Tax Matters. Pension funding. What you need to consider

Transcription

1 Tax Matters Pension funding What you need to consider July 2015

2 Pension funding - what you need to consider The last number of years have been a cash flow led environment across both corporate and personal worlds. Therefore,it is not surprising that pension funding has suffered. A significant number of Irish working adults do not have a pension, and many of those who do are not paying it enough attention. This may not be the most positive introduction to a briefing but it allows us to set out some of the key issues you need to address, whether for the first time in the selection of a pension fund or indeed to revisit your existing fund. Funding your pension - how and when to do it Pension categories - In broad terms the typical categories of pensions are: 1. Retirement Annuity Contracts (RACs) RACs have been the traditional form of personal pension funding for self-employed individuals. The contract is between the self-employed tax payer and a revenue approved pension provider. The contract provides benefits on retirement through an annuity or Approved Retirement Fund (ARF) with a lump sum drawdown. There are restrictions on the level of contribution on which tax relief is available depending on your annual income and age see table 2 below. 2. Personal Retirement Savings Account (PRSA) A PRSA is a contract between the individual and the PRSA provider. PRSA benefits are determined by the paid by and on behalf of the contributor and the investment return on those. The combined annual sum contributed (i.e. both employer and employee ) are restricted based on your annual income and age see table 2 below. 3. Occupational Pension Plan (OPP) An OPP is the most common type of employer-funded pension in Ireland. There are three main types of OPP: 1. Defined Benefit scheme (DB scheme) DB schemes aim to provide a set level of pension and/or lump sum at retirement. The level of benefits depends on your service in the scheme and salary at retirement. Generally, DB schemes in the private sector aim to provide employees with a pension of 1/60th of salary for every year of service to a maximum of 40/60ths. You may have the option to take a retirement lump sum and a reduced pension. Public sector schemes tend to provide retirement lump sums of 3/80ths of salary and a pension of 1/80th of salary for every year of service to a maximum of 40 years service. 2. Defined Contribution scheme (DC scheme) In a DC scheme your employee contribution and the contribution paid by your employer are usually fixed as a percentage of salary. The will be invested in a fund in order to provide your retirement benefits. DC schemes do not provide any guarantees, your benefits at retirement will depend on a number of different factors including contribution levels, fund performance, plan charges and the annuity rates available when you retire. 3. Executive Pension Plan (EPP) An EPP is aimed towards key individuals or directors of the company. An EPP operates in much the same way as a DC scheme. There are three types of EPP: - insured plan - administered by a life company and investing solely in traditional unit linked funds; - self-directed plan - administered by a life company but permits extensive investment controls to the individual (i.e. share dealing/the purchase of residential and commercial property); and - Small Self-Administered Pension Scheme (SSAPS) - under Revenue rules this type of arrangement must appoint a Revenue approved Pensioneer Trustee. This can either be an individual or a company who is independent of the sponsoring employer. Similar to a self-directed plan, a SSAPS permits extensive investment controls to the individual (i.e. share dealing/ the purchase of residential and commercial property). Personal to your pension scheme Self-employed individuals can claim tax relief on personal pension to a Retirement Annuity Contracts (RAC) or a PRSA. Members of an occupational pension scheme can also claim tax relief on their own, as distinct from made by the employer. A single earnings cap of 115,000 applies for all types of pension made by individuals. However, personal pension cannot avail of PRSI or Universal Social Charge (USC) relief. Employer funded to your pension scheme Employer to occupation pension schemes and Executive Pension Plans (EPPs), as opposed to PRSAs, are subject to different limits depending on your earnings, service and the level of fund you have built up to date. These are often higher than the individual limits. This is particularly useful if you are a senior employee or director as employer could be a means of increasing your pension beyond the normal individual limits. Other tax issues, including salary sacrifice, must be considered as part of the pension planning in respect of employer funded.

3 Table 1-Summary of pension categories Table 2 - Summary of maximum amounts on which tax relief may be claimed in respect of qualifying premiums Age RAC Personal Pension Up to 30 years 15% 30 but less than 40 20% 40 but less than 50 25% 50 but less than 55 30% 55 but less than 60 35% 60 years or over 40% PRSA s % of net relevant earnings (maximum NRE 115,000) Company schemes Applicable Self employed Everyone Company employees & directors Type Contribution limits for tax purposes Tax treatment of employer Tax treatment of employee Defined Age & income related n/a Income tax relief only/no PRSI or USC relief Defined contribution Age & income related Taxable Benefit In Kind (BIK), subject to USC Income tax relief only/no PRSI or USC relief Defined benefit or defined contribution Age & income related for employee limits, income related for employer limits Not a taxable benefit for the employee Income tax relief only/no PRSI or USC relief Individuals who are engaged in specified occupations and professions, primarily sports professions, qualify for a minimum 30% deduction irrespective of age. Where in any year part of a premium cannot be fully relieved because of the operation of the limits, that part is carried forward and added to the qualifying premium in the following year. Planning cash flow for tax and pension payments Preliminary income tax 2015 From a cash flow planning point of view it is always worthwhile annually considering the basis on which you wish to make your preliminary tax payment. This is particularly important where you have varying levels of income and reliefs/credits. Where a qualifying pension contribution is paid after the end of a year of assessment, but before 31 October in the year following the year of assessment (the specified return date), it may be treated as paid in the year of assessment. An election for such treatment must be made before 31 October, or before the extended filing date of 12 November 2015, for filing of your tax return 2014 where you are complying with the Revenue Online Service (ROS) extended pay and file deadline criteria. Your preliminary tax payment for the current year 2015 can be based on one of the following options: % of your income tax liability for the tax year 2013; % of your income tax liability for the tax year 2014; or 3. 90% of your income tax liability for the tax year There are considerations in respect of each of the above options: % of your income tax liability for the tax year 2013 The taxpayer can base the amount of preliminary tax to be paid on 105% of the final tax payable for the pre - preceding tax year. For the tax year 2015 the applicable look-back year is Under this option, preliminary tax must be paid by means of direct debit. During the first year of arranging the direct debit scheme, the taxpayer must meet his preliminary tax obligation by making a minimum of three payments. Payments under this option in any subsequent tax year must be made by making a minimum of eight or more payments. The tax payer will not be treated as having paid the full amount of the preliminary tax unless all the instalments are met. This option can apply only in the event you had an income tax liability in the tax year From a cash flow position this may be a favourable option. The balance of tax should be paid on filing the tax return for 2015 on 31 October 2016 (or ROS extended deadline, if available) % of your income tax liability for the tax year 2014 If, before the application of preliminary tax paid, you are in a refund position for 2014 you do not have an obligation to make a preliminary tax payment for Otherwise, under this option you should pay 100% of your income tax liability for the tax year You should be aware that where you made a film investment or an investment in an Employment and Investment Incentive Scheme ( EIIS ) in 2014, legislation provides that the calculation of preliminary tax due must be adjusted to exclude relief for film investment or EIIS made in the year 2014.

4 However, where a pension top-up payment is made before the return filing date for 2014, it can be factored into the 2015 preliminary tax calculation as well as getting a deduction for 2014, thereby providing an effective double deduction for cash flow purposes. This benefit can be invaluable when budgeting for tax and pension payments % of your income tax liability for the tax year 2015 You have the option of paying 90% of the current year s liability. As the preliminary tax is due for payment prior to the end of the full tax year this is likely to be an estimate of the tax due. If there is any underpayment of tax under this option, Revenue may impose an interest charge on the amount underpaid. Summary This article has set out a broad overview of some taxation issues to be considered. Each individual s pension should be tailored to their personal circumstances and their retirement goals. Where applicable, the level of funding to your spouse s pension should also be considered. In order to evaluate the type of pension or scheme suitable to you personally or to your company, and the level of funding required to meet your retirement needs, you should contact your existing pension advisor. If you do require assistance Grant Thornton provides an expert and independent financial planning services through Grant Thornton Financial Counselling Limited (GTFC). Extension to Personal Fund Threshold (PFT) application deadline Revenue rules currently restrict the maximum tax-relieved pension fund at retirement (this is known as the Standard Fund Threshold or SFT) to 2 million - this cap applies from 1 January Where an individual already had a fund in excess of that amount, they are entitled to apply for a PFT and thereby protect the higher value of their pension fund and avoid penal tax treatment applying. Revenue recently extended the deadline for making an electronic PFT application from 2 July until 31 July The application must be made online via ROS or PAYE at anytime so anybody who needs to apply for a PFT, and who is not registered with one of these, should do so immediately as late applications will not be considered.

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