Revenue Note for Guidance

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Revenue Note for Guidance

784 Retirement annuities: relief for premiums

Summary

This section defines the type of individual who may claim relief in respect of retirement annuity premiums and the kind of payments which may qualify for that relief. It also exempts the investment income of a fund maintained for the purpose of a scheme approved under the section.

This section also includes provisions relating to “vested RACs” (as defined in section 787O(1)). 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. become a “vested RAC”) on that date. 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 that date and the transitional arrangements in subsection (2F) 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.

Details

(1) Relief, to the extent authorised by section 787, may be given to an individual —

  • who pays a “qualifying premium” (that is, a premium under an annuity contract approved by the Revenue Commissioners the main benefit secured by which is, or, but for the fact that the individual elects under subsection (2A) to have the proceeds of the contract transferred to himself or herself or to an approved retirement fund (ARF), would be, a life annuity for the individual in his/her old age or a contract under section 785 (contracts for dependants), and
  • who is or was chargeable to tax for any year of assessment in respect of “relevant earnings” from any trade, profession, office or employment (or would be so chargeable but for the fact that his/her profits or gains are or were insufficient) and paid a qualifying premium for that year.

(2) Subject to subsections (2A) and (3) and to section 786, the basic conditions for approval of an annuity contract are that it must be made with a person lawfully carrying on in the State the business of granting annuities on human life and where the provider is not established in the State, it must be an insurance undertaking authorised to transact insurance business in the State under the relevant EU Directive (Directive 2002/83/EC of 5 November 2002) – thus applying the regulatory environment imposed by that Directive on such undertakings; and the only benefits it may provide are —

  • except where the individual opts under subsection (2A), a non-commutable and non-assignable life annuity for the individual, commencing at such age between 60 and 75 as he/she may choose;
  • a non-commutable and non-assignable life annuity for the widow (or widower) or surviving civil partner of the individual, commencing on the individual’s death and not greater in amount than the individual’s own annuity;
  • a refund of premiums plus interest and bonuses if, on the death of the individual before commencement of his/her annuity, no annuity is then payable to the individual’s widow (or widower) or surviving civil partner.

The contract may, however, include provisions which will allow a part of an individual’s retirement annuity (but not a spouse’s, civil partner’s or dependant’s annuity) to be commuted for a cash sum not exceeding 25 per cent of the value of the annuity. This facility will be available to the individual even where he or she opts under subsection (2A) to have the balance of the value of the annuity transferred either to an ARF or direct to himself or herself.

As the contract, to be eligible for approval, must secure a life annuity for the individual himself or herself, a contract, for example, which secured only an annuity for the individual’s widow would not be capable of approval. Also, except in the circumstances mentioned above, the provision of benefits in the form of non-taxable lump sums is precluded, including those which might arise from the surrender, commutation or assignment of an annuity.

(2A) The Revenue Commissioners are not to approve an annuity contract on or after 6 April, 1999 unless it provides an option for the individual to have the value of the annuity, after deduction of any lump sum in part commutation of the annuity and an amount which the person with whom the contract is made is required to pay into an approved minimum retirement fund (section 784C), paid to him or her or to an ARE (section 784A).

(2B) Where an individual opts, as above, to have the value of the retirement contract paid to himself or herself, the amount of the payment is to be regarded as income of the individual chargeable to income tax under Schedule E and PAYE applies to it. This also applies to payments under an annuity contract from a foreign source – thus placing domestic and foreign providers on an equal footing as regards their obligations. Unless a revenue payroll notification in respect of the individual has been received from Revenue, the person making the payment must deduct tax from the payment at the higher rate of income tax.

(2C) However, a retirement annuity contract will not cease to be an approved contract because of any provision in law (whether or not in the contract) whereby the parties to the contract may cancel it and transfer assets into one or more Personal Retirement Savings Account(s) of which the individual, who is a party to that contract, is the contributor.

(2D) Revenue approval of a retirement annuity contract will not be prejudiced by any rule in the contract that allows the annuity secured by the contract to be commuted sufficient to discharge any tax charge on a chargeable excess, which arises in connection with that annuity, under the provisions of Chapter 2C (relating to the maximum tax-relieved pension fund).

(2E) The provision of the encashment option (as provided for in section 787TA) in a retirement annuity contract will not affect Revenue approval of the contract.

(2F) A retirement annuity contract, which becomes a “vested RAC” (within the meaning of section 787O(1)) when an individual attains the age of 75 years, without having drawn down benefits, shall not cease to be an approved contract where the insurance undertaking with which the contract is made–

  • in the case of a contributor who was 75 years of age prior to 25 December 2016 (i.e. the date on which Finance Act 2016 was passed)–
    • pays an annuity or a retirement lump sum to the contributor, or
    • transfers an amount to the contributor or to an ARF
    on or before 31 March 2017, or
  • regardless of whether the RAC becomes vested on the date the contributor attains the age of 75 years or on 25 December 2016, uses the annuity assets, to discharge any liability to chargeable excess tax under Chapter 2C of Part 30 arising as a result of the deemed vesting of the annuity contract.

In the case of an individual who attains age 75 before 25 December 2016, the use of the annuity assets to discharge chargeable excess tax is to be in priority to any payments to the individual or transfer to the individual or to an ARF.

(3) The Revenue Commissioners have discretion to modify, within certain limits, the conditions for approval of an annuity contract set out above even though the contract may cover one or more of the following matters —

  • an annuity after the individual’s death to a dependant other than a widow, widower or surviving civil partner;
  • retirement before the age of 60 on grounds of ill-health;
  • retirement before the age of 60 (but not before the age of 50) in occupations where the customary retirement age is before 60;
  • an annuity guaranteed for a minimum period not exceeding 10 years notwithstanding the death of the annuitant;
  • the assignment to the beneficiary of an annuitant’s estate of the part of a guaranteed annuity payable after the annuitant’s death.

(4) Contributions under trust schemes, or part of trust schemes, approved under the section are eligible for relief in the same way as “qualifying premiums”. To qualify for approval, a scheme must be established under irrevocable trusts; and its rules must impose the same limitation on the annuities to be provided as are applicable in the case of annuity contracts with assurance companies. The income arising from the investments and deposits of a fund maintained for the purposes of an approved trust scheme are is exempt from income tax.

(4A) At any time when an annuity provider is not established in the State, the provider must enter into an enforceable contract with the Revenue Commissioners to meet all of the duties and obligations imposed by section 784 and Chapter 2C of this Part and section 125B of the Stamp Duties Consolidation Act 1999, or appoint an administrator resident in the State to carry out those duties. These requirements also extend to an annuity provider under section 785. Any contract between the Revenue Commissioners and an administrator is to be governed by the laws of the State and the courts of Ireland are to have exclusive jurisdiction in determining any dispute arising under such contracts. Where an administrator opts to appoint a person resident in the State to discharge the duties and obligations, the person’s identity and the fact that they have been appointed must be notified to the Revenue Commissioners.

(4B) The Revenue Commissioners may by way of notice seek information from an annuity provider about annuity contracts and the payments made under them. The information sought can include the name, address and PPS number of the annuity holder and individuals who receive payments under the annuity contract, and the amount of any payments. The provision can apply to both domestic and foreign providers and gives the Revenue Commissioners discretionary power to get access to relevant information about payments should they deem it necessary.

(5) The Revenue Commissioners have power to withdraw their approval of an annuity contract or a trust scheme where appropriate.

(6) Approved annuity contracts are excluded from certain legal requirements regarding notices of assignment, since it is a condition of approval that the annuities must be non-assignable.

(7) Annuities payable in respect of annuity contracts approved under this section or section 785 are regarded as a pension chargeable to tax under Schedule E and the PAYE system accordingly applies to it.

Where an annuity contract becomes a vested RAC, within the meaning of section 787O(1), the amount of cash and other assets in the vested RAC which represent 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.

Relevant Date: Finance Act 2020