Pensions are a tax efficient savings plan which allows individuals to set aside part of their income, during their career, to provide an income for themselves after retirement.
Pensions are deferred taxation. That is a sum of money from your salary is not taxed and is put in a pension which is rolled up tax free and then drawn down as retirement income in the future (and taxed at that point)
A pension fund is normally an approved (by Revenue) fund to be invested, and the returns from these investments would gradually accumulate over time tax free. Upon retirement, the owner would have the ability to access the pension fund. The access may be in the form of regular payments spread out over a period. Some pensions provide that a lump sum can be paid on retirement tax free.
Three main pensions options are available:
- Occupational pensions
- Personal Retirement Savings Account (PRSA)
- Retirement Annuity Contract Pensions (RAC)
Occupational Pensions
Some employers may provide pension plans, referred to as occupational pensions. For this type of pension plan, employees will be supplied with a regular income after retirement and some may offer a lump sum payment upon retirement.
Since it is not legally obligated some employers may not provide an Occupational Pension. If this is the case, they must allow their employees access to a Personal Retirement Savings Account, (this is discussed below) instead.
Defined Benefit Contribution Schemes and Defined Benefit Schemes
Pensions within the umbrella of an occupational pension can take the form of either defined benefit schemes or defined contribution schemes. The two different types of schemes vary in how they provide and calculate pension benefits.
In a defined benefit scheme, you will be given a set retirement benefit, which is calculated based on a set formula which takes into accounts factors such as
- Your age (different maximum contributions apply based on age)
- your wage and
- years worked with the employer.
Some members of the pension scheme may prefer this system as it offers certainty to them.
In contrast, in a defined contribution scheme there are no fixed pension benefits. Contributions are made by either you or your employer. These contributions are invested and the contribution plus the returns will make the final pension amount.
As an employer, there is no obligation to choose one scheme over another. There are also hybrid schemes that combine aspects of both defined benefit and defined contribution schemes. For example, an employee may have a guaranteed benefit with a separate component which would be a defined contribution.
Will an Occupational Pension affect my Social Welfare Pension?
In short, maybe.
Occupational pensions and social welfare pensions are separate, but they may consider each other in integrated or coordinated schemes. In other words, an occupational pension’s overall benefits may be adjusted to take into account the benefits of their social welfare pension.
It is advisable to seek professional advice, if you are unsure whether your occupational scheme will be affected.
Occupational Pensions and The Law
Although there is some room for variation and individual rules within different occupational pensions, they are confined by the Pension Act 1990 and the European Union (Occupational Pension Schemes) Regulations, 2021. The legislation gives rights to members of a pension scheme, for example the right to information and involvement with the scheme. There is also a body assigned to deal with complaints from members of pension schemes, this is the Pensions Ombudsman.
If you have any questions or queries about your pension plan or your rights as a member, please contact our firm.
Occupational Pension Alternatives
In the case that you do not have access to an occupational pension, there is the alternative of a Retirement Annuity Contract (an RAC) or a Personal Retirement Savings Account (PRSA)
Personal or Private Pensions
If the pension type is personal/ private, it must be chosen by the member and there are no obligations given to your Company or Employer.
A personal pension leaves much of the onus on the pension member as there are many different providers, investment funds and charging structures available to choose from. However, under Irish law there is no limit on the amount of personal pensions one can hold, allowing individuals to have multiple pension plans simultaneously, as a way to ‘ hedge bets’.
Within the umbrella of a personal pension there are two types; a Retirement Annuity Contract Pension and a Personal Retirement Saving Account.
The main difference between the two is that an RAC pension is an insurance contract focused on providing retirement income, while a PRSA is an investment account designed to save and grow funds for retirement.
Comparing Retirement Annuity Contract Pensions and Personal Retirement Savings Account
A Retirement Annuity Contract is a more traditional form of personal pension, open only to people with a regular source of income. It is an investment policy, supplied by an insurance company, which requires a set defined contribution. This is then invested and accumulates tax free. However, there is some low taxation from a RAC post retirement, when looking to withdraw your pension. Within the umbrella of RACs there are two different types; one which provides benefits on retirement until death and another which provides a lump sum, and any excess money may be inherited.
A PRSA is very similar to a RAC, however it is intended to be more flexible.
Firstly, a PRSA will allow employers to contribute, as well as members. Also, it is available to all, regardless of their job status. It is also quite flexible as a PRSA member is not bound by a set contribution amount or any set payment dates. Furthermore, PRSAs can be carried from one job to another, and you can transfer your pension to another PRSA provider without penalty. Notably, however, a RAC cannot be transferred onto a PRSA.
The Alternatiave; a State Pension
What is the State Pension?
The state pension is available for Irish residents over the age of 66 who satisfy a means test.
There are two types of State Pension a contributory and non-contributory pension.
A contributory pension takes account of your social insurance contributions you have accrued during your working life. At present since 6 April 2012, 520 full rate PRSI contributions (equivalent to ten years contributions is required) Prior to 2012 it was 260 full rate PRSI contributions (equivalent to five years contributions was required).
A non-contributory pension does not and is the basis state pension.
Can I rely on the State Pension alone?
It is not uncommon that people may not form a private or occupational pension if they will qualify for the State pension. This can be seen in the 2019 CSO survey in which revealed that just under 60% of workers had pension coverage, outside of the State Pension.
However, this is not advisable as the reality of living on a state pension is quite a bit harsher than most realise. As of 2023, the weekly pension payment is only €254 for people between the age of 66 and 80, and €264 for people over the age of 80. To put this into perspective, a full-time minimum wage worker in 2023 would take home over €400 per week.
Conclusion
Setanta Solicitors advise both employers and employees on employment law. Please contact us to schedule a no obligation consultation at info@setantasolicitors.ie or 01 215 0168
