Revenue Note for Guidance

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Revenue Note for Guidance

772 Conditions for approval of schemes and discretionary approval

Summary

This section sets out the circumstances in which retirement benefit schemes are to be approved by the Revenue Commissioners for tax purposes. It requires the Commissioners to approve a retirement benefits scheme which satisfies the “prescribed conditions” and enables them at their discretion to approve a scheme even though it might not comply with one or more of those conditions.

Details

Approval conditions

(1) The Revenue Commissioners must approve a retirement benefits scheme if it satisfies all the “prescribed conditions”, that is, the conditions in relation to both the scheme itself and the benefits provided.

The scheme

(2) The following conditions must be satisfied —

  • the scheme must be a bona fide retirement benefits scheme for employees;
  • the scheme must be recognised by both the employer and the employees concerned, and each employee who has a right to participate in the scheme must be given written particulars of all details of the scheme which concern him/her;
  • where the scheme is an overseas pension scheme, the administrator of the scheme must either enter into a contract with the Revenue Commissioners, enforceable in a Member State, in relation to the discharge of all duties and obligations imposed on the administrator under Chapters 1 and 2C of of this Part and section 125B of the Stamp Duties Consolidation Act 1999, or appoint an administrator resident in the State to carry out those duties. Any contract between the Revenue Commissioners and an administrator is to be governed by the laws of the State and the courts of Ireland are to have exclusive jurisdiction in determining any dispute arising under such contracts. Where an administrator opts to appoint a person resident in the State to discharge the duties and obligations, the person’s identity and the fact that they have been appointed must be notified to the Revenue Commissioners;
  • the employer must be a contributor to the scheme;
  • the scheme must be in connection with a trade or undertaking carried on in the State by an Irish resident;
  • an employee’s contributions are not to be returned to him/her.

The benefits

(3) The following conditions must be satisfied —

  • the basic benefit must be a pension for the employee at a specified age not earlier than 60 and not later than 70 (or on earlier retirement through incapacity) which does not exceed 1/60th of the employee’s final remuneration for each year of service up to a maximum of 40 years, that is, a maximum of 2/3rds of final remuneration;
  • the limit on the maximum pension for a widow, widower, surviving civil partner, children or dependants, or children of the surviving civil partner of an employee who dies in service, is a pension or pensions payable that does not exceed any pension or pensions which could have been provided for the employee assuming the deceased had continued in service up to retirement age;
  • any lump sums payable to a widow, widower, surviving civil partner, children, dependants, or children of the surviving civil partner, or personal representative of an employee who dies in service are not to exceed, in the aggregate, 4 times the employee’s final remuneration;
  • any benefit payable to a widow, widower, surviving civil partner, children or dependants, or children of the surviving civil partner of an employee on the employee’s death after retirement can be in the form of a pension not exceeding the employee’s pension;
  • subject to subsection (3A), except in the case of an individual opting for an approved retirement fund (section 784A), the amount which a member of an approved scheme may, on retirement, be permitted to receive as a cash payment, in commutation of part of his/her pension, is not to exceed 3/80ths of his/her final remuneration for each year of service, up to a maximum of 40 years – where an individual opts under section 784A, the maximum tax-free lump sum which may be paid is 25 per cent of the value of the pension fund – see subsection (3B);
  • apart from the above no other benefits are to be payable.

Flexible options on retirement

(3A) As on and from 6 February 2011, and subject to the exception set out in the following paragraph, the Revenue Commissioners are not to approve a scheme unless it provides to an individual entitled to a pension under the scheme or, where a pension is payable under a pension adjustment order to the spouse, civil partner or former spouse, former civil partner of such an individual, an option (the ARF option) to have the value of their pension rights in respect of both main scheme benefits and AVCs, or in respect of their defined contribution AVCs only, – after the deduction of any lump sum under the scheme (in part commutation of pension) and an amount which the pension administrator is required to pay into an approved minimum retirement fund (section 784C) – paid to him or her or to an approved retirement fund (section 784A). A payment under such options cannot be made before the date on which the pension would otherwise have become payable. However, the option can be exercised up to that date.

The exception referred to in the preceding paragraph relates to members of defined benefit schemes, other than members who are proprietary directors. The ARF option referred to in the preceding paragraph is available to such members only in relation to that part of their pension fund that is attributable to AVCs.

(Prior to 6 February 2011 the ARF option in respect of both main scheme benefits and AVCs was available only to an individual who was a proprietary director or to the spouse civil partner or former spouse, former civil partner of a proprietary director where a pension was payable under a pension adjustment order. Otherwise, the ARF option was only available in respect of AVC benefits.) In the case of defined benefit occupational pension schemes the ARF option extends only to AVCs and not to the main scheme benefits.

The Minister for Finance introduced a measure on 4 December 2008 which allowed a member of a defined contribution scheme who retired on or after that date, and who would otherwise have been compelled to purchase an annuity, to defer the annuity purchase to 31 December 2010. In order to allow individuals who deferred the purchase of an annuity avail of the ARF option, the deadline for purchase was further extended to one month after the date Finance Act 2011 was signed into law i.e. up to 6 March 2011). This was to allow for any administrative arrangements that scheme administrators might have had to put in place. This deadline also applied where an individual decided to purchase an annuity rather than go the ARF route.

(3B) Where an individual exercises the ARF option, then the provisions of sections 784(2B), (3B) 784A, 784B, 784C, 784D and 784E will apply with any necessary modifications. In addition, where an individual opts for the ARF option (other than a member of a defined benefit scheme who is not a proprietary director or a member of a defined contribution scheme who opts to ARF only his or her AVCs the value of the normal lump sum, , that he or she can take in part commutation of pension can not exceed 25 per cent of the value of the pension fund. Where the individual opts to ARF only the AVC fund the maximum lump sum he or she can avail of at retirement is one and a half times their final salary.

In the case of an individual who has availed of the deferred annuity purchase option and who subsequently opts for an ARF, the specified income amount (section 784A) and the AMRF “set-aside” amount (section 784C) that apply are €12,700 and €63,500 respectively rather than the higher amounts that applied from 6 February 2011 to 26 March 2013.

In addition, for the purposes of section 784C(6) (i.e. in order for an AMRF to become an ARF) the specified income amount of €12,700, rather than the higher amount which applied until 26 March 2013, also applies for a transitional period of 3 years from 6 February 2011 for an individual who had retired prior to 6 February 2011 and who had transferred funds into an AMRF before that date.

Please refer to the Guidance Notes on section 784C for further details.

(3C) For schemes which allow deferral of purchase of an annuity, the date by which an option must be exercised (in subsection (3A)) is to be taken as the latest date on which an annuity must be purchased from an annuity provider in accordance with the rules of the scheme.

Transfers to PRSAs

(3D) A retirement benefits scheme will not cease to be approved because of any rule permitting the transfer to a personal retirement savings account (PRSA) of either or both of —

  • a member’s entitlements where the member changes employment or the scheme is being wound up, where-
    • benefits have not been paid to the member under the scheme, and
    • the member has been in the scheme for 15 years or less; and
  • an amount equal to the accumulated value of a member’s AVC contributions.

Borrowing

(3E) A retirement benefits scheme will not have its approval revoked, or will not be denied approval, merely because of the inclusion in its rules of a provision which authorises the scheme to borrow.

Commutation to meet tax charge on Chargeable Excess

(3F) Approval of a scheme will not be prejudiced by any scheme rule that allows administrators of private sector occupational pension schemes to commute part of a member’s entitlement under the scheme sufficient to discharge any tax charge on a chargeable excess, which arises in connection with that entitlement, under the provisions of Chapter 2C (relating to the maximum tax-relieved pension fund).

(3G) A retirement benefits scheme does not cease to be an approved scheme where, notwithstanding the rules of the scheme, the trustees discharge liabilities of the scheme under section 59(3) of the Pensions Act 1990 (inserted by section 43 of the Social Welfare and Pensions Act 2010).

(3H) The inclusion of a provision for the encashment option (see section 787TA) in the rules of an occupational pension scheme will not affect Revenue approval of the scheme.

(3I) A retirement benefits scheme will not have its approved status revoked where the trustees allow a scheme member or, where the scheme is subject to a pension adjustment order, the spouse/former spouse/civil partner/former civil partner of that member, avail of the AVC pre-retirement access option provided by section 782A, notwithstanding that the rules of the scheme as approved by Revenue would not allow for such a facility.

Discretionary approval

(4)(a) The Revenue Commissioners may, at their discretion, approve schemes even though one or more of the prescribed conditions is not complied with. However, the Revenue Commissioners cannot approve a scheme unless it appears to them to comply with the provisions of subsection (3A).

(4)(b) In particular, the Commissioners may approve schemes where —

  • the maximum pension and lump sum benefits are payable by reference to a lesser number of years’ service than 40,
  • employees may retire up to 10 years earlier than normal retirement age,
  • the rules permit a return of members’ contributions in certain circumstances, or
  • the scheme relates to a trade or undertaking carried on only partly in the State, or by a person not resident in the State.

Withdrawal of approval

(5) The Revenue Commissioners may withdraw approval of a scheme, already given, if they consider that the facts no longer warrant the continuance of approval.

Alterations of schemes

(6) Where an alteration has been made to a scheme, any approval already given is not to apply unless the alteration has been approved by the Revenue Commissioners. However, section 19(2)(d) of the Finance Act, 1999 provides that a scheme approved before the 6th day of April, 1999 will not cease to be an approved scheme where the rules are altered to provide the options on retirement allowed by section 784A.

Aggregation of schemes

(7) When a scheme is being considered in relation to compliance with the prescribed conditions, account is to be taken of any other retirement benefits scheme which applies to the same class or description of employees. If the conditions are satisfied when all the schemes concerned are taken together, they are regarded as satisfied by each scheme; if not, they are regarded as not being satisfied by any of the schemes.

Relevant Date: Finance Act 2019