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PENSIONS / TAXATION / FINANCIAL PLANNING

OCTOBER 2007

REVENUE COMMISSIONERS PENSION

Key in at search “pensions” and you pick up the 2007 Pensions Manual. This manual sets out the background to the Revenue rules and definitions.

The main sections which relate to Occupational Pension Schemes are dealt with in Section 770 to 782 of the TCA 1997.

Retirement annuities and Approved Retirement Funds are dealt with in Section 783 to 787

PRSA are dealt with at 787(a) to 787(i)

Limits on tax reliefs/ pension funds – Schedule 23b

Summary of Pension Legislation

Pension Contributions

Maximum amounts which tax relief can be claimed in respect of qualifying premiums are as follows:-

Age

Percentage of Net Relevant Earnings

Up to 30 years

15%;

30 but less then 40

20%

40 but less then 50

25%

50 but less then 55

30%

55 but less then 60

35%

60 or over

40%

The earnings cap is €262,382 (for tax year 2007) on net relevant earnings. Contributions are allowable until the individual reaches 75 years of age.

Premiums can be carried forward if not fully relieved in any particular tax year.

Additional Voluntary Contributions

Employees and occupational schemes are entitled to tax relief on the aggregate annual contribution including AVC’s subject to the foregoing limits.

Option on Retirement

For self employed or proprietary directors (holding 5% of voting shares) the following may apply:-

Take up to 25% of the pension fund tax free;
Balance of the funds to be transferred or a minimum of €63,500 to Approval Minimum Retirement Fund (AMRF). This requirement is not required if the pensioneer’s specified income is greater then €12,700 per annum;
The AMRF cannot be drawn down until the individual reaches 75 years of age;
An alternative is to invest in an annuity contract;
The balance of the funds taken by the individual and taxed under the PAYE system or invested in an Approved Retirement Fund (ARF).

ARF and AMRF Main Features

Any income or gains arising within the ARF or AMRF are exempt from tax as long as they are held within the ARF or AMRF. However payments out, whether capital income or gains, are chargeable to tax under the PAYE system;
Section 14 of the Finance Act, 2006 placed a cap on Pension Funds of €5million as at 6^th December 2007. There is an earnings adjustment factor i.e. like inflation of 3.3% per annum. The current cap to which a Pension Fund can be €5,165,000;
The Finance Act, 2003 extended the circumstances on which assets in an ARF are treated or will be treated as distributed called “Pensions in Payment”. This inserted by Section 779(a) TCA and 784(a)(1b) TCA.

Distributions accordingly are deemed where they are used for the following purposes:-

Make a loan or secure a loan to an ARF holder or to a connected person;
Acquire property from the ARF holder or a connected person;
Acquire property to used as a holiday property or as a residence by the ARF holder or a connected person;
Acquire shares or other interest in a closely held company which the ARF holder or a connected person is a participator;
Acquire any tangible moveable property;
The acquisition of property for the use in connection with any business of the ARF holder or person connected with the ARF holder.

Annual Imputed Distribution

The Finance Act, 2006 provided that a 3% annual imputed distribution will apply to the value of assets held in an ARF at 31^st December in each year. The main features are as follows:-

Imputed distribution will apply to ARF’s created on or after 6^th April 2000 where the ARF holders is 60 years of age or over for the whole of that tax year;
The 3% rate is phased over the periods 2007 to 2009;
2007 - 1%;
2008 - 2%;
2009 - 3%.
Actual distributions made during the year from the ARF may be deducted from the imputed distribution;
The net imputed distribution amount, if any, is to be regarded as a notional distribution from the ARF.

The purpose of this exercise is to force people to distribute the ARF or a portion of the ARF. The State taxes ARF’s. The tax treatment of assets in the ARF are as follows:-

ARF Inherited By

Income Tax due

CAT Due

Surviving Spouse

No tax due on transfer to ARF in Spouse name

None

Children under 21

No tax due

Yes

Children 21 and over

Yes at standard rate of tax

No.

Others

Yes at marginal rate

Yes.

Death of Surviving Spouse

Income Tax due

CAT Due

Children under 21

No.

Yes

Children over 21

Yes at standard rate

No

Others

Yes at standard rate

Yes

Finance Act, 2006

Chapter 2C TCA 1997 imposes a limit or ceiling for total capital value pension benefit that can be drawn in a lifetime from a tax relief pension product. This is called Standard Fund Threshold (SFT).

Each occasion an individual becomes entitled to receive a benefit under a pension arrangement for the first time (called in legislation “Benefit Crystalisation Event” (BCE) they use up part of their standard or pension fund threshold. At each BCE a capital value must be attributed to the benefit that crystalises.

When the capital value, when aggregated with BCE, exceeds the individual’s fund threshold a chargable excess arises equal to the amount of which the fund threshold is exceeded.

The whole of the amount of the chargable excess is then subject to an upfront income tax charge of 41% payable by the Pension Scheme Administrator. The new booklet which we have in the library will give you examples of this position.

Banking and Borrowing

Small Self Administered Pension Scheme (SSAP) post Finance Act, 2004 and pre Finance Act, 2004

Pre Finance Act, 2004

Indirect borrowings mainly structured through the intermediary unauthorised unit trust i.e. Custom House type fund. The property investment is transacted by the SSAP purchasing units in a unit trust using the initial equity and bank borrowings the property by purchased, mortgaged and administered on behalf of the unit holder. The initial equity was funded from existing cash. Once the borrowing was cleared the unit trust was wound up and the property transferred back to each individual SSAP. This form of indirect SSAP borrowing continues post Finance Act, 2004 so the borrowings can now either be routed through the SSAP or alternatively through SSAP subscribed for units in the Unit Trust with the borrowing resided in the Unit Trust.

Section 16 of the FA 2004 extended Section 7.7.2(3e) of the TCA and allows the schemes to borrow.

IORP Directive and Borrowings

Occupation Retirement Provision Directive set out in the Social and Welfare and Pension Act, 2005 and this ensures that members and beneficiaries of Occupational Pension Schemes are adequately informed of the financial position of the scheme.

The IORP prohibition on non one member arrangements applies post 23^rd September 2005 i.e. any borrowings within a more then one member scheme are prohibited. See the Pension Board’s website www.pensionsboard.ie

One Member Scheme

One member schemes are defined and governed by Regulation SI 294/06 Occupational Pension Schemes (Investment) Regulations, 2006. A single member scheme is a scheme whose rules limit membership to a single member, save where a Pension Adjustment Order applies. A scheme that previously had one more then one member qualifies as a single member if there is currently only one member or the current rules do not permit any additional members to join. It is considered also the requirement for member investment control is satisfied where the consent to the members is required for investments. The presence of a pensioner trustee will not of its own disqualify a scheme from being a single member scheme.

SSAP Investment Power Restrictions

The restrictions on investments are recapped as follows:-

Prohibition loans to members;
Self investment;
Property acquisition.

Additional conditions are imposed in relation to the acquisition of property as follows:-

Overall Scheme investment must match Scheme liabilities;
Property investment must not compromise liquidity of the Scheme.
Property development by a trust could well be regarded as trading by the Revenue and consequently lose tax exempt status;
Purchase of overseas property only permitted where the Pensioner Trustee can maintain control of the assets to ensure Revenue rules are complied with;
Any proposals involving diversion of sponsoring employers’ taxable activities into the Scheme are not accepted.

Private Companies

Investments must be limited to 5% of the scheme assets and 10% of the private company shares capital. Pride and possession articles prohibited.

Banking Consideration

Note that the SSAP itself cannot be pledged as loan security however the Trustees, as legal owners of the Asset scheme, are entitled to borrow provided it is not a non prohibited investment and complies with Revenue borrowing. Typical bank underwriting criteria to tick the boxes.

Comfort that SSAP qualifies as a single member scheme;
Pension Trust has borrowing capacity. The Trustee must have power to borrow;
General rules bank prefer to lend to pension schemes that have been established for a few years;
Age of beneficiary/scheme member is important in so far as the borrowing term cannot exceed 15 years of the beneficiaries actual or protected retirement date;
The financial strength of the Employer Company;
Pattern of recent years annual pension contribution;
Current pension scheme, value and split of investment;
Revenue borrowing guidelines must be complied with.

Revenue Borrowing Guidelines

Only assets purchased by borrowing may be used to provide security to the lender.
Assignment of rental income to the lender is not permitted;
Life cover on the amount of debt may only be provided outside the scheme;
No cross collateralisation. This effectively limits recourse to the subject property itself and you cannot use other pension assets to secure it.

No Interest Only Loans

Loans for a period of more then 15 years are not permitted.
Loan must be repaid in full prior to normal retirement date;
Use of scheme assets to clear residual debt is not permissible.

Geared Property Investment Vehicle.

In relation to investment made via geared investment vehicles and unit trusts it is possible to link a scheme investment to a particular property within a collective investment fund provided the arms length rules apply i.e. all acquisitions, disposals and levies must be on a total arms length basis.

O’Gradys

Solicitors

17^th October 2007