New Pension Options FA 2000 Changes

Introduction

The Finance Act 1999 introduced new options for certain individuals on retirement. These options are set out in detail in our Booklet IT 14. Finance Act 2000 introduced a number of changes to this system. The following is a summary of the changes.

Who may avail of the new options?

Up to 5 April 2000 only persons with retirement annuities or directors who controlled more than 20% of the voting rights in their company were entitled to exercise the new options. With effect from 6 April 2000:

• Directors who control more than 5% of the voting rights in their company
  and
• Employees who make additional voluntary contributions (AVC's) to their pension scheme can exercise the new options. AVC's are contributions made by an employee or director, where the employer does not make a matching contribution.

The option may be exercised only at the time a pension would otherwise become payable. But where the rules of a pension scheme allow for the purchase of an annuity to be deferred for a period, the new options may be exercised up to the latest date by which an annuity must be purchased. This applies to pensions becoming payable on or after 6 April 1999. The tax free lump sum which may be taken by employees with AVC's is not affected by the change.

Changes in taxation of Approved Retirement Funds (ARFs)/ Approved Minimum Retirement Funds (AMRFs) opened on or after 6 April 2000

In the case of existing ARFs/AMRFs, income and gains were taxable in the hands of the ARF/AMRF holder as they arose. Distributions of the original pension fund were also chargeable to tax in the hands of the ARFs/AMRFs holder.

Where the ARF/AMRF is opened on or after 6 April 2000 a new scheme of taxation, known as 'gross roll-up' applies. This means that as long as income or gains are allowed to remain in the ARFs/AMRFs, there is no tax liability. Where funds are withdrawn, whether these withdrawals come from income or gains or from the original pension fund, they are taxed under PAYE as the income of the ARFs/AMRFs holder for the year in which the withdrawal is made. Where the qualifying fund manager has not received a Tax-Free Allowance certificate, tax must be deducted at the higher rate (2000/01, 44%).

Withdrawals following death of the ARF/ARMF holder

Special rules apply to withdrawals from an ARF/AMRF following the death of the holder.

• Generally the amount distributed is treated as the income of the deceased ARF/AMRF holder for the year of death.
• But where the distribution is made to an ARF/AMRF in the name of the ARF/AMRF holder's spouse or to a child of the ARF/AMRF holder who is under 21 at the date of death of the ARF/AMRF holder, no income tax liability will arise.
  CAT liability may arise in the case of a distribution to a child under 21 at the date of the ARF holder's death.
• Where the distribution is made from the ARF/AMRF following the death of the surviving spouse or to a child of the ARF/AMRF holder who is 21 or over at the date of death of the ARF/AMRF holder, tax will be deducted at the standard rate for the year in which the distribution is made. No further tax liability will arise in respect of such a payment.

Qualifying fund managers

A list of qualifying fund managers is contained in Booklet IT 14. With effect from 6 April 2000, the following persons may also act as qualifying fund managers:

• Banks licensed in other EU States
• Insurance companies licensed in other EU States, who are carrying on life assurance business in the State
• Investment Intermediaries, authorised either in the State or in another EU State, to hold client money other than a Restricted Activity Investment Product Intermediary.

A qualifying fund manager who is not resident in the State must appoint a resident agent who will be responsible for the discharge of all duties and obligations regarding the ARFs/AMRFs managed by that qualifying fund manager.

Further Information

Copies of Booklet IT 14 and an insert outlining the Finance Act 2000 changes are available from the Revenue Forms & Leaflets Service at 01 - 878 0100 or from any tax office.