Pension Products and Retirement Funds - Finance Act 2003

Section 14 makes a number of changes to the tax regime governing various pension products and also makes changes to the tax treatment of Approved Retirement Funds (ARFs).

Capital gains tax exemption is being extended to Personal Retirement Savings Account (PRSA) assets; it already applied to assets of occupational pension schemes and to certain Retirement Annuity Contracts (RAC). All tax payable in respect of pension income is paid under PAYE as benefits are paid out.

The circumstances in which contributions made to an occupational pension scheme or a statutory pension scheme may be set back to earlier years are being restricted. At present discretion is given to the Revenue Commissioners as regards the years to which non-ordinary annual contributions are to be attributed. In practice, this means that the contributions are set against income of earlier years in certain circumstances. From 6 February 2003, the setting back of contributions will be confined to contributions deducted from a lump sum payable on retirement to provide for dependants’ benefits or contributions made on retirement to pay back a previous refund of contributions or benefits previously provided to the member of a scheme (such as a marriage gratuity), where the contributor had previously left a scheme.

For 2003 and subsequent years non-ordinary annual contributions to a pension scheme paid for a tax year between the end of the tax year and the return filing date for that year will be allowed in the tax year, subject to limits, where a claim is made by the return filing date for the year. The return filing date is the 31 October following the end of the year. This mirrors the present carry-back relief available to those paying premiums under retirement annuity contracts.

Contributions that cannot be allowed either in the preceding year or in the year of payment may be carried forward to following years and allowed, subject to the age based limits for those years.

The circumstances in which assets in an Approved Retirement Fund (ARF) are treated as having been distributed are extended. With effect from 6 February 2003, assets will be treated as distributed in so far as they have been used for the following purposes:

• To make a loan or to secure a loan to the ARF holder or to a connected person;
• To acquire property from the ARF holder or a connected person;
• To acquire property to be used as holiday property or as a residence by the ARF holder or a connected person; where the property is acquired on or after 6 February 2003 for some other purpose (e.g. letting) and is subsequently used as holiday property or as a residence by the ARF holder or a connected person the distribution will arise at the time the property comes to be used for this purpose and will include any ARF assets used in the repair or improvement of the property;
• To acquire shares or other interests in a closely held company in which the ARF holder or a connected person is a participator;
• To acquire any tangible moveable property.

The sale of assets in the ARF to the ARF holder or a connected person will also be regarded as a distribution of the value of the assets in question.

In so far as ARF assets are treated as distributed they are no longer regarded as ARF assets; similarly, where the acquisition of assets is treated as giving rise to a distribution, the assets will not be regarded as assets in the ARF.

These new rules on distributions for ARFs will also apply to Approved Minimum Retirement Funds (AMRFs). Also the restriction on payments out of an amount of capital invested in approved minimum retirement fund is being strengthened to ensure that the restriction applies to distributions and amounts treated as distributions. Where assets in a PRSA are used in such a manner that a distribution would be treated as having been made if those assets were in an ARF, the assets will be treated as having been made available to the PRSA contributor. This means that any such transactions will be contrary to the rules of the PRSA until such time as the PRSA contributor is entitled to take benefits from the PRSA (generally at age 60 or over). Any such transactions would give rise to a tax charge under PAYE on the PRSA contributor in the same way as a tax charge would arise where such transactions occur in relation to funds in an ARF.

The person who manages assets in an ARF or an AMRF, known as a Qualifying Fund Manager (QFM), will in future be required to notify the Revenue Commissioners when he or she commences to act as a QFM; managers already acting in this capacity will be required to notify the Revenue Commissioners within 3 months of the passing of the Act.

The differential in the rates of age-based tax relief which applied for PRSAs and other pension products is being removed. For 2003 and subsequent years the rate for all pension products will be as follows where at any time during the tax year the contributor was:

The 30% rate will apply irrespective of age to certain sportspersons who retire early.

A single combined earnings cap of £254,000 is being applied to income that qualifies for relief in respect of pension contributions. The maximum relief will be the age based percentage of this amount. This will apply for the year 2002 and subsequent years in respect of contributions made on or after 4 December 2002 (Budget day).

For 2003 and subsequent years an individual will not be regarded as being in pensionable employment for the purposes of qualifying for relief for contributions to a PRSA or a Retirement Annuity Contract (RAC) where the individual is a member of an employer sponsored pension scheme for the purposes of survivor’s and dependant’s benefits only (up to now, an employee was not regarded as in pensionable employment for RAC purposes where the benefits provided by the pension scheme were limited to a lump sum payable on death or disability while in service). Such an employee will now be able to make PRSA contributions which are not linked to the pension scheme. Employee contributions to such a scheme will be treated as RAC contributions for the purpose of calculating the maximum RAC/PRSA relief on contributions.

The power governing the making of PAYE regulations is being changed to allow the Revenue Commissioners to apply the net pay arrangements to RAC premiums deducted by employers. Under the net pay arrangement, tax relief is given by the employer applying PAYE on the employee’s salary after deducting allowable contributions to the pension scheme/PRSA or RAC.