Ireland Fact-File Part 7:
Business Owner Welfare and Lifestyle
7.2 Ireland Business Domestic Pensions
The structure of pension provision for individuals
in business: Domestic Pensions
The Irish pension system is, as might be expected from the
complexity of the social insurance system, somewhat complex
itself. However, the state pension generally relies on sufficient
social insurance contributions having been made over the pensioner's
working life in Ireland (or another EU country, see below).
The state pension (transition) should be applied for to the
Department of Social and Family Affairs at the following address:
Social Welfare Services , College Road , Sligo three months
before your 65th birthday, and is only paid during the 65th
year, after which the state pension (contributory) will be
in effect.
In order to receive the transitional state pension, in addition
to being 65, the pensioner in question must be retired, and
(as stated above) have made sufficient social insurance contributions
(which must have commenced before the age of 55, must number
above a certain amount – which differs according to retirement
age, and must average a certain number per year – ditto).
The maximum weekly rate for this type of pension is around
EUR230, and it is not means tested.
The contributory state pension, which kicks in at age 66,
is also not means tested, and the person receiving it can
work without their pension being affected (not the case with
the transitional pension).
In order to receive the state pension (contributory), the
pensioner must be aged 66 or over, and have paid sufficient
Class A, E, F,G, H, N or S social insurance contributions.
As with the transitional state pension, there are rules pertaining
to when these contributions began, how many have been paid,
and the average number of contributions per year.
The maximum weekly rate is, as with the transitional pension,
around EUR230.
For those who do not qualify for a contributory state pension,
a non-contributory payment is sometimes available (at up to
approximately EUR230 per week), provided a means test is passed,
and habitual residence conditions are met.
A fuller explanation of the state pension system is available
from the Department of Social and Family Affairs: http://www.welfare.ie/EN/Pages/retired.aspx
In terms of private pensions, there are a number of options,
all providing, as is traditional in most countries, a significant
degree of tax relief (at either 20% or 41%, depending on the
rate of tax that applies to the taxpayer in question.
The amount of the individual contribution that qualifies
for tax relief is progressive according to age, as follows:
- Under 30: 15%
- Between 30 and 39: 20%
- Between 40 and 49: 25%
- 50+: 30%
- 55+: 35%
- 60+: 40%
However, these limits don't apply to employer contributions,
only to the contributions made by an individual, meaning that
business owners making provision for their own retirement
via a private scheme set up for their business can make more
substantial employer contributions, thereby benefiting from
the tax relief which would not have been available had they
received that compensation as salary or dividends.
Of the several different types of private pension (Group
scheme pensions, Executive Pensions, Small Self-Administered
Pensions, Personal Retirement Savings Accounts and Personal
Pensions, also known as retirement annuity contracts, or RACs),
the latter two are most likely to be of interest to a self-employed
entrepreneur, whose business is not of a size to make the
use of a company scheme viable.
RACs are defined contribution plans, in that the eventual
benefit is based on the amount contributed. In order to be
eligible to contribute, the pensioner must have had ‘relevant'
earnings (defined as those earned while in ‘non-pensionable'
employment, or while self-employed, in a trade or profession
designated by the rules covering this area).
Tax relief is granted on contributions as outlined above,
and subject to a cap; if an employer does choose to make a
contribution, this will be taxed as a benefit in kind.
When the taxpayer decides to take a benefit from the RAC,
usually on retirement, 25% can be taken as a lump sum (tax
free), with the remainder usually invested in the provision
of an annuity. All funds invested in this type of scheme ‘roll
up' without becoming subject to income tax or capital gains
tax.
PRSAs are also defined contributions schemes, and are available
to anyone under the age of 75 (employers are obliged to allow
their employees to contribute via the payroll, and can – but
are not obliged to – make contributions as well, whereas the
self-employed can contribute directly).
Standard PRSAs and non-standard PRSAs are available, and
differ in terms of permitted charges and investments; expert
advice regarding the most suitable option is important.
Tax relief, with the rates and restrictions detailed above
(and again subject to a cap) is granted via PAYE if the taxpayer
in question is an employee, but must be reclaimed directly,
if the taxpayer is self-employed.
Updated in December 2010
The austerity budget
delivered in December 2010 put in place a number of pension-related
changes, including reducing the standard fund threshold (the
maximum lifetime level of pension saving for tax purposes)
from EUR5.4mn to EUR2.3mn, stipulating that retirement lump
sums of more than EUR200,000 be taxed (at the standard rate
up to EUR575,000, and at the marginal rate thereafter) be
taxed, replacing the previous lifetime limit, and reducing
the annual earnings limit to receive tax relief on pension
contributions from EUR150,000 to EUR115,000.
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