FINANCE ACT 2021

The Finance Act 2021, enacted on 21 December 2021, introduced several notable changes to tax provisions relating to pensions in Ireland. The relevant changes, which became effective from 1 January 2022, are highlighted below.

Death-in-Service Benefits – ARF Option

Previously, where an employee died in service before normal retirement age (and prior to drawing down his/her pension), Revenue rules permitted the payment of the following benefits:

• a lump sum not exceeding the greater of €6,350 or four times salary; and
• after the payment of the lump sum, any additional funds could only be used to provide a pension for a spouse or dependent(s). 

In practice, this meant that, after the payment of the lump sum, the trustees would be required to purchase an annuity for the employee’s spouse or dependents. Given the cost of annuities, the purchase of annuities can be an unattractive option.

Section 12 of the Finance Act 2021¹ has now introduced an option for trustees to transfer the surplus funds into an Approved Retirement Fund (ARF) for the benefits of the deceased’s spouse or dependents.

This now aligns with the options available to pension scheme members who draw down their pension at normal retirement age. This change is of particular relevance to trustees who may need to update their trust deeds to allow for this new flexibility to use an ARF for death-in service benefits.

Chapter 10 of the Revenue Pensions Manual has been amended to reflect the above-mentioned change.

PRSAs - Removal of 15-Year Rule Requirement

Courtesy of Section 13 of the Finance Act 2021², scheme members are now permitted to transfer their benefits under their occupational pension scheme to a Personal Retirement Savings Account (PRSA) irrespective of that member’s period of service. Previously, members of occupational pension schemes were not allowed to transfer their benefits under the scheme to a PRSA if such members had more than 15 years of service.

The ‘15-Year Rule’ was long considered to be an anomaly in the Taxes Consolidation Act 1997, one which has been happily rectified, and the removal of this requirement will give members more choice when leaving service or changing employer.

Chapters 13 and 24 of the Revenue Pensions Manual have been amended to reflect the above-mentioned changes.

Removal of Approved Minimum Retirement Fund (AMRF) Requirements

The Finance Act 2021 has abolished the Approved Minimum Retirement Fund (AMRF) requirements. 

Previously, before an individual could avail of an Approved Retirement Fund (ARF), the individual was required to have:

• a guaranteed retirement income of over €12,700 per annum; or
• have €63,500 invested in an AMRF. 

The purpose of the AMRF requirements was to protect pensioners without a minimum level of retirement income from drawing too much income from their pension funds.

The removal of the AMRF requirements is intended to simplify post retirement options and provide individuals with more flexibility in accessing their pension funds.

Chapter 7 of the Revenue Pensions Manual has been amended to reflect the above-mentioned change.

FINANCE BILL 2022

The Finance Bill 2022, which is expected to be signed into law on or before 25 December 2022, includes a number of changes to the tax provisions relating to pensions in Ireland. A summary of the proposed changes is set out below:

Changes to tax treatment of pension contributions to PRSAs

Under the current tax rules, employer contributions to Personal Retirement Savings Accounts (PRSAs) are treated as a Benefit in Kind (BIK) for the purposes of employee income tax. The Finance Bill proposes to alter the current position by abolishing the BIK charge for employer related PRSA contributions.

If passed into law, this change will bring the tax relief available for employer contributions to a PRSA in line with the tax relief available for employer contributions to an occupational pension scheme. The change may increase the popularity of PRSAs as a genuine alternative to executive pension plans.

Pan-European Personal Pension Product (PEPP)

PEPPs are EU-wide voluntary pension products designed to facilitate cross-border pension savings with the EU. The Finance Bill proposes to introduce a new provision in the Taxes Consolidation Act 1997 which will provide tax relief on contributions to a PEPP, similar to the tax treatment on contributions to PRSAs.

Tax treatment of lump sums from foreign pension scheme

From 1 January 2023, the tax treatment of lump sums from foreign pension schemes are to be treated in the same way as lump sums from an Irish occupational pension scheme, for an Irish resident individual (i.e. a tax-free exemption of up to €200,000 on the lump sum).