Pension Schemes 1/6th Rule

Occupational Pension Schemes

Section 10 Finance Act 2002 introduced age-related amendments to the existing employee contribution limit of 15% of remuneration in Sections 774(7) and 776(2) TCA 1997. (See Tax Briefing Issue No.47).

Following consultations with industry sources it has been agreed that the Revenue discretionary code of approval practice would be amended in relation to what became known as the 1/6th Rule (i.e. the requirement that the employer bears 1/6th of the total cost of member’s benefits in occupational pension schemes). The change is necessary to ensure that scheme members will not be prohibited from availing of the proposed age-related limits subject, of course, to the applicable limits on scheme benefits.

As a consequence, a new paragraph 4.1 of Chapter 4 of the Revenue Pensions Manual is substituted for the existing paragraph. The new paragraph is applicable for the 2002 year of assessment and subsequent years of assessment.

The new paragraph reads as follows:

“It is a condition of approval of a scheme that the employer must contribute to it but, subject to the considerations mentioned in Chapter 5 and any funding requirements imposed by the Pensions Acts (as regulated by the Pensions Board), the timing of the contributions is a matter for the employer.

While Revenue will not insist that there be a stated minimum level of employer contributions, it will continue to be a requirement that such contributions be “meaningful” in the context of the establishment, operation of and the provision of benefits under a scheme. For instance, in the circumstances where an employer would bear the cost of the establishment of a scheme and the ongoing operating costs of the scheme in addition to meeting the costs of the provision of death in service benefits under the scheme, such overall contributions would generally be considered to be meaningful. In other circumstances, an employer’s contributions, which would not be less than 10% of the total ordinary annual contributions to a scheme (exclusive of employee voluntary contributions), would always be considered to be meaningful.

It will always be open for employers and their advisers to approach the Retirement Benefits District to discuss the circumstances of particular schemes.”