Revenue Note for Guidance

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Revenue Note for Guidance

Schedule 23B

[Part 30, Chapter 2C]

Limit on Tax-Relieved Pension Funds

Overview

Schedule 23B is linked to Chapter 2C of Part 30 – relating to the limit on tax relieved pension funds. The Schedule deals with the operational aspects of the arrangements as follows:

  • Paragraph 1 – how the value of an individual’s uncrystallised pension rights on 1 January 2014 are to be calculated for both defined contribution (DC) and defined benefit (DB) type arrangements.
  • Paragraph 2 – the various types of benefit crystallisation event (BCE) and when they are deemed to occur, e.g. entitlement to a pension, annuity, lump sum etc. under a pension arrangement.
  • Paragraph 3 – how the capital value of a BCE is to be calculated for the various types of BCE identified.
  • Paragraphs 4 & 5 – how the amount of the standard fund or personal fund threshold that is available at the time of a BCE is to be determined.

It also includes a table setting out the relevant age-related valuation factors.

Details

Calculation of the uncrystallised pension rights of an individual on the specified date

par 1 The amount of an individual’s uncrystallised pension rights on 1 January 2014 (the specified date) is the sum of all of such rights on that date in respect of all relevant pension arrangements that he or she has (e.g. occupational pension scheme, RAC, PRSA, AVC, Buy Out Bonds etc.). An individual’s uncrystallised pension rights are, essentially, rights to pension benefits built up, or in the process of being built up, but which have not yet crystallised i.e. the individual does not have a present right or entitlement to those benefits on 1 January 2014. The entitlement to the rights is a prospective one which will crystallise at some time in the future. The purpose of valuing these rights on the specified date is to determine if the value of those rights (together with the amount of any BCEs since 7 December 2005) exceeds the amount of the standard fund threshold (SFT) of €2m. If it does, then that value or amount, subject to a maximum of €2.3m, becomes the individual’s protected “personal fund threshold” (PFT) for the purposes of Chapter 2C unless the Revenue Commissioners issued a certificate to the individual under the legislation as it applied prior to the passing of Finance (No.2) Act 2013, in which case the amount on the certificate is the PFT (adjusted as necessary by the relevant earnings factors).

(Note – where a BCE occurs on 1 January 2014 it will be deemed for the purposes of valuing an individual’s uncrystallised pension rights to have occurred on the following day.)

The methodology to be used for valuing uncrystallised pension rights depends on whether the relevant pension arrangement involved is a DC arrangement or a DB arrangement.

Where the uncrystallised benefits are in a DC type pension arrangement e.g. a DC occupational pension scheme, a retirement annuity contract with an insurance provider or a PRSA with a PRSA provider, the capital value of those rights is simply the assets (or so much of the assets) in the arrangement that represent the individual member’s accumulated rights on that date – the assets may be cash or non-cash, and if the latter, the market value of those assets must be established on that date.

In the case of DB arrangements, a formula must be used to determine the value of uncrystallised rights. A formula is required in these cases because establishing the capital value of those rights is not so straightforward as there is no fund specifically earmarked to provide the pension benefits (which will generally be paid directly from the scheme). In order to work out the capital value of the uncrystallised rights at 1 January 2014, a conversion or valuation factor is needed. The legislation specifies a valuation factor of 20 for this purpose (see section 787O(2)(a)(i)).

This conversion factor is applied to the gross annual pension (i.e. before any commutation for a lump sum, where the scheme provides a discretionary lump sum commutation option) that the individual would be entitled to under the scheme rules, at his or her current salary and service level, if on 1 January 2014, he or she had acquired an actual rather than a prospective right to receive a pension, in respect of those rights. If the scheme provides a separately accrued lump sum entitlement (otherwise than by way of commutation of part of the pension) e.g. civil service pensions, the value of any lump sum entitlement is added to the capital value of the DB pension to arrive at the overall capital value of the individual’s pension rights on 1 January 2014.

A number of assumptions must guide the calculation of the uncrystallised pension rights in the case of DB arrangements. These are that:

  • the individual had reached normal retirement age on that date (or had reached the age required under the pension arrangement to avoid any reduction in benefits on account of age), and
  • that the individual’s rights to receive the pension had not arisen because of incapacity.

Occurrence of benefit crystallisation event

par 2 Paragraph 2 sets out when a benefit crystallisation event (BCE) is to be taken to occur (and in effect the different types of BCE that can arise). Most of the BCE’s cover particular circumstances where pension rights that have been built up under a pension scheme are realised by the individual, most commonly by a pension or annuity coming into payment or a lump sum being paid. But other BCE’s deal with situations where

  • a pension or annuity is not taken and the value of the fund (less the lump sum) is placed in an ARF,
  • a fund is transferred abroad,
  • an option to transfer PRSA assets to an ARF is not exercised and instead the assets are retained in that, or any other, PRSA, or
  • the owner of a Retirement Annuity Contract (RAC) or a PRSA does not take benefits from the RAC or PRSA on or before the date of his or her 75th birthday. In these circumstances, the RAC or PRSA becomes vested on the date the owner attains the age of 75, or on 25 December 2016 (the date Finance Act 2016 was passed), if the owner was 75 before that date.

There is also an-anti-avoidance BCE to deal with situations where, after a benefit is taken by way of a pension, the amount of the pension increases substantially. In such cases, a separate BCE arises, which must be valued and tested against the appropriate fund threshold, if the increase in the pension is above a set level called the “permitted margin”. The term “permitted margin” is defined in section 787O(1) as being the greater of two calculations – “calculation A” or “calculation B” – which, in summary, is the greater of 5% p.a. or 2% plus the relevant movement in the CPI, between the time the pension is paid and the time it is increased.

Therefore, an individual cannot avoid the possibility of a tax charge on a chargeable excess simply by choosing the ARF option, by taking the benefits overseas or by arranging a relatively small pension in payment at the start followed by a large increase or increases later.

Calculation of amount crystallised by a benefit crystallisation event

par 3 Paragraph 3 sets out the basis for calculating the amount crystallised for each type of BCE as follows:

  • The capital value of a DB BCE that is a pension drawn down after 1 January 2014 is determined by the formula P x A, where P is the annual amount of pension which would be payable to the individual (before any commutation of part of the pension for a lump sum) and A is the relevant age-related factor, as set out in the Table to this Schedule. If the arrangement provides for a separate lump sum entitlement (otherwise than by way of commutation of part of the pension) e.g. most public service schemes, the value of the lump sum is treated as a separate BCE and is added to the capital value of the annual amount of pension payable to arrive at the overall capital value.
    However, where part of a DB pension has been accrued at 1 January 2014 and part after that date, transitional arrangements allow the capital value of the pension at retirement to be calculated by way of a “split” calculation, so that the part accrued up to 1 January 2014 (called the “accrued pension amount” – APA in the formula in subparagraph (aa)) will be valued at a factor of 20 and the part accrued after that date valued at the appropriate age-related factor. A condition of applying the “split” calculation is that the administrator concerned is satisfied from information and records available to the administrator that an accrued pension amount arises in relation to the pension in question. The administrator must retain for a period of 6 years the information and records on foot of which the administrator was satisfied that an accrued pension amount applied, for the purposes of satisfying Revenue, if required, that such was the case
  • For an annuity type BCE (e.g. in respect of DC type arrangements) the capital value of those rights is simply the assets (or so much of the assets) in the arrangement that represent the individual member’s accumulated rights on that date, as are used to purchase the annuity.
  • For a lump sum type BCE the capital value is the amount of the lump sum paid.
  • For a BCE arising where an “ARF” option is chosen, then irrespective of whether the relevant pension arrangement is a DB or DC type arrangement, an amount consisting of cash and/or assets representing the value of the annuity or pension that would otherwise have become payable under the scheme must, depending on the option chosen by the individual, be transferred to either the individual, an ARF or an ARMF. The amount crystallised is simply the value of the cash sums and/or assets as are to be transferred following the exercise of the “ARF” option.
  • For a BCE involving the retention of assets in a PRSA, the amount crystallised is the aggregate of the cash sums and the market value of any assets retained in the PRSA or any other PRSA.
  • For a BCE arising where an RAC or a PRSA vests as a result of the owner not taking benefits on or before the date of his or her 75th birthday, the amount crystallised is the aggregate of the cash sums and the market value of any assets which represent the owner’s rights under the RAC at the date the owner attains the age of 75 years or, in the case of a PRSA, the aggregate of the cash sums and the market value of the assets in the PRSA at that date. Where the owner attained the age of 75 years prior to 25 December 2016, the relevant date for establishing the aggregate of the cash sums and the market value of the assets is 25 December 2016.
  • For a BCE arising where an individual transfers his or her pension rights to an overseas scheme, the amount crystallised is simply the amount of any payment made to the overseas scheme or the value of any assets transferred to that scheme.
  • For a BCE arising because a pension in payment is increased beyond a permitted margin (i.e. the greater of 5% p.a. or 2% plus the movement in the CPI between the month when the pension came into payment and the month when it was paid at the increased amount), the amount crystallised for BCE purposes is the amount by which the increased annual amount of pension in payment exceeds the increased amount of the pension if it was increased by the permitted margin. This amount (which will be a positive amount) is then multiplied by the relevant age-related valuation factor to arrive at the capital value of the BCE. As the calculation of this BCE always commences at the date the pension first came into payment, where previous increases in the pension have given rise to BCE’s under this provision these must be deducted so as to avoid double counting. (For BCE’s which occurred in these circumstances on or before 1 January 2014, the relevant valuation factor was 20, or such higher factor as was agreed by the individual with Revenue before 1 January 2014.)

Amount of a standard fund threshold or personal fund threshold that is available at the date of a current event

par 4 Paragraph 4 sets out how the amount of an individual’s SFT or PFT, that is available at the date of a BCE is to be determined, as follows:

  • where the BCE is the first BCE that has occurred on or after 7 December 2005, then all of the SFT (€2m) or, as the case may be, PFT is available. In other words, if the capital value of the BCE is, say, €1.5m and no prior BCE’s have occurred, then the €1.5m is tested against the €2m SFT (or the PFT), no chargeable excess arises and the individual still has €0.5m of the SFT unused for future BCE’s.
  • where there have been BCE’s prior to the current BCE on or after 7 December 2005 and the amount of those BCE’s (called the “previously used amount”) is equal to or greater than the amount of the SFT (€2m) or PFT, as the case may be, then by definition none of the SFT or PFT is available and, therefore, all of the current BCE is a chargeable excess subject to tax under Case IV of Schedule D at the higher rate of income tax for the tax year in which the BCE giving rise to the chargeable excess occurs.
  • in any other case (which by definition means a case where some but not all of the SFT (€2m) or PFT, as the case may be, has been used up by prior BCE’s) the amount of the SFT or PFT that is available at the time of the later (i.e. current) BCE, is the balance after deducting the amount of the prior BCE’s.

Meaning of previously used amount

par 5 Paragraph 5 provides that in determining “the previously used amount” for the purposes of calculating how much, if any, of the SFT or PFT is available at the time of a current BCE, the amount of each prior BCE must be adjusted in accordance with a formula. This ensures, in the context of a reduction in the SFT, that the value of a prior BCE can never be less than its capital value at the time it crystallised.

The table following sets out the age-related valuation factors.

TABLE

Age

Relevant age-related factor

(1)

(2)

Up to and including 50

37

51

36

52

36

53

35

54

34

55

33

56

33

57

32

58

31

59

30

60

30

61

29

62

28

63

27

64

27

65

26

66

25

67

24

68

24

69

23

70 and over

22

Relevant Date: Finance Act 2020