Ireland Expat Pensions

The Irish pension system has Three Pillars:

• Pillar 1: State Pensions;
• Pillar 2: Occupational Pensions;
• Pillar 3: Private Pensions & Wealth.

Typical for the Irish system is that:

• The State Pension is not Means Tested but in a rather complex manner related to in the past paid Social Security Contributions.
• There is an enormous amount of Pension Funds and small Occupational Pension Plans.

I. Structure

The State Pension is paid to people as of age 66 who have paid enough Social Security Contributions (PRSI). It is not Means Tested and thus there is no decrease if you have other kind of income.

If you prefer to retire early, make sure that you continue to make PRSI contributions or that you are getting credited for contributions if you are eligible.

If you retire at age 65, you might qualify for a benefit payment until you reach age 66. To qualify, you have stopped working and meet the PRSI limit.

The current qualifying age for all State Pensions is age 66. An increase to age 67 in 2021 and to age 68 in 2028 is planned.

Under the Programme for Government 2020 a Commission for Pensions has been set up to examine sustainability and eligibility issues with State Pensions and the Social Insurance Fund. Change is expected in the future.

II. New Total Contributions Approach

People who apply for the State Pension as of September 2012 and who don’t qualify for the maximum rate of pension due to gaps in their PRSI record, can be assessed under a new Total Contributions Approach (TCA) and can thus use the new Home Caring Periods Scheme to help them qualify for a higher rate of pension.

The new TCA means that the total number of PRSI contributions you paid, instead of when they were paid, are taken into account when the DSP assesses your application.

The TCA calculation includes the new Home Caring Periods Scheme. The changes benefit people who spent time outside the paid workplace, while raising a family or in a caring role.

If you reached pension age on or after 1 September 2012, your pension rate can be calculated in 2 ways: using the Average Rule or the New TCA Rule. DSP will carry out both calculations and choose the highest outcome.

The National Pensions Framework has proposed that the TCA should replace the current Average Rule. However, legislation is required before any changes may come into effect.

III. Qualification

To qualify for a State Pension, you must be aged 66 or over and have enough Class A, E, F, G, H, N or S social insurance contributions. These are called full rate PRSI contributions.

To qualify you need to:

1. Have paid PRSI contributions before a certain age;
2. Have a certain number of paid PRSI contributions;
3. Have a certain yearly average number of PRSI contributions since you first started to pay PRSI (this is the average rule) or have a certain total number of PRSI contributions. (this is the Total Contributions Approach).

1] Paid PRSI Contributions Before A Certain Age

To get a State Pension, you must have started to pay PRSI before age 56.

The date you first started to pay PRSI is known as your date of entry into insurance. Which date is also important when you calculate your yearly average number of PRSI contributions or total number of contributions.

Your entry into insurance is taken as the date of the first paid PRSI contribution made when you started your first job. However, this is not always the case for people with mixed PRSI contributions or people who were self-employed.

There are special rules if you have a mixture of full-rate PRSI contributions and modified-rate contributions. Modified-rate contributions are PRSI contributions at Classes B, C and D (paid by civil and public servants).

If you have mixed PRSI contributions and you paid your first full-rate employment contribution before 6 April 1991 and before you were 56, your entry into insurance can be the date you first started to pay the full rate of PRSI, if that would be to your advantage.

If you started to pay full-rate PRSI after 6 April 1991, your entry into insurance is the date you first paid any social insurance.

PRSI for the self-employed was introduced in 1988.

a] If you started to pay self-employed PRSI on 6 April 1988 and had previously paid employee PRSI at any time, your date of entry can be either 6 April 1988 or the date when you first paid employee PRSI. Whichever would give you a higher rate of pension.

b] If you started to pay self-employed PRSI after 6 April 1988, your date of entry into insurance will be the date your first full-rate contribution was paid.

2] Number Of Paid Contributions

The number of paid PRSI contributions you need to have in order to qualify for the State Pension depends on your personal retirement date.

If you reach retirement age as of 6 April 2012: You need to have 520 full-rate PRSI contributions (10 years’ contributions). Only 260 of these 520 contributions can be voluntary contributions.

If you reached retirement age between 6 April 2002 and 5 April 2012: You needed to have 260 full-rate contributions (5 years’ contributions).

If you reached pension age before 6 April 2002: You needed 156 qualifying full-rate paid contributions (3 years’ contributions).

3] Yearly Average Or Total Number Of Contributions

A] If you reached pension age before 1 September 2012

You must have a yearly average number of PRSI contribution from the year you first started to pay PRSI to the end of the tax year before you reach pension age.

This is probably the most complex aspect of qualifying for a State Pension. There is the normal average rule and the alternative average rule.

Normal average rule: The normal average rule states that you must have a yearly average of at least 10 qualifying contributions paid or credited, from the year you first entered insurance to the end of the tax year before you reach pension age.

You need an average of 10 contributions a year to get a minimum pension and you need an average of 48 a year to get the maximum pension.

Alternative average rule: The rule says you must have an average of 48 Class A, E, F, G, H, N or S contributions for each contribution year. This rule applies from the 1979-1980 tax year to the end of the tax year before you reach pension age. This average of 48 contributions entitles you to the maximum pension. You cannot get a reduced pension when this alternative average is used.

The DSP looks at your average in two ways. It assesses both the normal average and the alternative average. The alternative average will probably be looked at first because it is easier to assess. Most employed or formerly employed people will be able to meet the alternative average rule of 48 contributions.

If you do not have an average of 48 contributions from 1979, then the DSP will look at the normal method of assessing the average and you may get a reduced pension. If you do not meet the alternative average, it is almost impossible for you to have an average of 48 using the normal average rule.

Working in the home and the average rule: Since 6 April 1994, the Homemakers’ Scheme has allowed the DSP to disregard up to 20 years spent as a homemaker when calculating the yearly average. The Homemaker’s Scheme can only be used when calculating your yearly average number of contributions.

The Homemakers’ Scheme applies to anyone who provides full-time care for a child under 12 or an ill person or a person with a disability aged 12 or over. It applies equally to (wo)men. It does not apply to time spent caring before the scheme started in 1994.

B] If you reach pension age as of 1 September 2012

You can be assessed using either the average rules (see above) or the new Total Contributions Approach (TCA).

The TCA does not use a yearly average to calculate the rate of pension. Instead, the rate is based on the total number of contributions you have paid before you reach the age of 66.

The TCA calculation includes the HomeCaring Periods Scheme which can allow for up to 20 years of homemaking and caring duties. The Homecaring Periods Scheme can only be used with the TCA.

Using the TCA, you will qualify for the maximum personal rate of State Pension if you have 2,080 or more PRSI contributions (or 40 years’ of employment).

If you have fewer than 2,080 contributions, you may still qualify for a high rate of pension because up to 1,040 HomeCaring Periods (20 years) and up to 520 credited contributions (10 years) can be used as part of your pension calculation.

However, your combined HomeCaring Periods and credited contributions cannot total more than 1,040 (20 years).

If your combined total of paid contributions, HomeCaring Period and credited contributions is less than 2,080, you will qualify for a reduced rate of pension.

For example, a combined total of 1,040 paid contributions, made up of HomeCaring Period and credited contributions, would entitle you to 50% of the maximum pension (1,040 / 2,080 = 50%).

IV. Pro Rata Pension For Mixed Insurance

You may get a pro-rata pension if you have a mixed insurance record. Which can happen if you spend part of your working life in the public service (paying modified-rate

contributions) and part in the private sector (paying full-rate contributions).

A career in both the public and private sectors may not give you a mixed insurance record. This is because people with incomes above certain amounts did not have to pay PRSI before 1974. In addition, certain groups who now pay PRSI were outside the system.

If you have mixed insurance, you may still have enough full-rate contributions to get a State Pension depending on your exact circumstances. It is possible that one person will qualify but another, who has more contributions, will not qualify.

If you reach pension age on or after 6 April 2012 with a mixed insurance record, you need to meet all these conditions:

• You have a minimum of 520 PRSI contributions (full-rate and modified-rate).
• You have at least 260 full-rate paid contributions since your entry into insurance.
• Adding together a mixture of full-rate contributions and modified-rate contributions, gives you a yearly average of 10 from the time you first entered insurance (or 1953, whichever is later) to the end of the tax year before you reach 66. This yearly average condition does not apply if the TCA (or Aggregated Contributions Method) is used.
• You do not qualify for a pension under EU regulations or under reciprocal arrangements with other countries (or you only qualify for a pension at a lower rate than this pro-rata pension would give you).

If you meet all these conditions, you may qualify for a pension proportionate to the number of contributions that you paid at the full rate.

V. Retirement Age

• The current qualifying age for all State Pensions is age 66.
• An increase to age 67 in 2021 and to age 68 in 2028 is planned.

I. Overview

The Pensions Authority stated that there are too many smaller pension plans in Ireland and that larger plans are better placed to protect the interests of its members.

For smaller plans the cost of satisfying the new regime may mean that current structures are unworkable and the Pensions Authority points to PRSA’s and Master Trusts as practical alternatives for Defined Contribution (DC) pension plans.

The objectives of pension plan consolidation are well known:

• Less risk,
• Higher quality;
• Greater efficiency,
• Which will lead to better outcomes for pension savers.

Employers have to objectively assess their current pension plans, how they align with the requirements of IORP II and what alternatives may be feasible based on their own objectives and organisational structures.

Greater consolidation of Defined Contribution (DC) pension plans has delivered positive benefits in many countries and Ireland can follow that example.

The required underlying legislative framework to facilitate this should be made simpler.

Master Trusts are not regulated although the Pension Authority did state which standards could look like for Master Trusts in Ireland. The plan at this stage was to introduce these requirements as Codes of Practice following the transposition of IORP II.

As for Defined Benefit (DB) plans, what will IORP II mean? As of March 2020, there were 570 continuing DB plans subject to the Minimum Funding Standard with total assets of € 65.3bn. This represents an average DB fund size of €114m.

Since early 2020 the Pensions Authority has been engaging with larger DB plans in order to gauge how prepared Trustees are for IORP II and in particular how well managed the plans are in order to protect member benefits.

The Pensions Authority is of the view that there will be mixed conclusions. For a well managed plan IORP II should not represent a major hurdle. But for others it may present a number of challenges which will need to be addressed.

IORP II is likely to drive change in the management and governance of occupational pension plans in Ireland. If these changes do bring about lower risks, value for money, high quality and improved member outcomes, Irish occupational pensions, and the members it serves, will be in a better place.

II. Are there Legal Obligations?

No Mandatory Ocupational Pension Claim

There is no obligation on an employer to provide a pension scheme for employees.

However, employers in some sectors are obliged to provide a pension plan under the terms of a registered employment agreement (REA).

There is however an obligation on all employers to give each employee access to a PRSA: a personally owned pension that lets you save for retirement even if there is no occupational pension scheme in place. An employer, must as a minimum, facilitate a PRSA through payroll so that employees can avail of this type of pension.

What About Auto-Enrolment?

The potential of Auto-Enrolment to help resolve Ireland’s future pension funding challenges, a clear commitment and timeframe for implementation seems advisable.

The original plans for a 2022 implementation are unlikely. In order to succeed in a meaningful way the Auto-Enrolment System must consider how best to capture those who have no private pensions, for example the self employed, low earners, homemakers, younger and older age demographics.

In the meantime, where occupational schemes have voluntary participation, there may be an opportunity for those employers to operate an Auto-Enrolment System prior to the Government roll-out.

III. Providers

Ireland has the following type of Pension Providers:

• Pension Funds;
• Insurance Companies.

Pension Funds

There are over 75.000 active occupational pension funds, representing almost half a million active members. For your insight, some countries have eight pension funds…

There are 74.866 DC and 597 DB active funds in the Irish pension fund sector. Funds are overseen by Trustees and range from a few very large funds with 5.000 active members and billions of euro in assets to a significant number of very small funds with a single member and assets in the thousands of euro.

The top ten pension funds account for 30% of the sectors assets. The large number of remaining funds, unique to Ireland, are primarily made up of small self-administered schemes and are usually single member arrangements. This heterogeneity of plan structures poses challenges when assessing sector risks.

DB pension funds account for two thirds of assets in the sector (€76 billion) but the greater share of active members are in DC pension funds. There is a clear transition away from DB funds. Many DB funds are now closed to new members. The structural change from DB to DC pension funds has shifted investment risk from the corporate sector to households.

Insurance Companies

Due to the many small pension plans in Ireland, many thereof are covered by Insurance Companies. As DB has become expensive due to the low interest rate, DC plans are popular.

Pillar 3 is made up of Personal Pensions:

• Personal Retirement Savings Account (PRSA);
• Retirement Annuity Contract (RAC).

I. Personal Retirement Savings Account (PRSA)

It is also called a ‘Defined Contribution’ pension.

It must be taken out with an authorised PRSA provider which includes many insurers. The pension has to meet certain requirements laid down in legislation. In particular, the charges may not exceed a certain level.

Anyone under the age of 75 may take out a PRSA.

II. Retirement Annuity Contract (RAC).

It is an insurance contract approved by the Revenue Commissioners.

RAC’s are generally taken out by the self-employed and employees who do not have access to an employer’s pension scheme.

These pensions are often called ‘Defined Contribution’ pensions as the value at retirement depends on the level of contributions paid and the investment return.

When the time comes to access the value, in general you can take up to 25% as a tax free Lump Sum. The remaining 75% is transferred to a new plan which will pay-out.

These Policies Can Take Three Main Forms:

A] An Annuity: A policy which will pay an income to the policyholder until death, regardless of how many years that will be. There is no associated surrender value.

B] An Approved Retirement Fund (ARF): A Lump Sum investment to which certain retirement benefits can be transferred at retirement. The capital is invested with a qualified fund manager and a range of investment options is available. Which means that the pension can continue to be invested while you take an income.

C] An Approved Minimum Retirement Fund (AMRF): Similar to an ARF but cannot be withdrawn until age 75.

There are detailed Revenue qualifying rules around the availability of ARF’s and AMRF’s.

The Pensions Authority

The Pensions Authority (formerly known as the Pensions Board) is the statutory body tasked with overseeing the proper administration of pension plans and the protection of pension rights for people living in Ireland.

The Authority is the regulatory body for:

• Occupational Pension Plans;
• Personal Retirement Savings Accounts (PRSA’s);
• Retirement Annuity Contracts (RAC’s).

The main functions of the Pensions Authority includes:

• Providing information and guidance to members and trustees of pension schemes;
• Encouraging people to take part in pension plans and provide for retirement;
• Supervising pension plans for compliance with the Pensions Act and investigating potential breaches of the Act;
• Monitoring Defined Benefit (DB) plans to ensure sufficient funds are available to meet the ongoing and eventual needs of members;
• Approving PRSA’s with the Revenue Commissioners;
• Keeping a public register of PRSA’s and their providers;
• Monitoring the operation of pensions legislation and pensions developments;
• Issuing guidelines on the duties and responsibilities of trustees;
• Advising the Minister for Social Protection on pension matters.

Regarding the handling of complaints:

• The Pensions Authority can assist you if you are concerned about the operation of your PRSA or occupational pension plan;
• If you have a complaint about your pension that you are unable to resolve with your PRSA provider, then you may contact the Pensions Authority for advice and assistance.

The Pensions Authority can:

• Act on behalf of pension plan members who are concerned about their plans;
• Investigate the status and conduct of an occupational pension plans;
• Prosecute for breaches of the Pensions Acts;
• Take court action against trustees for the protection of members and their rights.

For more information: www.pensionsauthority.ie/

I. State Pensions

• The current qualifying age for all State Pensions is age 66.
• An increase to age 67 in 2021 and to age 68 in 2028 is planned.

II. Occupational Pensions

Most pension arrangements in the private sector permit members to retire early in certain circumstances. However, the benefits you receive are likely to be (much) lower than they would otherwise be at normal retirement age.

In occupational pension schemes, early retirement is generally possible with the employer's and/or trustees' consent from age 50 onwards.

Under personal pension arrangements, retirement benefits can be taken from age 60.

Under PRSA arrangements, early retirement from an employment is possible from age 50.

I. State Pensions

• The manner of pay-out is lifelong annuity. No Lump Sum nor Flexi Draw Down.
• The current qualifying age for all State Pensions is age 66.
• An increase to age 67 in 2021 and to age 68 in 2028 is planned.

II. Occupational Pensions

The pay-out can be very flexible which depends on the plan details regarding age and manner of pay-out meaning Annuity/Lump Sum/Flexi Draw Down.

I. Taxation Of Pensions

There are income tax relief limits which means that there is a maximum on the amount of income that can be contributed to a pension plan each year with tax benefits.

The annual maximum is related to the age and stated as a percentage of the gross income. The current annual maximum amounts to € 115.000,-.

II. IncomeTax Rates

General

Income tax applies to almost all income and so even when you have retired you are still subject to the same general tax rules as everyone else.

The 2021 tax rates have the following structure:

Taxable Income (Single)                                     Tax Rate

• €             0,-      to         €     9.950,-                  10        %
• €     9.951,-      to         €   40.425,-                  12        %
• €   40.526,-      to         €   86.375,-                  22        %
• €   86.376,-      to         € 164.925,-                 24        %
• € 164.926,-      to         € 209.425,-                 32        %
• € 209.426,-      to         € 523.600,-                 35        %
• € 523.600,-      and more                                 37        %

Lump Sum

The amount of Lump Sum you can take out of a pension plan is limited, with different rules applying depending on the type of arrangement you have.

For RAC’s, PRSA’s and people transferring to AMRF/ARF’s at retirement, the Lump Sum limit is 25% of the retirement fund.

For a guaranteed Defined Benefit (DB) occupational pension plan you may be able to take 1.5 times your final remuneration as a Lump Sum, if you have completed 20 years’ service and have no benefits from a previous plan.

For an investment based Defined Contribution (DC) plan, the amount of Lump Sum available to you depends on whether you choose to take your benefits in the form of an Annuity or an AMRF/ARF.

A maximum of € 200.000,- can be taken as a tax free pension Lump Sum. This is a total lifetime limit even if Lump Sums are taken at different times and from different pension arrangements.

Lump Sums between € 200.001,- and € 500.000,- are taxed at 20% with any balance over this amount taxed at your Marginal Rate and subject to the Universal Social Charge.

III. International Tax Aspects

If you receive pension pay-out from another country than the country where you retire, then it is advisable to see if there is a Double Tax Treaty in order to prevent or mitigate double taxation in the residenital country and at source.

If there is no such treaty, you can only appeal to unilateral rules in order to try to prevent the effect of a possible double taxation.

I. State Pensions

Expats living in Ireland can receive State Pension from another country. State pension claims can never be transferred to another country.

If you have worked in Ireland and also in one or more EU states, your social insurance contributions from each EU state will be added to your Irish PRSI contributions to help you to qualify for a social welfare payment, such as a State pension.

Ireland has bilateral social security agreements with Canada, USA, Australia, New Zealand, Austria, Japan, Republic of Korea and Quebec. These agreements will generally let you combine social insurance paid in Ireland with the other country to help you qualify for retirement pensions.

II. Occupational Pensions

Expats living in Ireland can receive Occupational Pension Claims from another country.

A transfer of a pension claim to another plan in another country is not always possible. Within the EU context we hope that due to action of the EU (by taking The Netherlands to EU Court for not making such a transfer possible) that these kind of transfers will be always possible in the near future.

III. Tax

If you receive pension pay-out from another country than the country where you retire, then it is advisable to see if there is a Double Tax Treaty in order to prevent or mitigate double taxation in the residenital country and at source.

If there is no such treaty, you can only appeal to unilateral rules in order to try to prevent the effect of a possible double taxation.

Expats with a UK Occcupational Pension Claim often hear that it is very attractive to transfer their UK claim to a QROPS pension plan.

QROPS stands for ‘Qualifying Recognised Overseas Pension Scheme. A QROPS is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from registered pension schemes in the UK.

The initial idea of a QROPS was to get the value out of the UK without paying any UK tax on the transfer value. Which is now not always possible.

To qualify as a QROPS the scheme must meet the requirements set by UK tax law. For example being available to residents in that country and not being accessible before age 55 unless under special circumstances.

If you are interested in such a QROPS transfer, please make sure that a specialist looks into all relevant aspects. Among which there are the following questions:

• Would it result in a much lower tax exposure or would it increase substantially?
• Are the related QROPS costs not too high?
• Is the related transfer capital big enough to earn back the extra costs?
• Are the available investment funds of a quality level?
• Does your advisor have financial benefit from such a transfer by getting a percentage of the transfer value? (For Dutch advisors this is prohibited by law, fortunately.)

Impact New Double Tax Treaty The Netherlands & Ireland

The new double tax treaty is applicable as of 2021 and it is relevant for the taxation of the pay-out of workplace pensions and private annuity.

Until the new treaty and as of 1969, the pay-out was only taxable by the residential country of the person receiving the pay-out.

The new treaty states the following regarding the pay-out of workplace pensions and annuity:

• All periodical pay-out may in general be taxed by the residential country of the person receiving them.
  However, if the gross annual pay-out exceeds € 25.000,- and there has been granted a tax benefit during the build-up phase, then the country from which the pay-out originates is allowed to tax.
• Besides this periodical aspect is relevant that any cash out lump sum pay-out will be taxed by the country at source.

Consultations Future Irish Pension System

The Pensions Commission has launched a four-week public consultation process on the future of State pensions, aimed at putting the national pension system on a fiscally and socially sustainable basis for the future.

The cost of State pensions ballooned by 44% between 2011 and 2021 - soaring from €6.1 billion in 2011 to €8.8 billion allocated for 2021.

Pensions now account for 38% of the overall social welfare budget, compared to 29% ten years ago.

The Programme for Government contains a commitment to examine sustainability and other issues in respect of State pension arrangements, including the qualifying age for a pension, contribution rates, total contributions and eligibility requirements.

The Pensions Commission will also examine issues including retirement ages in employment contracts, "especially where they are below the State pension age".

In a bid to curb the rising cost, in 2014 the Fine Gael-Labour government raised the qualification age for the state pension from 65 to 66, with a further rise to 67 due in 2021, and another increase to 68 scheduled for 2028.

The rise in the retirement age left employees whose employment contracts forced them to retire at 65 facing a "gap year" where eligibility for the State pension was delayed until they were 66 - leaving them at a loss of around €12,000.

They were allowed to claim jobseekers' benefit of €203 per week - €45 per week less than their entitlements under the State pension - but were forced to sign on the live register and to be genuinely seeking work.

Many older people found this demeaning - and just yesterday, the Department of Social Protection announced that the requirement to seek work was being removed.

A successful campaign by trade unions and other groups to stall the planned rise to 67 which was due to take effect last month will cost the state €221m in 2021, and €453m in a full year.

The Pensions Commission is now inviting contributions from stakeholders including employees, the self-employed, the unemployed, retirees, carers and younger people, along with various representative groups.

The Chair of the Pensions Commission, Josephine Feehily, noted that reforms to State pension arrangements had the potential to affect almost everyone in Ireland.

"We want to hear people's views on the future of the Irish State pension system, including when it should be paid, the basis on which it should be paid, how it can be paid for and how to make sure that it is as fair as possible," Ms Fehily said.

"Because today's workers are paying for today's pensioners, we are particularly keen to hear from younger people, who may not know it but who are, and will be, funding State pension payments over the coming decades," she added.

Social Protection Minister Heather Humphreys described the State pension as the "bedrock" of the Irish pension system.

"Thankfully with improvements in life expectancy, Irish people can expect a long and healthy retirement. Careful consideration is required to ensure that sustainable State pensions can be funded into the future," the Minister said.