Providing for retirement is a
very important issue if the end of employment is not to be
followed by a significant decline in living standards. Apart
from the value in a house, few people are able to save much
during their work lives. The erosion of the real value of
State Retirement Benefits combined with greater life expectancy
highlights the importance of pension planning. The Central
Statistics Office 2011 Survey reports that the average life
expectancy for men in Ireland is 76.8 years, whilst for women
the average life expectancy is 81.6 years Source: Irish Times
Pension schemes provide a tax-efficient
saving system to ensure that retirement income is above the
breadline level. Unlike other tax allowances, the pension
contribution is also exempt from PRSI.
In 1995, an ESRI survey of occupational and personal pensions
for the Pensions Board and the then Department of Social Welfare,
found that only about half the workforce in Ireland have supplementary
pension cover in addition to the State Pension.
There are 3 types of Pensions:
- Personal pensions, which are designed for
both self-employed people and for those in non-pensionable
- Occupational pensions (company pensions),
which are provided through employer-sponsored pension schemes.
- State pensions provided under the Social
There have been significant developments in the Irish pensions
sector in recent years.
In the Finance Act 1999, the
Minister for Finance introduced significant changes to a)
the tax rules applying to pension contributions by self-employed
persons and employees without a company pension, and b) the
options available at the time of retirement.
The establishment of the Pensions Board to
regulate company pension schemes and in particular to protect
the interests of employees, has been an important development.
The existing trend of an irreversible move
away from defined benefit, also known as 'final salary schemes',
is accelerating. By guaranteeing employees a pension related
to salary on or near the retirement date, employers take the
risk of under funding. People are living longer, investment
returns are lower and the new accounting standard called FRS
17 which comes into full force in 2003 will require that a
pension fund surplus or deficit be reflected in a company's
In the U.K. large employers such as the accountancy
firm Ernst and Young, have ended 'final salary schemes,' even
for existing employees. The impact of FRS 17 on companies
has been highlighted by chemical group ICI's disclosure on
the announcement of its December 2001 results, of a GBP £453
million in its GBP £7.6 billion pension and healthcare
schemes. A survey by actuaries Bacon & Woodrow found that
from a sample of 15 member companies of the FTSE 100, the
average pension scheme funding levels under FRS 17, has fallen
to 105.6 per cent from 124.9 per cent under the old rules.
Retail group Marks and Spencer (M&S) which
operated a very generous pension scheme, with no employee
contributions and payment of up to two-thirds of final salary,
has decided not to provide new employees with guaranteed pensions.
M&S estimates it will be paying total contributions equivalent
to about 10 per cent of salary under the new arrangements-less
than half the 22 per cent of salary it paid into the existing
scheme in 2001, at a cost of GBP £120 million.
In defined contribution, also known as 'money
purchase schemes', the final pension depends on how much goes
in, how it is invested and how the investment performs. Risk
is passed from the employer to the employee compared with
final salary schemes. However, a money purchase scheme works
better for people with fluctuating earnings and for those
who often change jobs.
Employers contribute an average of 15% of
salary in final salary schemes compared with 6% of salary,
for money purchase schemes.
Finance Act 2002 Changes to Pension Rules
In the Finance Act 2002, the Minister for
Finance provided for a significant improvement in the taxation
relief* for members of occupational pension schemes.
Changes in pension rules for employees
In order to encourage employees to increase
their level of pension cover, the following improvements in
the pension rules for employees:
(1) The previous limit of 15% of qualifying
annual earnings for tax relief* for contributions, including
Additional Voluntary Contributions (AVCs) by employees into
occupational pension schemes, has been increased to the tax
relieved limits at present applying to contributions by those
not in occupational pension schemes to Retirement Annuity
Contracts (RACs). These limits are:
|Up to 30 years of age
||15% of net relevant earnings
|30 to 39
|40 to 49
|50 to 54
|55 to 59
|60 years and over
The overall existing maximum pensions benefit
rules will continue to apply.
(2) Where a self-employed person who is in
a RAC scheme joins an occupational pension scheme, he/she
is no longer be obliged to terminate his/her RAC scheme but
can continue contributing to the RAC or take out a further
RAC but without any tax relief in respect of these continuing
or further contributions and without notifying the employer
as is required for an AVC.
(3) The previous rules provided that under
an occupational pension scheme, the maximum benefit that can
be provided for a spouse or dependant was two thirds of the
full pension the pension scheme member could have obtained
and the maximum for all dependants together was 100 per cent.
The new tax relief rules allow pension schemes to provide
benefits, if they wish, up to 100% of the member's possible
pension on retirement to an individual spouse/dependant.
In addition, the new tax arrangements also
apply to the new Personal Retirement Savings Accounts (PRSAs)
where they are used as an AVC. This means that where a PRSA
holder joins an occupational pension scheme and takes out
an AVC - PRSA, the annual limits on such AVC-PRSA contributions
for tax purposes are increased to 30% through age progression
as at (1) above.
Personal Retirement Savings Account-PRSA
A PRSA is
· an investment vehicle used for long term retirement
provision by employees, self employed, homemakers, carers,
unemployed, or any other category of person.
· a contract between an individual and an authorised
PRSA provider in the form of an investment account.
Why pension planning should not be left on
The longer you delay in starting a pension, the more that
will have to be funded each month, to ensure an adequate income
on retirement. The chart below, shows how much it will cost
you for every 5 year period that you delay.
Note: The costs shown are recommended
costs and are for illustration purposes only. An investment
return of 9% is assumed. Actual returns could be higher or
lower than this. Contributions are assumed to increase by
5% p.a. The pension of EUR:15,000 in today's terms is based
on an inflation rate of 5% p.a. It is assumed that a fund
of EUR:100 will buy a pension of EUR:8.50 at age 65
*Note: Tax Relief outlined are those currently applying as
Warning: The value of your investment
may go down as well as up.