Revenue Note for Guidance

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Revenue Note for Guidance

787TA Encashment Option

Summary

This section provides a one–off opportunity for individuals with dual private and public sector pension arrangements, who meet certain conditions, to encash their private pension rights, in whole or in part, from age 60 (or earlier, where retirement is due to ill health), with a view to eliminating or reducing the chargeable excess that would otherwise arise when their public service pension crystallises. The exercise of this option attracts income tax (which is ring-fenced) at the point of encashment on the full value of the rights at the higher rate of tax in force at that time plus Universal Social Charge (USC) as provided for in section 530AN(3A)(a). This broadly neutralises the tax relief that such individuals would have availed of when building up their private pension funds. In general, no “tax-free” lump sum can be taken from a scheme in respect of which the encashment option has been exercised. The administrator of the scheme will be primarily responsible for deducting and remitting the “encashment tax” to Revenue.

This section applies from 8 February 2012, with transitional arrangements for affected individuals who may have drawn down their private sector pensions before that date but who remain members of a public sector scheme on or after that date.

Details

(1) Subsection (1) sets out the definitions and other assumptions underpinning the section. For the most part these are self-explanatory but the following points should be noted.

“Active member” of a public sector scheme means, essentially, a member who remains in the relevant public sector employment accruing normal pension benefits. It would exclude an individual with preserved benefits under a public sector scheme.

“Private sector scheme” means an occupational pension scheme, an RAC, a PRSA and a qualifying overseas pension plan, as defined in section 787O.

“Public sector scheme” means all public service pension schemes as defined in the Public Service Superannuation (Miscellaneous Provisions) Act 2004 and all statutory schemes i.e. schemes established by or under any enactment not included in the foregoing, as defined in section 787O.

“Relevant individual” – to qualify for the encashment option an individual must be a “relevant individual” on 8 February 2012 (the date of publication of the Finance Bill 2012). This means he or she must –

  • be a member of a private sector pension scheme and a member of a public service pension scheme on that date, or
  • be a member of a public service pension scheme on that date and have drawn down some or all of his or her r private sector scheme benefits within the “relevant period” (defined as the period from 7 December 2005 to 7 February 2012). This caters for individuals who may have drawn pension benefits within the relevant period from say an RAC or PRSA but remain in public service employment and a member of the public service scheme on 8 February 2012, or
  • be a member of a private sector scheme on or after that date and subsequently become a member of a public service scheme (this caters for individuals moving from the private sector into a public service career in the future).

In each case the individual must remain an active member of his or her public service scheme until his or her retirement date (i.e. 60 or later), i.e. he/she must continue in the public service employment and accrue pension benefits up to retirement.

“Retirement date” is defined as the earlier of the date on which the member retires where that is on or after the date the member reaches 60 and the date he or she retires on ill-health grounds under the rules of the scheme.

(2) This subsection provides for the application of the section to a relevant individual where the individual has not drawn down any pension benefits from his or her private sector schemes before 8 February 2012. It is subject to subsection (11) reflecting the fact that subsection (11) specifically and separately deals with situations where private sector scheme benefits have been drawn down before that date.

It allows the encashment option to be availed of in situations where the combined capital value of the pension scheme savings, both public and private, are likely to exceed the Standard Fund Threshold (SFT) of €2m or the individual’s Personal Fund Threshold (PFT), if he or she has one, and where the intention is that the public sector pension benefits will be crystallised last (i.e. after all private pension savings have been crystallised).

(3)(a) Where subsection (2) may apply to an individual, he or she may irrevocably instruct (in writing) the administrator of the private sector scheme or schemes to exercise the encashment option provided for in subsection (6). The individual must also meet the Revenue notification conditions set out in subsection (4).

(3)(b) The encashment option can be exercised on behalf of a relevant individual on one occasion only and on the same date in respect of each of his or her private sector schemes.

(3)(c) Where an administrator or a relevant manager (i.e. a qualifying fund manager (QFM) of an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF) or a PRSA administrator) receives an irrevocable instruction in writing from an individual, the document must be retained for 6 years and be made available to Revenue on request.

(4)(a) Before the encashment option is exercised, the individual must notify Revenue of his or her intention in that regard at least 3 months before his or her date of retirement from the public sector scheme. The notification must be in such form as may be prescribed or authorised by Revenue, and provide the following information:

  1. The individual’s full name, address and PPS Number.
  2. An estimate of the value of the individual’s accrued pension rights to be encashed or the specified amount* (i.e. the amount by which the capital value of the private and public service schemes exceeds the SFT or PFT).
  3. Particulars of the private sector scheme(s) in respect of which the encashment option is to be exercised.
  4. The name, address and phone number of the administrator of each such scheme.
  5. Such other information as Revenue may require for the purposes of this section.

*Also see subsection (12) in relation to the “other specified amount”.

It will not always be possible through the encashment option to fully eliminate the “specified amount” i.e. the difference between the combined capital value of the individual’s pension scheme savings, both public and private, and the SFT of €2m or the individual’s PFT. This would be the case where the capital value of the individual’s public sector scheme on its own exceeds the SFT of €2m or the individual’s PFT. Where this is the case, then the encashment option can never fully mitigate the chargeable excess (i.e. the specified amount) as the option does not extend to public sector schemes. In such a situation, in order to keep the chargeable excess on the public sector scheme to a minimum, the individual would have to encash all of his or her private sector schemes, as not do so would push up the overall chargeable excess arising on the public sector scheme when it crystallises. Therefore, it will be an estimate of the value of the individual’s accrued pension rights to be encashed rather than the specified amount that will have to be included in the notification to Revenue in such situations.

(4)(b) Once the option is exercised, the individual must notify Revenue in writing within 7 days and provide in a schedule details of the scheme or schemes involved and the amounts encashed under each scheme.

(5) The notifications referred to in subsections (4)(a) and(b) shall be in such form as prescribed or authorised by Revenue and shall include a declaration that the notification is correct and complete.

(5A) The failure of an individual to provide the notification referred to in subsections (4)(a) & (b) within the set time limits may be disregarded if Revenue consider that the circumstances warrant it.

(6)(a) The exercise of the encashment option is the transfer to the relevant individual by the administrator of the individual’s private sector scheme or schemes (having already been irrevocably instructed to do so) of the value of the individual’s accrued rights under those schemes. The administrator can make the transfer in the case of an individual retiring on ill-health grounds before the age of 60, on the date of ill-health retirement, and in any other case, on or before the individual’s retirement date but in no case before the individual attains the age of 60. The amount transferred will be:

  1. the individual’s accrued rights under the private sector scheme (including any which relate to Additional Voluntary Contributions) where the condition referred to in paragraph 6(b) applies, or
  2. in any other case, the specified amount (i.e. the amount by which the combined capital value of the pension scheme savings, both public and private, exceed the SFT of €2m or the individual’s PFT if he or she has one).

(6)(b) The condition needed for the encashment amount to equal the individual’s accrued rights under his or her private sector scheme(s) is that the capital value of the individual’s public sector scheme on its own will exceed the SFT of €2m or the individual’s PFT.

(6)(c)(i) & (ii) Where the encashment option is exercised in respect of the whole of a private sector scheme, no lump sum is payable and where the option is exercised in respect of a part of a private sector scheme, the lump sum is reduced in proportion. A formula is provided to work out how much of a lump sum can be taken (i.e. the restricted lump sum) where partial encashment of a scheme takes place.

(7) An encashment amount is to be regarded as income of the individual for the tax year in which the amount is paid and is chargeable to income tax under Case IV of Schedule D.

(8) Where the encashment option is exercised the administrator of the private sector scheme must deduct income tax from the encashment amount at the higher rate for the tax year in which the payment is made and remit it to the Collector-General in accordance with subsection (10). In addition, the administrator must apply the USC at the rate set out in section 530AN(3A)(a) to the payment.

(9) An encashment amount regarded as an individual’s income will not form part of his or her total income for the purpose of the Tax Acts and the higher rate of income tax that is to be deducted is a “ring-fenced” rate and no deductions or reliefs can be set against that encashment amount to reduce the amount of income tax payable.

(10) The deduction and collection arrangements that apply to chargeable excess tax under the provisions of section 787S apply to encashment tax deducted by an administrator or a relevant manager (i.e. a QFM in the case of an ARF/AMRF and a PRSA administrator in the case of a PRSA). The administrator must deduct tax from the encashment amount and pay it to the Collector-General within 3 months of the date of encashment with the following information:

  1. The name and address of the administrator or relevant manager,
  2. The name, address and PPS number of the individual who has availed of the encashment option,
  3. Details of the pension arrangement giving rise to the encashment option,
  4. The amount of, and basis of calculation of, the encashment option or deemed encashment option,
  5. Details of the amount of tax that the administrator or relevant manager has to account for in relation to the encashment option.

The normal provisions as regards assessments and appeals apply.

(11) Transitional arrangements apply in the case of individuals who would otherwise meet the various conditions except that they have already crystallised some or all of their private pension funds before 8 February 2012.

(11)(a)(i) An individual who has cashed in some or all of his or her private pension funds before 8 February 2012 may, where he or she considers that the circumstances set out in paragraph (b) may apply, irrevocably instruct the administrator of his or her private pension schemes (or the relevant manager in the case of a crystallised pension scheme) to exercised the encashment option provided for in subsection (6) as if the benefit crystallisation event (BCE) had not occurred. In effect, the individual can exercise the encashment option in respect of private sector schemes that are still “intact” and/or in respect of private sector schemes already drawn down. The individual must also meet the Revenue notification conditions set out in subsection (4) (as modified by subsection (12)).

(11)(a)(ii) Where the encashment option is exercised in respect of a private pension scheme that has already crystallised, subsection (6) is to apply as if the reference in that subsection to an administrator were a reference to a relevant manager – in the case of crystallised schemes it will be the relevant manager (i.e. the QFM of an ARF or AMRF or the PRSA administrator of a PRSA) that will be transferring the encashment amount to the individual.

(11)(b) The circumstances that the individual referred to in paragraph (a)(i) considers may apply such that he or she can irrevocably instruct the administrator as per paragraph (a)(i) are that the combined capital value of the individual’s private sector and public sector pension schemes (whether already crystallised or still intact) are likely to exceed the SFT or the individual’s PFT, if he or she has one, and the individual’s public service pension will be crystallised last after all private sector benefits have been crystallised.

(12) The modified notification conditions that the individual must meet are effectively the same as the notification requirement specified in subsection (4) modified to take account of the particular circumstances of individuals who may already have cashed in their private sector schemes. The individual must comply with subsection (4) as if the following were substituted for subparagraphs (ii), (iii) and (iv) of paragraph (a) of that subsection, as follows:

  1. an estimate of the value of the accrued rights in respect of which the encashment option is to be exercised or, as the case may be, the other specified amount*,
  2. although one or more of the schemes may have already been drawn down within the relevant period, particulars of the private sector scheme or schemes in respect of which the encashment option is to be exercised,
  3. the name, address and telephone number of the administrator or relevant manager of each such scheme.

*Note – “other specified amount” is the term used in the situation provided for by subsection (11) to distinguish it from the term “specified amount” used in relation to situations provided for by subsection (2) – but both terms have the same meaning i.e. the amount by which the capital value of the individual’s private and public service schemes exceeds the SFT or the individual’s PFT.

(13)(a) Where an encashment option is exercised in relation to an individual referred to in subsection (11)(a), in respect of private sector schemes that had not been drawn down before 8 February 2012, the provisions of subsections (7) to (10) will apply, that is, tax will be charged under Case IV of Schedule D and deducted by the pension scheme administrator at the higher rate. USC will be charged at the rate set out in section 530AN(3A)(a). Tax and USC should be remitted to the Collector General within 3 months of the exercise of the encashment option.

(13)(b) In cases where the encashment option is being exercised in relation to such an individual in respect of private sector schemes that have been drawn down in whole or in part, before 8 February 2012, the provisions of subsections (14) or (15) apply. These set out special rules for the purposes of determining the encashment tax (i.e. the deemed amount) depending on what type of benefits were taken from the scheme.

(14)(a) For the purposes of exercising the encashment option, the value of the individual’s “accrued rights” under a private sector scheme that has already been drawn down in full is the amount crystallised by the BCEs occurring at that time. These could comprise a lump sum paid, assets transferred to an ARF and/or AMRF or retained in a PRSA, assets used to pay a pension or buy an annuity or assets taxed and paid directly to the individual. Schedule 23B sets out how various types of BCE are to be valued. In such cases, the part of the encashment amount from which encashment tax is to be deducted (i.e. the deemed encashment amount) depends on the type of BCE occurring. These are provided for in section (14)(b).

(14)(b) Where the BCE is –

  1. a lump sum paid under the rules of a scheme that would have been paid tax-free if section 790AA had never been enacted, the deemed encashment amount is the amount of that tax-free lump sum,
  2. the transfer of assets to an ARF, the deemed encashment amount is the lesser of the amount transferred to the ARF at the time the BCE event occurred and the value of the assets in the ARF at the date the encashment option is exercised,
  3. the transfer of assets to an AMRF, the deemed encashment amount is the lesser of the amount transferred to the AMRF at the time the BCE event occurred and the value of the assets in the AMRF at the date the encashment option is exercised,
  4. the retention of assets in a PRSA (known as a vested PRSA), the deemed encashment amount is the lesser of the value of the assets retained in the vested PRSA at the time the BCE event occurred and the value of the assets in the vested PRSA at the date the encashment option is exercised,
  5. in any other case, the deemed encashment amount is nil. This covers a pension or annuity already in payment and situations where an individual took a transfer of the pension benefits as a taxable lump sum.

(14)(c) The deemed encashment amount is to be regarded as income of the individual for the tax year in which the encashment option is exercised and is to be charged to income tax in accordance with subsection (16), i.e. under Case IV of Schedule D.

(15)(a) & (b) Where the encashment option is to be exercised in respect of part of a private sector scheme that has already been drawn down, a formula (A x B/C) is used to determine the deemed encashment amount for taxation purposes.

The formula basically multiplies the value of the relevant BCE (i.e. “A”) by the “fraction” of the individual’s accrued rights under the scheme that are being encashed.

(15)(c) The deemed encashment amount is to be regarded as income of the individual for the tax year in which the encashment option is exercised and is to be charged to income tax in accordance with subsection (16) i.e. under Case IV of Schedule D.

(16)(a) Any deemed encashment amount is to be charged to income tax under Case IV of Schedule D.

(16)(b) & (c) The relevant manager (i.e. the QEM of the ARF and AMRF and the PRSA administrator of the vested PRSA) is responsible for deducting income tax at the higher rate for the tax year in which the encashment option is exercised and for remitting the tax to the Collector General.

(16)(d)(i) The relevant fund manager, in deducting tax from a deemed encashment amount relating to an ARF, AMRF or vested PRSA, must include the amount of tax relating to a lump sum paid under the rules of the scheme from which the ARF or AMRF assets were transferred or under the rules of the PRSA within which the PRSA assets were retained.

(16)(d)(ii)(I) A “tax credit” will apply in respect of standard rate income tax paid on the lump sum against encashment tax on the lump sum where the whole of the lump sum paid is subject to the encashment option and encashment tax. The tax credit will be given where the relevant manager meets the condition set out in subparagraph (d)(iii).

(16)(d)(ii)(II) A “tax credit” will apply in respect of a portion of the standard rate income tax paid on the lump sum against encashment tax on the lump sum where only part of the lump sum paid is subject to the encashment option and encashment tax. The formula in subsection (15) is used to determine the correct portion of the standard rate income tax paid on the lump sum that may be credited against the encashment tax. The tax credit will be given where the relevant manager meets the condition set out in subparagraph (d)(iii).

(16)(d)(iii) The condition referred to in subparagraphs (d)(ii)(I)& (II) is that the relevant manager must obtain a certificate from the administrator of the private sector scheme (who originally paid the lump sum and deducted income tax at the standard rate) giving the information set out in paragraphs (a) to (e) of section 787RA(2). The information required in the certificate is –

  1. The name and address of the administrator,
  2. The individual’s full name and address and PPS number,
  3. Details of the pension arrangement under which the lump sum giving rise to the excess lump sum was paid,
  4. Date of payment of the lump sum,
  5. Details of the amount of tax that the administrator has to account for in relation to the lump sum.

(16)(d)(iv) Where credit is given for standard rate income tax paid on a lump sum against encashment tax, the tax on the lump sum is not available for credit against any chargeable excess tax that may arise in respect of that individual (as provided for by section 787RA).

(16)(d)(v) The certificates referred to in subparagraph (d)(ii) must be retained for a period of 6 years and produced to Revenue if required.

(17) The relevant manager must satisfy the payment of the encashment tax from the assets of the ARF/AMRF or PRSA and to the extent that the amount cannot be met, or met in full in that way, the balance is to be discharged in accordance with subsection (18).

(18)(a) To the extent that the encashment tax cannot be met in full from the assets in the ARF, AMRF or PRSA, the unpaid tax is deemed to be tax on a chargeable excess and passes on to the public sector pension scheme administrator to be paid at the time the first BCE in respect of the individual arises under his or her public sector scheme (i.e. at the point of retirement) and will be a debt due to the administrator from the individual, or where the individual is deceased, from his or her estate.

(18)(b) The public sector pension scheme administrator will be reimbursed by the individual for the payment of the unpaid tax in the manner provided for in section 787(7).

(18)(c) An amount of encashment tax deemed to be chargeable excess tax in this way will not be treated as chargeable excess tax for any other purpose i.e. it will not be possible to credit tax that might arise on the public sector lump sum against it under the provisions of section 787RA.

(19)(a) Where the encashment option is exercised in relation to a private sector scheme that has already been drawn down, in circumstances where a lump sum was taken and the remaining benefits were taken as a pension, annuity or transferred to the individual as a taxable lump sum (i.e. there is no QFM or PRSA administrator to deduct and pay over the tax to the Collector General), the deemed encashment amount (which is charged to tax under Case IV of Schedule D by virtue of subsection (16)) is to be taxed at the higher rate for the year in which the encashment option is exercised. In such cases the encashment tax is to be treated as “unpaid tax” and passed on to the public sector pension scheme administrator to be discharged as “tax on a chargeable excess”. However, recovery of such tax by the public sector scheme administrator may only be made from the gross public sector pension payable to the individual and not from the individual’s lump sum from the public sector scheme.

(19)(b) The provisions of subsection (16)(d)(ii)&(iv) will apply, with any necessary modifications, to encashment tax referred to in subsection (19)(a). This means that a credit can be taken by the individual for standard rate income tax paid on the lump sum in respect of which the encashment option is exercised (or a credit for the appropriate amount of the lump sum tax where a partial encashment is involved) against encashment tax on the deemed encashment amount relating to the lump sum. To qualify for this credit, the individual must obtain a certificate from the administrator of the private sector scheme who originally paid the lump sum to the individual and deducted lump sum tax at the standard rate from it, giving the information set out in paragraphs (a) to (e) of section 787RA(2).

(19)(c) The provisions of section 787R(6) apply to a certificate referred to in paragraph (b) – this means that the individual must retain the certificate for a period of 6 years and produce it to Revenue if requested.

(20) Where the encashment option is exercised in relation to all, or part, of the assets in an ARF, AMRF or vested PRSA the assets, or the relevant part of the assets, will no longer be considered as assets in the ARF, AMRF or vested PRSA from the date of the exercise of the option and, therefore, can no longer benefit from the “gross roll-up” regime that applies to such funds.

(21)(a) Where the encashment option is exercised, the encashment amount, or the deemed encashment amount, will not be considered as a BCE for SFT or PFT purposes and, in the context of the transitional arrangements, where a private scheme has already been crystallised the BCE events concerned will be disregarded (in whole or in part) for SFT/PFT purposes in the future.

(21)(b) The encashment amount, or the deemed encashment amount, transferred to the individual following the exercise of the encashment option cannot be used as a contribution to, or premium in respect of, a tax relieved pension arrangement.

(21)(c) The encashment amount, or the deemed encashment amount, is not to be considered as a distribution of the assets of an ARF, AMRF or PRSA and, therefore, cannot be taxed by the QFM or PRSA administrator, as if they were a distribution.

(22) Where an encashment option is exercised in relation to a private sector scheme that has already been crystallised and the deemed encashment amount is the amount, or part of the amount, of the tax free lump sum paid, the lump sum (or the relevant part of it) will be disregarded for the purpose of determining excess lump sum tax (within the meaning of section 790AA) on a lump sum that is paid to that individual on or after 8 February 2012.

(23)(a)&(b) The individual and the pension scheme administrator (including the administrator of the public sector scheme where appropriate) or the QFM/PRSA administrator are jointly and severally liable for the tax due on the encashment amount and this applies whether or not any one of them is non-resident.

Relevant Date: Finance Act 2019