For Financial Adviser Use Only

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1 For Financial Adviser Use Only Pensions Spotlight A regular update on all matters affecting pensions Issue 3 - September 2011 In this issue... of Pensions Spotlight I have decided to look at a number of areas that have proven to be quite topical over recent weeks. One is the interaction of termination payments and pensions an issue that is becoming more common for clients. With the recent launch of Executive Income Protection from Aviva, it is a timely opportunity to revisit early retirement due to ill health and the pension benefits associated with it. The Civil Partnership & Certain Rights and Obligations of Cohabitants Act 2010 provides certain rights to qualified cohabitants on the ending of a relationship of cohabitation and provides legal recognition and certain rights to civil partners, with effect from 1st January This piece of legislation will impact on pension benefits in respect of qualified cohabitants and civil partners and a summary of some of the key issues is provided in this issue. Lastly, your clients can access an easy to use pensions calculator on ie and financial advisers can now access a more detailed version of the calculator through I think these tools will prove to be very useful for you and should aid the pensions conversation you ll be having with your clients. As always I would welcome any feedback you have on Pensions Spotlight and would invite you to submit any topics that you would like me to cover in Issue 4 which will be issued to you in the next couple of months. Just mark.reilly@ aviva.ie with any suggestions. If you have any questions on any of the enclosed topics, just contact myself or your local broker consultant. Mark Reilly Mark Reilly Retirement Marketing Manager mark.reilly@aviva.ie Contents New tools to help your clients close their retirement savings gap The interaction of termination payments and pensions Ill health early retirement how it affects the self employed and employees Civil partnerships and co-habiting couples summary of key issues

2 Helping your clients close the retirement gap Mnd the Gap pension calculators Find out if your customers are paying enough into their pension. We have developed two pension calculators one for customers and one for financial advisers For Customers It s a simple 2 step process to identify if they are saving enough for their retirement. For Financial Advisers A more sophisticated tool including options for incorporating pension type, employment status, tax rate, existing pension funds, non pensionable assets, investment style, and projected retirement benefits. The financial adviser calculator will also provide you with a two page summary report which you can print off or to your clients. These innovative calculators will support you when discussing the importance of saving for retirement with your customers. Page 2

3 The interaction of redundancy payments & pensions Introduction Any area that comes up a lot with financial advisers is the interaction of redundancy payments with pensions and in particular tax-free pension lump sums. Below is a summary of the taxation treatment of redundancy payments and how they interact with pensions. Types of redundancy payments A payment made to an employee in connection with the termination of an employment may be made up of the following components: Statutory redundancy payments Ex gratia termination payments Pension scheme lump sums Pension scheme refunds of contributions Pay in lieu of notice Statutory redundancy payments These are payments an employee is entitled by law to receive provided certain conditions are met. They are as the name suggest, only payable where the termination of the employment arises as a result of redundancy (whether voluntary or compulsory). These payments are exempt from income tax and the Universal Social Charge (USC). Ex gratia payments Ex gratia payments, that is, payments made by an employer over and above the statutory redundancy payment are taxable. However, there are a number of exemptions which reduce the amount charged to tax and a further relief which reduces the tax chargeable. These exemptions and reliefs are looked at in more detail below. Pension scheme lump sums Pension schemes will often allow individuals to take a lump sum and a reduced pension. An employee who retires before reaching normal retirement age may take a lump sum and begin to receive his / her pension immediately subject, of course, to the benefit terms of individual schemes. Although the pension scheme lump sum is tax free (up to a lifetime limit of 200,000), it can have an effect on the exemptions available in respect of other lump sum payments. Page 3

4 Pension scheme refunds of contributions Any refund of contributions provided for under an approved pension scheme is not regarded as income in the hands of the employee and it does not reduce his / her entitlement to the various exemptions available in respect of other taxable lump sums. However, a charge to tax at the standard rate in force at the time (currently 20%), is imposed on a pension scheme in respect of such refunds (including interest). Pay in lieu of notice An employer is obliged by law to give notice in advance that an employment is to be terminated. The length of the notice depends on the employee s number of years of service and can range from one week to eight weeks. An employment contract is usually states what the required period of notice is. It may happen that an employer will not want the employee to work out the notice period. In these circumstances, the employer must pay the employee in lieu of notice. The treatment of pay in lieu of notice is similar to that of ex gratia payments and accordingly, it may be paid tax-free provided it does not exceed a certain tax free amount. Exemptions and reliefs Some payments are not taxable, for example, statutory redundancy payments and certain pension scheme lump sums. All other payments are subject to tax but may be covered by the following exemptions: Basic exemption The basic exemption is 10,160 together with an additional 765 for each complete year of service. The figure of 765 cannot be apportioned to give additional relief for part of a year of service. Jane Smith was made redundant after four years and eleven months of service with her employer. The amount which she can receive tax-free is: 10,160 + ( 765 x 4) = 13,220 Only complete years of service are taken into consideration. Therefore the period of 11 months is ignored. Page 4

5 Increased exemption The basic exemption of 10,160 plus 765 for each complete year of service may be increased by a maximum figure of 10,000 provided: The employee has not made a claim for the increased exemption amount in the previous 10 tax years No tax free lump sum has been received or is receivable under an approved pension scheme relating to the office or employment or if a tax-free lump sum of less than 10,000 has been received or is receivable from the scheme, the increased exemption will be the basic exemption plus 10,000, less that amount, or, in the case of deferred benefits, the actuarial value of that amount. If the lump sum received or receivable is greater than 10,000 the increased exemption is not available. Revenue approval must be sought if the increased exemption is being used. Rita Murphy gets a lump sum of 20,000 when she leaves her job after 11 years. She gets 11,000 from the pension scheme. She is only entitled to the basic exemption of 18,575: 10,160 + ( 765 x 11) = 18,575 She cannot use the increased exemption as the lump sum received from her pension scheme is greater than 10,000. Ray O Brien gets a lump sum of 29,000 when he leaves his job after 11 years and 5 months. The present day value of his lump sum entitlement at 65 years is 2,500. The exemption due to him is 26,075: 10,160 + ( 765 x 11) + 7,500 = 26,075. As the present day value of the lump sum entitlement is 2,500, the full 10,000 of the increased exemption cannot be used. Jim Jones gets a lump sum of 29,000 when he leaves his job of 12 years and 10 months. He is not a member of a pension scheme. The increased exemption due to him is 29, ,160 + ( 765 x 12) + 10,000 There is no tax due on his lump sum of 29,000 as it is under 29,340, the increased exemption due to Jim. Page 5

6 Standard capital superannuation benefit (SCSB) The SCSB is an alternative exemption which is available to all employees. This alternative exemption may be substituted for the basic exemption or increased exemption if it produces a higher figure. The SCSB is calculated by the formula: A x B/15 C Where A = the average annual remuneration for the last 36 months service to date of termination of the office or employment; B = the number of complete years of service in the office or employment; C = the amount of any tax free lump sum received or the current value of any tax free lump receivable in the future under an approved pension scheme Where under the terms or conditions of a pension scheme, the employee i. is entitled to surrender irrevocably the option or right to commute, in whole or in part, a pension in favour of a lump sum; and ii. has irrevocably surrendered such right at the date of termination of the office or employment, the value of C in the above formula will be nil. However, where an employee only makes a partial surrender, the value of the full lump sum entitlement (i.e. actual lump sum received plus current actuarial value of the balance of the possible lump sum receivable at some future date) must be taken into account for the purposes of C in the above formula. Top slicing relief The amount of tax charged may also be reduced by what is known as top slicing relief. There is a formula for calculating the relief, the effect of which is to reduce the tax rate on the lump sum payment to the employee s average rate of tax for the previous 3 tax years. Where an employee feels that such relief is due he / she should contact their local tax office. The relief is available after the end of the tax year in which the employee received the lump sum. The formula is as follows: Tax paid on lump sum (Taxable Lump Sum x average rate of tax in previous 3 years). Page 6

7 Redundancy payment worked example John Doyle was made redundant on 6 June He worked for 18 years with ABC Ltd. His pay for the final 36 months of employment was 90,000. Payments Due Normal salary 1,000 Arrears of pay 350 Bonus 500 Holiday pay 250 These are taxable in full under PAYE and do not form part of the redundancy package. Redundancy Package Amounts Due Non-statutory redundancy 50,000 Statutory redundancy* 3,000 Pay in lieu of notice 750 Tax-free lump sum from pension fund 7,000 *Statutory redundancy is exempt from tax and is therefore ignored. Total lump sum Non-statutory redundancy 50,000 Pay in lieu of notice 750 Total 50,750 Basic exemption 10,160 + ( 765 x 18) = 23,930 Increased exemption 10,160 + [( 765 x 18) + ( 10,000-7,000)] = 26,930 Page 7

8 SCSB 90,000 / 3 x 18 / 15-7,000 = 29,000 The highest exemption is the SCSB of 29,000 and this is given against the lump sum. The taxable lump sum is therefore 21,750 ( 50,750-29,000). The Universal Social Charge (USC) is applicable to this sum. The employee in this example could make an application for Top Slicing Relief if they feel that such relief is due to them. Top Slicing Relief due would be calculated as follows: Tax paid on the lump sum: 8, ( 21,750 x 41%) Taxable lump sum: 21,750 Average tax rate in last 3 years: 27% 8, ( 21,750 x 27%) = 3,045 Other considerations If an employee waives their right to a tax-free lump sum to enhance the tax-free amount of their redundancy payment, they will not be precluded from receiving a tax-free lump sum from any subsequent occupational pension scheme that they go on to become a member of. Similarly if they become self-employed and set up a Personal Pension Plan or PRSA they will not be precluded from taking a tax-free lump sum from either of these arrangements if they have previously waived their right to a tax-free cash lump sum in an occupational pension scheme as a means of enhancing the tax-free amount of their redundancy payment. Page 8

9 Ill health early retirement Retirement on the grounds of ill health is all too common these days and it is worth re-visiting some of the rules regarding ill health early retirement and how they apply to different pension arrangements. Firstly, it is worth noting that there are different definitions of ill health and different benefits payable depending on whether an individual is a member of a company pension scheme or has a personal pension plan or PRSA. Secondly, there are two definitions of ill health that can be applied to a company pension scheme and as such the benefits payable are entirely different. Lastly, there are additonal rules around ill health early retirement when dealing with 20% directors. Ill health under a personal pension plan or PRSA Retirement benefits can be drawndown on a personal pension plan or PRSA at any age before age 60 if the individual is permanently incapable through infirmity of mind or body of carrying on his own occupation or any occupation of a similar nature for which he is trained or fitted. (Section 784 (3) (b) and Section 787K (2) (a) Taxes Consolidation Act, 1997). This is no doubt a very restrictive definition of ill health as it requires the individual to be permanently unable to work again, so a very serious illness or disability would be required in order to qualify to take benefits. In regard to this definition it is worth noting that: In some cases the degree of ill health suffered may not be severe enough or long enough to qualify as being permanently unable to work again, and so in such cases the individual will not be able to draw benefits from the personal pension plan or PRSA. Even if the illness or disability is severe and permanent, the accumulated value of the personal pension plan or PRSA may be small if the individual has been contributing to it for only a short time before falling ill. As such the ill health retirement benefits which may be provided may be inadequate. One area worth looking at to counteract this very strict definition of ill health is to put in place an income protection policy alongside the personal pension plan or PRSA. While the individual may not be able to meet the Revenue definition of ill health they may qualify for claiming a benefit under an income protection policy. The income protection policy will pay out a regular income should the individual insured under the policy suffer a loss of earned income by being unable to work due to sickness or disability lasting longer than the chosen deferred period under the policy. The benefit will normally be payable from the end of the deferred period until the earliest of: Page 9

10 No longer satisfying the definition of disability, or Recovery, or The policy ending, or Retirement, or Death And don t forget individuals can claim full tax relief on all premiums they pay (which do not exceed 10% of total income) at their marginal rate of income tax. For further information on Aviva s Income Protection product please refer to broker/lifepensions/protection/personalincomeprotection/ Ill health under a company pension scheme For the purposes of ill health early retirement under a company pension scheme the Revenue have defined ill health as involving a physical or mental deterioration which is serious enough to prevent an employee from following his normal employment or which very seriously impairs his earning capacity. Revenue will not accept a decline in energy, or ability as being ill health. The Revenue definition of ill health under company pension schemes is quite comprehensive and is potentially wider than many commerical definitions of disability. This may result in a situation where an individual meets the Revenue definition of ill health under the company pension scheme but falls short of meeting the definition of ill health under an employer s income protection policy. This would be the case where the definition under the income protection policy is that the individual is unable to carry on any occupation, whereas the requirement in relation to the Revenue rules is that the individual be unable to carry on his occupation only. Where an employee retires on ill health grounds Revenue allow retirement benefits to be paid immediately regardless of the employees age. This contrasts with voluntary early retirement which requires a minimum age of 50. The maximum benefits allowed are those benefits the employee could have received if they had stayed until normal retirement age but based on final salary at date of leaving. Actual service is therefore equal to service up to normal retirement age (subject to a maximum of 40 years). The same principle applies in relation to lump sums. The employee s entitlement to a lump sum benefit will be calculated based on the service he would have completed at normal retirement age. Therefore, in most cases employees will be entitled, under Revenue rules, to a lump sum of 150% of their final salary at the date of leaving (provided they would have had 20 years service at normal retirement age). Alternatively employees may opt to take an alternative lump sum of 25% of the accumlated fund value. Page 10

11 In reality a defined contribution pension scheme can only provide benefits based on the funds accumulated. So while an employee might be entitled to maximun pension benefits and / or lump sum benefits there maybe insufficient funds in the pension scheme to meet these payments. In considering the options available on ill health, particularly in relation to a defined contribution scheme, the use of a parallel income protection policy should be borne in mind. Whilst this is not a relevant benefit and therefore is not regulated under Chapter1, Part 30 of the Taxes Consolidation Act, 1997, it is frequently provided in conjunction with or in addition to a pension benefit. The income protection policy is taken out by the employer on the life of the employee so that an income be paid to the employer in the event of the employee being unable to work due to an illness or disability. This can then be used to pay an income to an employee up until the earlier of retirement or the individual being deemed fit to return to work. An income protection policy can also provide a pension premium protection option which will pay an additional income to fund the employer s contribution to the pension scheme in respect of the ill employee. This will ensure that the employee has a properly funded pension available to him at normal retirement age. Having the income protection policy in place will mean that the employee does not have to take ill health early retirement under the scheme, but can remain as an employee until normal retirement age (provided they are not deemed fit enough to return to work in the meantime). They can then drawdown their retirement benefits in the normal way at normal retirement age. It is worth noting that Revenue will allow an individual to continue in membership of a scheme even though his employment has terminated as a result of ill health. In such circumstances the employer and also, if applicable, the employee can continue to contribute to the scheme and ensure an adequate fund is available at retirement. However, this option will not be permitted by Revenue where the employee has been in receipt of a formal termination package. Finally, employer s contributions to an executive or group income protection plan may qualify as an allowable business expense for corporation tax purposes. Serious ill health under a company pension scheme Revenue will permit approved pension schemes to include a rule which provides for full commutation of a pension if at the time it becomes payable the recipient is in exceptional circumstances of ill health and medical evidence indicates that the employee s life expectancy is measured in months rather than years. This is often referred to as the Death s Door Concession. Page 11

12 The Revenue Pensions manual at paragraph 7.5 refers to exceptional circumstances of ill health : This phrase is to be interpreted narrowly and strictly. It is not intended to refer to the kind of ill health which prevents somebody from working but to cases where the expectation of life is unquestionably very short. In other words, commutation on these grounds should not take place unless the administrator has been satisfied by receipt of adequate medical evidence that terminal illness is in point and that the expectation of life is measured in months rather than years. It is important to note that the Revenue Financial Services (Pensions Business Unit) must be consulted in cases of serious ill health involving 20% directors and members of Small Self Administerd Pension Schemes. The gross amount of the benefit that can be received under the Death s Door Concession by an employee in relation to a defined contribution scheme is the value of the accumulated fund. A portion of the lump sum received will be exempt from tax with the remainder being taxed at 10%. No further tax liability is imposed on the recipient of the benefit. In calculating the lump sum, a minimum amount of 3/80ths of final remuneration for each year of actual service will be permitted. The definition of final remuneration will be based on the average of the last 3 years service (Section 781, Taxes Consolidation Act, 1997). An alternative calculation of the exempt amount is based on the largest amount of tax-free cash lump sum which the employee could have received if commutation was occurring otherwise than under serious ill health rules. This in effect refers to the tax-free cash lump sum the indivdiual could have received if he had continued in service until normal retirement age. The final remuneration figure used is that applicable at the date of cessation of service. Importantly, the rules of the scheme will determine whether or not the employee has an entitlement under this concession and if so to what extent. Therefore the scheme must contain a rule permitting the Death s Door commutation. The scheme rules must also permit the employee to receive an enhanced commutation ill health early retirement. When dealing with cases of ill health early retirement under company pension schemes it will be imortant to get sight of the scheme rules to see what is payments are permitted. Page 12

13 Civil Partnerships The Civil Partnership & Certain Rights and Obligations of Cohabitants Act 2010 provides legal recognition and certain rights to registered civil partners, with effect from 1st January What is a registered civil partnership? Two persons of the same sex, who are not married and are over age 18, can register their civil partnership in a local Registry Office, subject to providing at least 3 month s notice. This is referred to as a registered civil partnership. Similar foreign relationships may also be recognised in the State as a registered civil partnership. What are the implications of a registered civil partnership? Civil partners of a registered civil partnership obtain certain rights in relation to: tax treatment for income tax purposes their shared home Succession Act rights Social Welfare and pension benefits. Pension Adjustment Orders following the dissolution of a registered civil partnership. What tax treatment applies to civil partners for income tax purposes? Civil partners can opt for single, joint or separate assessment for income tax purposes, with joint assessment being the default. If the civil partnership is dissolved, each of the civil partners will revert to single assessment. Shared home Civil partners of a registered civil partnership have protections, similar to those afforded to married couples and the family home, in relation to the shared home in which the civil partners ordinarily reside together. The written permission of one civil partner is generally required before the other civil partner can sell or mortgage the shared home, unless the civil partners agreed otherwise in a legal agreement before they entered the registered civil partnership. Do civil partners have Succession Act rights to each others s estates? Yes. Civil partners of a registered civil partnership have Succession Act rights similar to those enjoyed by a surviving spouse. Page 13

14 If a civil partner of a registered civil partnership dies intestate, i.e. without leaving a valid Will, then: If the deceased leaves only a surviving civil partner and no children, the surviving civil partner takes the whole estate. If the deceased leaves a surviving civil partner and children, the surviving civil partner takes 2/3rds of the estate, and the remaining 1/3rd is divided equally between the children. If a civil partner of a registered civil partnership dies testate, i.e. leaving a valid Will, then: If the deceased leaves only a surviving civil partner and no children, the surviving civil partner has a legal minimum right to ½ of the estate. If the deceased leaves a surviving civil partner and children, the surviving civil partner has a legal minimum right to 1/3rd of the estate. What are the tax implications of a civil partner inheriting property from his or her deceased civil partner? Finance (No 3) Act 2011 conveys the same exemtpion from Inheritance Tax on all assets that a surviving civil partner in a registered civil partnership may inherit from the deceased civil partner, thus bringing the tax treatment in line with how surviving spouses are treated. What are the inheritance tax implications for children in a civil partnership A child of a registered civil partnership, being the child of either civil partner, is entitled to a Group A tax free threshold in respect of inheritances taken from either or both civil partners in a registered civil partnership. The current (2011) tax free threshold for Group A is 332,084. What are the tax implications of a civil partner taking a gift or property, money or any other assets from his or her civil partner? There are no tax implications in respect of gifts taken by civil partners of a registered civil partnership from each other. Individuals in a registered civil partnership are exempt from CAT (Gift Tax), Capital Gains Tax and Stamp Duties in respect of gifts of any type made between them. Page 14 What are the tax implications for children of a civil partner who take a gift of property, money or other assets from either individual in the civil partnership? A child of one civil partner is entitled to a Group A tax free threshold in respect of gifts taken from either or both partners in a registered civil partnership. The current (2011) tax free threshold for Group A is 332,084.

15 What about social welfare benefits? On the death of a civil partner in a registered civil partnership, the surviving civil partner may be entitled to claim either the: State Widows, Widowers or Surviving Civil Partner s (Contributory) Pension, subject to satisfying the relevant PRSI payment conditions, or the State Widows, Widowers or Surviving Civil Partner s (Non Contributory) Pension, subject to satisfying the relevant means test. Note that the previous State Widows/Widowers Pension is now called the State Widows, Widowers or Surviving Civil Partner s Pension. Pension scheme benefits A pension benefit that is provided for a spouse (e.g. Spouse s death in service pension or lump sum) is deemed to apply equally to a surviving civil partner of a scheme member. Therefore spouse s benefits under pension arrangements apply equally to civil partners. Can a registered civil partnership be dissolved? Either of the civil partners can apply to the Courts for a decree of dissolution of the registered civil partnership where they have lived apart for at least two years of the previous three years. This is akin to divorce of a married couple. Pension adjustment orders Either of the civil partners of a dissolved registered civil partnership can apply to the Courts for a Pension Adjustment Order (PAO) in relation to the other civil partner s retirement or death in service benefits. A PAO in relation to death in service benefits must be sought within one year of the decree of dissolution of the registered civil partnership. However: A PAO cannot be sought by a civil partner who has married or entered into another registered civil partnership. A PAO obtained by a civil partner automatically lapses on the entry into a new registered civil partnership, marriage or death of that civil partner. A civil partner who obtains a PAO in relation to their civil partner s retirement benefits has the same rights as a spouse who obtain a PAO to take a transfer value into a PRSA, Buy Out Bond or occupational pension scheme of which they are a member. Page 15

16 Financial planning implications There are a few financial planning issues to consider: In fact finding you now need to ask information from clients about Civil Status as opposed to Marital Status. Civil Status is defined as including: Single Married Separated Divorced Widowed In a registered civil partnership Former civil partner in a dissolved registered civil partnership. You may also need to ask about cohabitation status There may be on-going protection needs, if one civil partner is financially dependent on the other. When a registered civil partnership is dissolved, one party may want to seek a PAO over the other s pension and death in service benefits. If a PAO is obtained, there will be an option to take a transfer value to a Buy Out Bond or PRSA. Page 16

17 Cohabitants The Civil Partnership & Certain Rights and Obligations of Cohabitants Act 2010 provides certain rights to qualified cohabitants on the ending of a relationship of cohabitation, with effect from 1st January What is a Cohabitant? A cohabitant is one of two individuals, over age 18, of the same or opposite sex who are not married to each other or civil partners of each other or related to each other, and who live together as a couple in an intimate and committed relationship. Examples include: A single man and single woman, living together. two single men (not in a registered civil partnership),living together a married man and a single woman, living together A married man and a married woman (but not married to each other), living together. What is a Qualified Cohabitant? Where cohabitation between two individuals ends, by death or otherwise, certain rights may apply to the cohabitants if they are at that time a qualified cohabitant, i.e. at the ending of the cohabitation they had lived together for: two or more years, where they are the parents of one or more dependent children of which both are the parents, and five years or more, in any other case. However an individual is not a qualified cohabitant if they were at any time during the period of cohabitation married to someone else and that individual had not lived apart from their spouse for at least four of the preceding five years. What rights do Qualified Cohabitants have on the break-up of the cohabitation? Where a cohabitation relationship ends, a qualified cohabitant who was financially dependent on the other cohabitant can go to Court and seek: a Property Adjustment Order, to require the other cohabitant to transfer to them part or all of any property or other assets the other cohabitant own or has an interest in. a Maintenance Order, to require the other cohabitant to provide once off and/or ongoing financial support to them, a Pension Adjustment Order over the other cohabitant s pension benefits. Page 17

18 Note that these rights only apply to a qualified cohabitant (i.e. cohabitants who meet the required minimum period of cohabitation) at the ending of the relationship of cohabitation - so not all cohabitants will have these rights. Do Qualified Cohabitants have Succession Act rights to each other s estates? No. Unlike civil partners in a registered civil partnership, qualified cohabitants do not have any Succession Act rights to each other s estate. However a cohabitant can always make provision through their Will for their fellow cohabitant. But a cohabitant s spouse or former spouse may retain their minimum legal share right to their estate, which may partly defeat any specific bequest left in a Will to their fellow cohabitant. Which Capital Aquisitions Tax (CAT) threshold limit applies to inheritances between civil partners? Currently the strangers threshold of 16,604 applies to inheritances received by a cohabitant from their fellow cohabitant. What about social welfare benefits? Unlike civil partners in a registered civil partnership, a qualified cohabitant is not entitled to a survivor s State Pension in their own right, on the death of their fellow cohabitant. Pension adjustment orders A qualified cohabitant who is financially dependent on the other cohabitant can apply to the Courts for a Pension Adjustment Order over the other cohabitant s retirement or death in service benefits, following the termination of the cohabitation relationship. Such a PAO automatically ceases on the entry into a civil partnership, marriage or death of the person in whose favour the PAO was made. A qualified cohabitant who obtains a PAO in relation to their fellow cohabitant s retirement benefits has the same right as a spouse who obtain a PAO to take a transfer value into a PRSA, Buy Out Bond or occupational pension scheme of which they are a member. Page 18

19 Cohabitation agreement The right of a qualified cohabitant to seek a PAO or any of the other orders on the termination of the cohabitation can be overridden by a prior cohabitation agreement between the two cohabitants to this effect. However such an agreement is only valid if: the cohabitants each received independent legal advice before entering into it, or received legal advice together and waived in writing the right to independent legal advice, and the agreement is in writing and signed by both cohabitants. Financial planning implications There are a few financial planning issues to consider You need to ask clients about cohabitation status, if they are living with someone else and are not married to each other or in a registered civil partnership. In particular you need to know: the period of cohabitation, as this is relevant to what rights they may have on the ending of the cohabitation relationship. Whether they have dependent children of the relationship. Whether they have a written cohabitation agreement between them. There may be on-going protection needs, if one is financially dependent on the other and particularly where there are dependent children. Remember a cohabitant: does not qualify for a survivor s State Pension, on the death of their fellow cohabitant, may not qualify for survivor s benefits under a pension scheme, and will not have Succession Act rights to each other s estate on death. They therefore need to make a Will if they want the other cohabitant to benefit from their estate on death. There may be Inheritance Tax issues to consider, as the stranger s threshold applies. When a cohabitation relationship ends, one party may want to seek a PAO over the other cohabitant s pension and death in service benefits. If a PAO is obtained, there will be an option to take a transfer value to a Buy Out Bond or PRSA. Page 19

20 WARNING: Past performance is not a reliable guide to future performance. WARNING: The value of your investment may go down as well as up. Aviva Life & Pensions Ireland Limited. A private company limited by shares. Registered in Ireland No Registered Office One Park Place, Hatch Street, Dublin 2. Member of the Irish Insurance Federation. Aviva Life & Pensions Ireland Limited is regulated by the Central Bank of Ireland. Aviva Life & Pensions Ireland Limited is a subsidiary of Aviva Life Holdings Ireland Limited, a joint venture company between Aviva Group Ireland plc and Allied Irish Banks, p.l.c. Life & Pensions One Park Place, Hatch Street, Dublin 2. Phone (01) Fax (01) Telephone calls may be recorded for quality assurance purposes