Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 2C

Limit on tax-relieved pension funds

Overview

Chapter 2C and associated Schedule 23B provide for a maximum allowable pension fund on retirement for tax purposes. The Chapter imposes a limit or ceiling on the total capital value of pension benefits that an individual can draw in their lifetime from tax-relieved pension products (including all Public Sector pension schemes), where those benefits come into payment for the first time on or after 7 December 2005. This is called the “standard fund threshold” or SFT and, from 1 January 2014, is set at €2m. In certain circumstances, a higher threshold (called the “personal fund threshold” or PFT) may apply. This arises if, on 1 January 2014 the capital value of an individual’s “uncrystallised” pension rights on that date (i.e. pension rights which the individual had not become entitled to on that date) when aggregated with the capital value of the individual’s “crystallised” pension benefits, if any, since 7 December 2005 (i.e. pension benefits which the individual has already become entitled to since 7 December 2005) exceeds the SFT and certain notification requirements are met.

In should be noted that for the purposes of the SFT limit, where the owner of an RAC or a PRSA does not take benefits from the RAC or PRSA by age 75, such benefits are treated as commencing on the date of the owner’s 75th birthday or on 25 December 2016 (i.e. the date Finance Act 2016 was passed), if he or she is 75 years of age before 25 December 2016, notwithstanding that benefits have not actually commenced by the appropriate date.

Where the Revenue Commissioners have issued a PFT certificate under the legislation as it applied prior to the passing of the Finance (No.2) Act 2013, the amount stated in that certificate is the individual’s PFT adjusted, as appropriate, by the relevant earnings factors). The Minister for Finance has discretion to increase both the SFT and PFTs in line with an earnings factor.

On or after 7 December 2005, on each occasion an individual becomes or, as outlined above, in the case of an RAC or a PRSA is deemed to become, entitled to receive a benefit under a pension arrangement for the first time (a “benefit crystallisation event” or BCE), they use up part of their standard or personal fund threshold. At each BCE a capital value must be attributed to the benefits that crystallise and the value is then tested by the pension scheme administrator against the individual’s appropriate fund threshold. In respect of defined benefit (DB) type arrangements, for the purposes of placing a capital value on the uncrystallised pension rights of an individual and for establishing the capital value of benefits taken in respect of those rights, a valuation factor must be used for the purposes of Chapter 2C of this Part and Schedule 23B to this Act.

For the purposes of calculating the capital value of DB scheme uncrystallised pension rights on the “specified date” (i.e. 1 January 2014) for PFT notifications, the valuation factor is 20. However, an administrator in determining the capital value of DB pension rights at a BCE arising after 1 January 2014, must use a factor of 20 in respect of that part of the pension rights, if any, accrued at 1 January 2014 and a relevant age-related factor for the part of the pension rights accrued after that date. The appropriate age-related factor to use depends on the age the individual has reached at the time he or she becomes entitled to the pension rights. The table in Schedule 23B specifies the relevant age-related factor in column 2 opposite the age attained as shown in column 1.

The exception to the foregoing is where the administrator of a relevant pension arrangement had (for the purposes of a PFT application) before 1 January 2014 (under provisions that applied up to 7 December 2010), and with prior Revenue approval, used a factor other than 20, having demonstrated that the alternative (higher) factor was more appropriate in a particular case. Where such an alternative factor has been used in determining a PFT, the factor to be used in respect of that arrangement for all purposes of Chapter 2C and Schedule 23B is —

  • on the specified date (i.e. 1 January 2014) the alternative factor, and
  • after 1 January 2014, the higher of the alternative factor and the relevant age-related factor.

Where however an alternative factor (which has Revenue approval) had been used prior to 7 December 2010 for the purposes of calculating a PFT, that same factor must be used for determining the capital value of any related BCEs.

When the capital value of a BCE either on its own or, when aggregated with BCEs that have been taken earlier, exceeds the individual’s appropriate fund threshold, a “chargeable excess” arises equal to the amount by which the fund threshold is exceeded. The whole of the amount of the chargeable excess is then subject to an up-front income tax charge of 40% payable by the pension scheme administrator in the first instance (although both the administrator and the individual are made jointly and severally liable to the charge). This charge is without prejudice to any other income tax charge that might arise on the balance of the chargeable excess as and when benefits are taken under the scheme whether by way of pension, annuity, taxable cash lump sum or distribution from an ARF, AMRF etc.

Where a BCE gives rise to a chargeable excess, the pension scheme administrator must make a return on Form 787S and remit the necessary payment to the Collector-General within 3 months of the end of the month in which the BCE giving rise to a chargeable excess occurs.

This Chapter also sets out how matters relating to Pension Adjustment Orders (PAO) are dealt with under the SFT regime. In summary, where a pension arrangement is subject to a PAO any chargeable excess tax arising must be apportioned between the member and the non-member former spouse or partner in accordance with the terms of the PAO.

Schedule 23B sets out the operational aspects of the arrangements, including:

  • how the value of an individual’s uncrystallised pension rights on the specified date (i.e. 1 January 2014) are to be calculated for both defined contribution and defined benefit type arrangements,
  • the various types of BCE and when they are deemed to occur e.g. entitlement to a pension, annuity, lump sum etc. under a pension arrangement,
  • how the capital value of a BCE is to be calculated for the various types of BCE identified,
  • 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.

787O Interpretation and General (Chapter 2C)

Summary

This is the interpretation and general section for Chapter 2C. It defines terms used in this Chapter and in the associated Schedule 23B, sets out what the relevant valuation factor is and provides that where more than one benefit crystallisation event occurs on the same day, the individual concerned must decide the order in which they are deemed to occur for the purposes of the Chapter. It also provides that where a pension arrangement is subject to a pension adjustment order (PAO), the PAO must be ignored for the purposes of applying for a Personal Fund Threshold (PFT) or calculating the value of a BCE.

Details

(1) The terms used in the Chapter are largely self-explanatory but the following should be noted.

accrued pension amount”, which is defined in relation to a BCE that is a defined benefit (DB) pension, means the part (if any) of the annual amount of pension payable at the BCE, which is “P” in the relevant formula in Schedule 23B, that had accrued under the arrangement on the specified date (i.e. 1 January 2014). The purpose of this definition is to facilitate a “split BCE” calculation where an individual has a DB pension at the point of retirement, part of which has been accrued by the specified date and part after that date. The manner in which the accrued pension amount is to be determined is set out in subsection (2A).

administrator” is given a broad definition given the range of relevant pension arrangements (as defined) that it is intended to cover. It is defined to include, in particular, administrators of private sector occupational pension schemes (paragraph (a)), retirement annuity contracts (paragraph (b) – normally Life Assurance Companies) and PRSA administrators (paragraph (c)). Paragraph (d) makes particular reference to the definition of administrator in the case of Public Sector schemes and provides that, for such schemes, the person who is to be the administrator is to be specified by regulations to be made under section 787U. The reason for this is to take account of the variety of administrative arrangements that exist for Public Sector pensions – the regulations will deal with the minutiae of what legal person is responsible for ensuring that the tax payment arising on a chargeable excess is made.

applied” means the application of a transfer amount in accordance with specified provisions of the Family Law Acts or the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010. Under a PAO the court designates a portion of an individual’s pension as belonging to his or her spouse, civil partner, former spouse, former civil partner or dependent members of the individual’s family. The spouse or civil partner becoming entitled to the benefit under the PAO (but not dependents) may request the trustees of the pension scheme to transfer the benefit to provide an independent benefit for the spouse under the same or another pension scheme. The trustees can also, in certain circumstances, effect a transfer on their own initiative.

designated benefit”, “retirement benefit” and “transfer amount” have the meaning assigned to them, respectively, in the Family Law Acts and the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010.

designated benefit”, in relation to a PAO, means “an amount determined by the trustees of the scheme concerned, in accordance with relevant guidelines, and by reference to the period and percentage of the retirement benefit specified in the order …..”.

The period referred to is the period of reckonable service of the member spouse or civil partner, prior to the granting of the decree or dissolution, which is to be taken into account. This could be, for example in the case of a married couple, the period of reckonable service prior to the decree during which the couple were married to each other. The percentage refers to the percentage of the retirement benefit accrued during that period which is to be paid to the non-member spouse or civil partner.

excepted circumstances” – Schedule 23B sets out the situations in which a benefit is deemed payable to an individual from a pension arrangement. It is at this point, known as a benefit crystallisation event or “BCE”, that the capital value of the pension fund is determined and tax becomes payable on any excess over the allowable limit. One of the BCEs provided for is essentially anti-avoidance in nature and is designed to prevent commencement of a pension at a low level so that the capital value of the fund at retirement is low for tax purposes, with the value of the pension increasing substantially thereafter. The definition of “excepted circumstances” provides for special rules for dealing with general pay-related pension increases where there is no issue of avoidance. Essentially, where the pension increase is linked to pay increases in the sector in which the individual was employed, then increases in excess of the permitted margin will not give rise to separate BCEs.

fund administrator” is defined to mean the QFM of an ARF or AMRF or the PRSA administrator of a vested PRSA, the beneficial owner of which is the non-member spouse or partner and the assets of which originated, in whole or in part, from the nonmember’s exercise of a relevant option (i.e. an “ARF option”) in relation to the nonmember’s transfer arrangement (i.e. the independent arrangement to which a transfer amount was paid from the relevant member’s pension arrangement in respect of the nonmember’s designated benefit under the PAO). It also includes the QFM/PRSA administrator of an ARF/AMRF or vested PRSA the assets of which were previously held in another ARF/AMRF or vested PRSAs whose assets originated from the transfer arrangement. In essence, the QFM or PRSA administrator of any ARF/AMRF or vested PRSA beneficially owned by the non-member spouse or partner which contains any assets that originated from the transfer arrangement (regardless of the number of funds the assets may have passed through in the meantime) is considered to be a fund administrator for the purposes of these provisions.

maximum tax relieved pension fund” is defined in terms, not of an amount that can be built up with tax relieved contributions, but rather as the limit on the capital value of pension benefits (benefit crystallisation events) that may be drawn down by an individual on or after 7 December 2005.

“non-member” is defined to exclude PAOs made in relation to a “dependent member of the family” within the meaning of specific provisions of the Family Law Acts. In essence, this excludes PAOs for dependent children up to 18, or 23 if in full time education, and dependent children with physical or mental disabilities. This means that chargeable excess tax arising in a situation where a PAO has been made in favour of a dependent child will continue to be recovered by the administrator solely from the portion of the retirement benefit payable to the pension scheme member under the scheme, having regard to the terms of the PAO.

pension adjustment order” means an order made in accordance with specified provisions of the Family Law Acts or the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010. It also includes any variation of such an order. The court can in the light of new evidence or changed circumstances vary, or further vary, a PAO by way of an order under specified provisions of the aforementioned Acts. The PAO, or any variation, must not have been suspended (or if so, has been revived) or discharged – in other words the PAO must be operational at the time the individual’s (i.e. the member spouse’s or civil partner’s) retirement benefits come on stream. Only PAOs relating to retirement benefits are covered. PAOs can also be made in relation to contingent benefits i.e. death-in-service benefits but, as death-in-service does not trigger a “benefit crystallisation event” under Chapter 2C, these are not relevant.

“personal fund threshold” (PFT) is the personal maximum tax relieved pension fund for an individual which may apply instead of the standard fund threshold (SFT) where the capital value of an individual’s pension rights on 1 January 2014 exceeds €2m (similar provisions applied when the scheme was introduced in 2005 and subsequently amended in 2010). The Minister for Finance may allow for an increase in a PFT from 2015 in line with an earnings factor.

Individuals with pension rights whose capital value exceeds €2m on 1 January 2014 can protect that higher capital value (up to an amount not exceeding the previous SFT of €2.3m) by claiming a PFT from the Revenue Commissioners.

Where the Revenue Commissioners have issued a PFT certificate under the legislation as it applied before the passing of Finance (No.2) Act 2013, the amount stated in that certificate (increased, as appropriate, in accordance with the relevant earnings adjustment factors) is the individual’s PFT.

In any other case, the amount of the PFT is the lesser of €2.3m and the aggregate of the capital value of all pension benefits which the individual has already become entitled to since 7 December 2005, if any, (i.e. “crystallised” pension rights) plus the capital value of any “uncrystallised” pension rights which the individual had on 1 January 2014 (i.e. pension rights which the individual was building up but had not become entitled to on that date). All PFTs claimed on or after 1 January 2014 will, therefore, fall somewhere between €2m and €2.3m.

relevant member” is defined as being a member of a relevant pension arrangement in respect of whose retirement benefit under the arrangement a PAO has been made in favour of a non-member spouse or partner. Where a member transfers his or her rights under the pension arrangement in respect of which the PAO was made to another pension arrangement he or she is still considered to be a relevant member for the purposes of the legislation.

relevant pension arrangement” is defined to include:

  • All Revenue approved occupational pension schemes, including AVC arrangements.
  • All Revenue approved retirement annuity contracts and trust schemes for professionals such as solicitors, accountants and dentists.
  • All PRSA contracts.
  • Qualifying overseas pension plans.
  • All public service pension schemes as defined in the Public Service Superannuation (Miscellaneous Provisions) Act 2004.
  • All statutory schemes – that is schemes established by or under any enactment – all statutory schemes that fall outside of the definition of public service pension scheme are captured here.

standard fund threshold” is the generally applicable “maximum tax relieved pension fund”, for an individual and is set at €2m for 2014. The Minister for Finance may increase the SFT from 2015 in line with an earnings factor.

subsequent administrator” is defined for the purposes of pin-pointing the correct administrator of a non-member spouse or partner’s independent pension arrangement to which the provisions of the legislation will apply. Conceivably, the non-member spouse after taking a transfer value in respect of his or her designated benefit under the PAO to a separate scheme to provide an independent retirement benefit, could make further transfers to different pension schemes (e.g. from one PRSA to another and so on). The administrator of each of these schemes could be said to be a “subsequent administrator”. However, the “subsequent administrator” that the legislation wishes to target and identify is the administrator of the most recent scheme to which the non-member’s pension rights have been transferred (i.e. the scheme under which the non-member currently has rights at the time any chargeable excess tax arises) or the administrator of the scheme that has actually paid out the retirement benefits to the non-member where this has occurred at the time the chargeable excess tax arises.

transfer amount” under the Family Law Acts and the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 means, in effect, the actuarial value in money terms of the designated benefit payable under the PAO. The need to value the designated benefit may arise where the non-member spouse or civil partner exercises his/her entitlement to have the value of the designated benefit applied to provide the non-member spouse or civil partner with an independent and separate benefit i.e. by seeking the splitting of the pension. A pension split may be applied for at any time prior to the commencement of benefits under the PAO.

transfer arrangement” is defined as a relevant pension arrangement to which a transfer amount has been applied to provide the non-member with an independent benefit. In that regard, however, note in particular that transfer arrangement also includes the member’s pension scheme where the “transfer amount” is used to provide an independent benefit for the non-member within that scheme. This in turn means that the definition of “subsequent administrator” also encompasses the administrator of the member’s scheme where those circumstances apply i.e. the administrator and the “subsequent administrator may be the same person. In addition, to ensure that it captures not just the initial independent scheme to which the non-member spouse may have transferred his or her rights under the PAO, the definition also includes any other pension arrangement to which the non-member spouse or partner’s accrued rights under the initial transfer arrangement has been transferred or subsequently transferred.

“vested RAC” is a retirement annuity contract (RAC) from which the owner has not taken retirement benefits, either by way of an annuity, a retirement lump sum or a transfer under the ARF options, on or before the date of his or her 75th birthday. Under subsection (6), where an RAC owner attains the age of 75 before 25 December 2016 (i.e. the date of passing of Finance Act 2016), without having taken benefits, the RAC is deemed to become a vested RAC on 25 December 2016. There are similar provisions in section 790D(1) in relation to “vested PRSAs”.

(2) The relevant valuation factor to be used for the purposes of calculating the capital value of a DB scheme benefits is 20 on the “specified date” (i.e. 1 January 2014) and a variable age–related factor after the specified date. In effect, this means that an individual applying for a PFT must use a relevant valuation factor of 20 in determining the capital value of his or her uncrystallised DB pension rights on 1 January 2014, whereas an administrator in determining the capital value of DB benefits at a BCE arising after 1 January 2014, will use a factor of 20 in respect of that part of the DB pension accrued at 1 January 2014 and the relevant age related factor for the part of the pension accrued after that date. The appropriate age related factor to use depends on the age the individual has reached at the time he or she becomes entitled to the pension. The table in Schedule 23B specifies the relevant age-related factor in column 2 opposite the age attained as shown in column 1.

The exception to the foregoing is where the administrator of a relevant pension arrangement had (for the purposes of a PFT application) before 1 January 2014 (under provisions that applied up to 7 December 2010), and with prior Revenue approval, used a factor other than 20, having demonstrated that the alternative (higher) factor was more appropriate in a particular case. Where such an alternative factor has been used in determining a PFT, the factor to be used in respect of that arrangement for all purposes of Chapter 2C and Schedule 23B is –

  • on the specified date (i.e. 1 January 2014) the alternative factor, and
  • after 1 January 2014, the higher of the alternative factor and the relevant age-related factor.

(2A)(a) Where an individual makes a PFT notification under the revised SFT arrangements the accrued pension amount is the annual amount of pension included in the statement which the administrator of each DB arrangement must give to the individual as part of the underlying documentation required to make the notification (this is, in effect, “AP” in the formula in paragraph 1(2)(b) of Schedule 23B for calculating an individual’s uncrystallised pension rights for a DB arrangement on 1 January 2014).

(2A)(b) In any other case, i.e. individuals who hold 2005 or 2010 PFTs and individuals who do not qualify for a PFT, the accrued pension amount is the annual amount of pension that would be represented by “AP” in the formula (referred to above) for calculating an individual’s uncrystallised pension rights on 1 January 2014, if those rights were being calculated. The accrued pension amount will be determined by the administrator at the point of the individual’s retirement.

(3) Where two benefit crystallisation events occur on the same day, the individual must determine the order in which they are to be deemed to occur. This could happen, for example, where a lump sum and pension entitlement arise on the same day. It becomes important where an individual may have a number of different pension arrangements with different administrators. If entitlements from different arrangements fell on the same day and were placing the individual into a chargeable excess position, the individual might wish to choose which benefit entitlement should give rise to the chargeable excess and which administrator should deal with it.

(4) Schedule 23B supplements Chapter 2C and shall be construed as one with that Chapter.

Where, on or after 7 December 2005, an individual is a relevant member of a relevant pension arrangement (which implies that the pension arrangement is subject to a PAO) then, in calculating the capital value of the relevant member’s pension rights for the purposes of-

  • a PFT notification under section 787P, and
  • determining the amount of a BCE occurring on or after 7 December 2005 arising under the pension arrangement (e.g. a pension, annuity, lump sum etc.) in respect of that member,

the benefits designated to a spouse or civil partner pursuant to the PAO or, where a transfer amount has been applied to provide an independent benefit for the non-member spouse or partner, the designated benefit that would otherwise have been payable if no transfer had taken place, are to be included in the calculations, as if the PAO had not been made. Basically, the administrator in both situations has to ignore the PAO and calculate the capital value of the pension rights or pension benefit as if the PAO had never been made.

In addition, where the relevant member takes a transfer value (or subsequent transfer values) to another scheme(s), the administrator of the new scheme, in calculating the capital value of a BCE and in providing information for PFT notification purposes in relation to the relevant member, must equally make those calculations as if the PAO had not been made. In such situations, the administrator must include in those calculations the sum that would have been transferred if there had been no PAO. The wording of the legislation implies that this requirement applies regardless of the number of transfers that take place and regardless of whether the transfer represents all or a part of the relevant member’s accrued rights under the original scheme to which the PAO applied. In other words, if the transfer was, say, split over two PRSAs or BOBs, each of the administrators would have to have regard to the legislation for PFT or BCE purposes.

In summary, any benefit arising under the PAO or pension rights designated under the PAO are deemed to be benefits or rights arising to the relevant member for the purposes of determining whether the relevant member is entitled to a PFT or whether his or her standard fund threshold or personal fund threshold has been exceeded at a BCE. This applies regardless of whether the benefit under the PAO is paid as a designated benefit from the member spouse’s or civil partner’s scheme or whether a transfer amount has been applied to provide the non-member spouse or civil partner with an independent benefit in accordance with the Family Law Acts and the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010.

The corollary of the PAO benefit being included in the calculation of the relevant member’s PFT and in the capital value of the relevant member’s pension at a BCE is that it is excluded from any such calculations in relation to the non-member spouse or civil partner, if he/she were to have independent pension provision in his/her own right.

(6) Where the owner of a Retirement Annuity Contract (RAC) attains the age of 75 before 25 December 2016 (i.e. the date of passing of Finance Act 2016), without having taken benefits, the RAC is deemed to become a vested RAC on 25 December 2016.

Relevant Date: Finance Act 2020