify for individual cover, may qualify group cover
- As cover is organised on a group basis, costs are significantly lower than equivalent individual life assurance cover.
- Administration much more straightforward than purchasing equivalent life assurance cover policies for each individual employee.
- Employer contributions to a pension are treated as a business expense and are not subject to Employer PRSI
- Employer contributions do not count towards the individual’s Revenue limits
Auto-Enrolment
The Irish Government is planning to launch an auto-enrolment pension scheme from 2022. Automatic enrolment in Ireland is being mooted as a measure that, if introduced, could bridge the pension gap.
The State pension retirement age has been in the news a lot lately. Will the qualifying age be extended upwards or be reduced back down?
Pension Time Bomb
You may have heard the above term in the news. What does it mean and why should it concern you? It’s all down to Irelands demographics! For every, one person who retired in 2019 there were five workers – by 2050, for every one person retired there will be only two workers!
If introduced, automatic enrolment would oblige employers to introduce a workplace pension scheme and automatically enrol their employees into the scheme.
Employers would then be obliged to contribute a percentage of an employee’s salary to help fund their retirement.
The Government is also supporting this idea to bridge the pension gap. This gap exists and will certainly continue to grow because the State pension will not be sustainable in the future due to increasing life expectancy and an ageing population.
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ARF Pension
ARF gives you more control over how your retirement fund is managed. It is an investment plan with the intention of growing your fund during your retirement years based on your own investment strategy.
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Approved Retirement Funds (ARF)
Retirement funds in excess of this threshold of €63,500 are invested in ARF’s.
An ARF is a personal retirement fund which allows you to keep your money invested after retirement, as a lump sum.
You can withdraw from it regularly to provide an income, which may be subject to Income Tax, PRSI and Universal Social Charge (USC) subject to your individual circumstances. Any remaining value left in the fund after the death of the ARF/AMRF holder can be left to your next of kin.
The minimum yearly drawdown requirement is currently 4% for those aged 60 and under the age of 71 where funds are under €2 million. For those over 71 years, a 5% drawdown applies. Larger funds with over €2m value require a 6% drawdown.
ARF holders are subject to income tax assessment whether the income is taken or not. This is called a deemed distribution and ARF holders are advised to take at least the minimum income payment annually.
Which to choose and Investment Options
An ARF invests in various assets such as shares, property, bonds and cash. The growth of your Retirement fund depends on the performance of the assets it is invested in. The fund is designed to grow in value, but your original investment is not guaranteed.
The key attributes of Retirement Funds can be summarised as follows:
- You keep control of your retirement money and retain ownership of the capital
- You have flexibility in terms of when and at what rate you draw on your ARF in retirement
- You can choose how to invest your ARF and select the type of investments that suit your needs and attitude to risk
- Any growth in your ARF is tax-free but withdrawals may be liable to income tax
- You have the option to use your ARF to buy an Annuity at a later date
- There is a risk that the ARF could run out in your lifetime. This could happen if you take income from your ARF at a rate which is higher than the investment growth achieved over a number of years
Income and Capital appreciation within the ARF is not subject to tax . Income distributions to you from your ARF may be exposed to taxation and may be liable to Income Tax of 0%, 20% or 40%. Retired couples over age 65 have an aggregate income tax exemption up to €36,000 p.a. The exemption for individuals over age 65 is €18,000 p.a. – PRSI & USC may also apply.
Summary of the tax rules of your ARF after your death
RF Inherited | Income Tax Due | Capital Acquisitions Tax (CAT) Due |
Surviving Spouse | No tax due on the transfer to an ARF in the spouse’s name | No |
Children (under 21) | No tax due | Yes* |
Children (21 & over) | Yes (30%) | No |
Others (including surviving spouse/civil partner if benefit paid out as a lump sum) | Yes, at deceased’s tax rate at the time of death (either 20% or 40%) | Yes* |
*Normal Capital Acquisitions Tax thresholds apply
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We Only Work With Trusted Financial Service Providers
Here at D Moloney Financial Services we work with a wide variety of financial providers. This allows us find the best products and offerings for our clients at the best available prices on the market.
The information contained herein is based on our understanding of current Revenue practice as at July 2020 and may change in the future.
Warning: If you do not meet the repayments on your loan, your account will go into arrears. This may affect your credit rating, which may limit your ability to access credit in the future.
Warning: If you do not keep up your repayments you may lose your home.
In accordance with the Sustainable Finance Disclosure Regulation (‘SFDR’), we inform you that in our advice with regard to Insurance-Based Investment Products (‘IBIPs’) we assess, in addition to relevant financial risks, relevant sustainability risks as far as this information is available in relation to the products proposed / advised on. More specifically, this means that we assess environmental, social or governance events / conditions that, if they occur, could have a material negative impact on the value of the investment. We integrate these risks in our advice depending on client preferences on a case by case basis.