Introduction to Pensions

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 Irish Central Statistics Office estimates that a man aged 65 can expect to live a further 14 years while a woman aged 65 can expect to live another 17 years.
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 employment.
• Occupational pensions (company pensions), which are provided through employer-sponsored pension schemes.
• State pensions provided under the Social Welfare system.
  There have been significant developments in the Irish pensions sector in recent years.

Personal Pensions

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.

Occupational/Company Pensions

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 balance sheet.

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:

Age Limits

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 long finger
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.

                                                                                                                                                  Source: New Ireland

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