Revenue Note for Guidance

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Revenue Note for Guidance

787Q Chargeable excess

Summary

This section deals with the concept of the chargeable excess and when such excess arises. It also provides that, where the tax on a chargeable excess, or any part of it, is paid by an administrator of a pension arrangement, then so much of the tax so paid shall itself form part of the chargeable excess unless the individual’s pension rights are actuarially reduced to reflect the amount of tax so paid or the administrator is otherwise reimbursed for the tax so paid.

In situations involving pension adjustment orders (PAOs), the section provides that where a non-member spouse or partner’s share of chargeable excess tax is recovered from a pension already in payment, from a transfer amount being made to another scheme or from an ARF, AMRF or vested PRSA beneficially owned by the non-member spouse or partner, the administrator (including the QFM) is entitled to dispose of or appropriate such assets of the pension arrangement, ARF, vested PRSA etc. as are required to meet the amount of the tax due and that no legal action can be taken by the non-member against such persons for doing do.

Public sector pension administrators may recover tax paid by them on a chargeable excess and any tax so paid is a debt owing to the administrator from the individual. Recovery may be by way of reimbursement from the individual’s pension entitlements, by direct payment from the individual or a combination of the foregoing. Where a public sector scheme is subject to a PAO and no transfer amount has been applied to provide an independent benefit for the non-member spouse or partner, or a transfer amount has been applied to provide an independent benefit within the same public sector scheme, the nonmember can equally avail of the public service reimbursement options.

Specifically in the case of public sector schemes, from 1 January 2014, the amount of any reimbursement from a lump sum is essentially limited to a maximum of 20% of the net lump sum payable to the individual, after any lump sum tax paid under section 790AA(3)(a)(i) or (3)(b)(i)(I) has been deducted, with any balance recoverable from the gross public sector pension payable, over a maximum period of 20 years. However, amounts that would otherwise be appropriated by the administrator from the individual’s lump sum and amounts that would otherwise be recovered from the individual’s gross pension, may be discharged by way of direct payment by the individual to the administrator or by way of a mixture of direct payment and appropriation of pension benefits. As an alternative to the forgoing, an individual may opt to have the chargeable excess tax deducted entirely from the gross pension over 20 years.

Details

(1) Income tax will be charged in accordance with section 787R where a benefit crystallisation event (BCE) occurs in relation to an individual who is a member of a relevant pension arrangement (as defined) on or after 7 December 2005 and either of two conditions set out in subsection (2) are met. A BCE is, in effect, any occasion where an individual becomes entitled to a pension benefit (e.g. lump sum, pension, annuity, ARF option).

(2) The conditions are—

  • that the amount of the BCE arising exceeds the amount of the individual’s standard fund threshold (SFT) or personal fund threshold (PFT) that is available at the date of that BCE. For example, if the capital value of the BCE arising is, say, €3.3m, no prior BCE’s have occurred and the individual has an SFT of €2m, then the amount of the BCE exceeds the amount of the SFT by €1.3m.
  • that none of the individual’s SFT or PFT is available at the date of the BCE. This would arise, for example, if there has been previous BCE’s the value of which equal or exceed the individual’s SFT or PFT.

(3) The amount of an individual’s SFT or PFT that is available at the date of a BCE is to be determined in accordance with paragraph 4 of Schedule 23B.

(4) Where the conditions in subsection (2) are met, the amount by which the current BCE exceeds the amount of the SFT or PFT available at that time, or the whole of the amount of the BCE where none of the SFT or PFT is available at that time, is to be called the “chargeable excess”.

(5) Where the tax arising on a chargeable excess is paid by the pension scheme administrator and is not recovered from the individual either by way of an actuarial reduction in the pension, from the pension fund itself (in the case of a defined contribution type arrangement) or perhaps from the tax free lump sum, then the amount of the tax paid will itself be considered a benefit to the individual and be subject to tax in its own right.

For example, if the capital value of the pension benefit coming into payment is €3.3m which gives rise to a chargeable excess of €1.3m (i.e. €3.3m – standard fund threshold of €2m) then the tax due would be €1.3m x 41% = €533,000. If, however, the administrator intends to pay the €533,000 without recovering it from the individual so that the pension is still based on a capital fund of €3.3m, then the following grossing up calculation must be carried out to arrive at the correct tax liability due:

  • chargeable excess of €1.3m is taken to equate to a post-tax figure of 59% (i.e. assume that the €1.3m is the after-tax balance of a chargeable excess which has been subject to tax at 41%).
  • therefore the pre-tax equivalent chargeable excess figure is €1.3m divided by 59 x 100 = €2,203,389.
  • a chargeable excess of €2,203,389 taxed at 41% would equate to a tax charge of €903,393 and this is the tax the administrator would have to pay to satisfy the requirements of Chapter 2C

Subsection (5) adequately deals with situations arising under a PAO where an administrator or a subsequent administrator of a transfer arrangement is required to pay the share of the chargeable excess tax arising for a member or a non-member from their pension benefits before the benefits actually come into payment. This subsection sets out the position where the non-member’s benefits have crystallised before the member’s BCE giving rise to the chargeable excess tax has occurred, and the non-member is receiving a pension directly from the pension scheme or has opted for an ARF, AMRF or vested PRSA.

(5A)(a) Subsection (5A) deals with situations where the non-member’s retirement benefits arising from the PAO have crystallised before the member’s BCE giving rise to the chargeable excess tax has occurred and the non-member is receiving a pension directly from his or her pension scheme, or the non-member has opted for an ARF, AMRF or vested PRSA, or the non-member’s benefits while not yet crystallised are transferred to another pension arrangement. The subsection provides that, notwithstanding the existing restrictions on the reduction of a pension actually in payment contained in section 59B of the Pensions Act 1990, where a non-member’s benefits have crystallised before the occurrence of the relevant member’s BCE giving rise to a liability to chargeable excess tax, and the non-member is receiving a pension payable under the transfer arrangement, any tax paid by the subsequent administrator in respect of the non-member’s share of the chargeable excess tax is itself treated as part of the tax, unless the non-member’s benefit is reduced to fully reflect the tax paid, or the non-member reimburses the administrator for the tax so paid.

(5A)(b) A pension scheme administrator, QFM or PRSA administrator who is liable to pay a non-member’s share of chargeable excess tax is entitled to dispose or appropriate such assets of the scheme, ARF and/or AMRF, or vested PRSA as are required to meet the liability, and the non-member must allow such disposal or appropriation.

(5A)(c) Where–

  • pension benefits are reduced by a subsequent administrator, or
  • the assets of a scheme, ARF, AMRF or vested PRSA are disposed of or appropriated by a scheme administrator, OFM or PRSA administrator

in accordance with this subsection, a court action may not be taken against such persons on account of such sale or appropriation.

(6) In the case of public sector administrators, any tax paid on a chargeable excess will be a debt owing to the administrator from the individual pensioner and the administrator will be reimbursed by the individual for the tax paid in accordance with subsection (7).

(6A) Where a PAO applies to a public sector scheme in situations where-

  • no transfer amount has been applied to provide an independent benefit for the non-member spouse or civil partner, or
  • a transfer amount has been applied to provide an independent benefit for the nonmember spouse or civil partner within the same scheme (i.e. the member’s scheme),

the provisions of subsection (6), (7), (8) and (9) apply to the member and the nonmember, i.e. both parties can avail of the public service reimbursement options in relation to chargeable excess tax paid by the scheme administrator.

(7) An administrator referred to in subsection (6) will be reimbursed for the payment of tax on a chargeable excess as follows.

(7)(a) Where the amount of tax paid is 20% or less of the value of the individual’s lump sum (net of any lump sum tax paid at the standard rate under section 790AA(3)(a)(i) or (3)(b)(i)(I) – the “net lump sum”)–

  1. by appropriating that percentage of the net lump sum,
  2. by direct payment by the individual of the tax paid to the administrator,
  3. by a combination of (i) and (ii) such that the aggregate equals the amount of tax paid by the administrator, or
  4. by the individual exercising the option set out in subsection (8).

(7)(b) Where the amount of tax paid is greater than 20% of the net lump sum by the individual exercising the option set out in subsection (8), or-

  • by appropriating not less than 20% of the net lump sum, or a higher percentage as may be agreed,
  • by payment by the individual to the administrator of at least 20% of the net lump sum, or a higher percentage as may be agreed, or
  • by a combination of (I) and (II) such that the aggregate is not less than 20% of the net lump sum, and
  • by allowing the balance, if any, of the tax to be recovered:
    • from the gross annual pension over a period to be agreed between the individual and the administrator up to a maximum of 20 years,
    • by the payment of the balance by the individual from his or her own resources, or
    • by the combination of a reduction in pension and payment of a sum by the individual.

(8) The option referred to in subsection (7)(a)(iv) and (b) is the option to reimburse the administrator by reducing the gross annual amount of pension payable under the rules of the relevant pension arrangement for a period not exceeding 20 years such that the reduction equals the chargeable excess tax paid.

(9) Where an individual agrees to pay an amount to an administrator to reimburse the administrator for tax paid on a chargeable excess, that payment must be made before the administrator pays over the net lump sum, or the appropriate part of the net lump sum, to the individual.

Relevant Date: Finance Act 2020