Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 2

Retirement annuities

Overview

This Chapter provides for relief from tax on payments made by an individual, engaged in a trade or profession or holding a non-pensionable employment, to secure a life annuity for himself or herself on retirement or an annuity for his/ her dependants on his/her death. Alternatively, the individual may, subject to certain conditions, opt to have the accumulated fund placed in an approved retirement fund (“ARF”) or have it paid over direct to him or her. While the availability of this option is mandatory only in respect of annuity contracts approved on or after 6 April 1999, it may be incorporated by agreement into contracts approved before that date.

Where the ARF was established prior to 6 April 2000, the individual would be chargeable annually to income tax or capital gains tax on income or gains from assets held in the ARF. No further tax will be payable on the transfer out of such an ARF of income or gains accumulated within that ARF. Where the ARF was established on or after 6 April 2000, no tax liability arises on the individual until distributions are made from the ARF. Where part of the value of the pension fund is paid direct to the individual, rather than being transferred to an ARF, the amount paid is treated as part of the income of the individual for the year in which the payment is made. All payments from a post 6 April 2000 ARF are subject to tax under the PAYE system. The taxation treatment of ARFs is dealt with more comprehensively in the note on section 784A below.

To qualify for relief on contributions, they must be made by way of premium under an annuity contract approved by the Revenue Commissioners or by way of contribution under a trust scheme approved by the Revenue Commissioners. Relief is available on contributions made in a year of assessment up to a specified percentage of the individual’s net relevant earnings, subject to an “earnings limit” of €115,000 (as provided for in section 790A), for that year) as follows –

Age

Percentage

under 30

15%

30 to 39

20%

40 to 49

25%

50 to 54

30%

55 to 59

35%

60 and over

40%

The 30% rate also applies to any individual, below age 55, whose income is derived wholly or mainly from certain sporting activities.

The income and gains arising from the investment of qualifying premiums or contributions are exempt from tax.

An annuity contract which does not vest (i.e. mature or come into payment) by the date of an individual’s 75th birthday is deemed to vest (i.e. it becomes a “vested RAC”) on that date. However, no benefits may be taken from the RAC contract where it is deemed to vest in this manner. Where the individual is 75 before 25 December 2016 (i.e. the date on which Finance Act 2016 was passed), the annuity is deemed to vest on 25 December 2016, and transitional arrangements in section 784(2F) as regards the taking of benefits apply.

The vesting of an RAC in this manner is a Benefit Crystallisation Event for the purposes of Chapter 2C of Part 30. In addition, the amount of cash and other assets in a vested RAC representing the individual’s rights under the contract at the time he or she dies is treated as if it was cash and other assets of an ARF and the taxation provisions in section 784A(4) apply accordingly.

Similar provisions apply to Personal Retirement Savings Accounts (see Chapter 2A of Part 30).

783 Interpretation and general (Chapter 2)

(1)(a) “approved retirement fund” and “approved minimum retirement fund” have the meanings assigned to them by sections 784A and 784C respectively.

“close company” has the same meaning as in section 430.

“connected person” has the same meaning as in section 10.

“director” is a member of the board of directors of a company, a sole director of a company, or where the affairs of a company are managed by the members, such a member.

“employee” includes, in addition to an employee in the ordinary sense, any person taking part in the management of the affairs of the company other than a director.

“participator” has the same meaning as in section 433.

(1)(a) & (b) “proprietary director” and “proprietary employee” mean, respectively, a director or employee of a company who beneficially owns, or is able, directly or indirectly, to control, more than 15 per cent of the ordinary share capital of the company. For the purposes of these definitions, ordinary share capital owned by a spouse, civil partner, child, child of the civil partner or dependant of a director or employee, or by a trust for the benefit of the director or employee or the spouse, civil partner, child, child of the civil partner or dependant of the director or employee, is treated as owned by the director or employee.

(1)(a) & (c) “sponsored superannuation scheme” is any arrangement made to provide benefits on retirement, death or disability for persons serving in an office or employment under which any part of the cost of the benefits is borne otherwise than by such persons themselves. An employee is regarded as bearing the cost of any payment borne by another person if that payment is chargeable as income in his/her hands (for example, if the cost of retirement benefits borne by the employer is treated as income of the employee under section 777).

(2)(a) & (b) “pensionable office or employment” is one to which a “sponsored superannuation scheme” relates. Where, however, the only benefit provided by such a scheme is a right to benefits referred to in section 772(3)(b) and (c) or a similar benefit under a statutory scheme, a member of the scheme is not to be regarded as being in a pensionable office or employment. A pensionable office or employment is to be regarded as such even though the duties are performed wholly or partly outside the State or the holder is not chargeable to tax in respect of it. Where an employee elects not to join a sponsored superannuation scheme membership of which is open to that employee, he/she is not to be regarded as having a pensionable office or employment.

(2)(c) Employee contributions to a pension scheme providing only for the benefits referred to in section 772(3)(b) and (c) will be treated as qualifying an RAC for the purpose of applying the age-based limits to contributions generally.

(3) “relevant earnings” means either —

  • income from employment other than pensionable employment,
  • income from any property attached to or part of the emoluments of any such employment, or
  • income from a trade or profession,

but does not include income from an employment with an investment company of which the recipient is a proprietary director or proprietary employee.

(4) The relevant earnings of a person are not to be regarded as that of his/her spouse or civil partner even if they are jointly assessed for tax purposes (under section 1017 or 1019). This allows the person to claim relief in his/her own right in respect of premiums paid so as to secure an annuity for himself or herself.

(5) The Revenue Commissioners have general powers to make regulations as regards matters of procedure if it should be found necessary to do so. Specific power is given to provide for —

  • the manner and form of claims to relief by self-employed, etc persons, assurance companies and the trustees of approved schemes;
  • the time limit for such claims;
  • the production of accounts, etc by the trustees of approved trust schemes;
  • the application of other provisions of the Income Tax Acts.

No such regulations have been made to date.

(6) There is a penalty of €3000 for making a false claim or for aiding or abetting a false claim.

Relevant Date: Finance Act 2021