tony gilhawley fsai fiipm technical guidance ltd. · current lump sum of €450,000: € 350,000 @...

Tony Gilhawley FSAI FIIPMTechnical Guidance Ltd.

Tax free lump sums Total value of benefits

2

The administrator!

3

Section 790AA, Taxes Consolidation Act, 1997Revenue Practice 25.6

4

Taxation of lump sums in excess of tax free amount

Approved retirement benefit scheme Includes Buy Out Bonds

Statutory scheme Public service pension scheme Retirement annuities RAC trust schemes PRSAs Qualifying overseas pension plan Migrant member relief

5

7th to 31st December 2005 €1,250,000

2006 €1,250,000

2007 €1,291,250

2008 €1,354,521

2009 €1,354,521

1st Jan to 7th December 2010 €1,354,521

7th to 31st December 2010 ???

2011 €200,000 tax free€375,000 @ standard

rate6

Tax free amount

Standard chargeable amount (SCA) Balance

€200,000 €375,000

Standard rate tax

PAYE & USC

7th December 2005

‘excess lump sum’

7

Previous lump sums taken since 7/12/2005 Nil

Available Tax Free Amount €200,000

Current Lump sum € 60,000

Current lump sum of €60,000 No tax under S 790AA

Tax free amount

Standard chargeable amount Balance

€200,000 €375,000 8

Previous lump sums taken since 7/12/2005 €90,000

Available Tax Free Amount €200,000 - €90,000 = €110,000

Available Standard Chargeable Amount € 375,000

Current lump sum of €150,000 €40,000 @standard rate

Tax free amount

Standard chargeable amount Balance

9

Previous lump sums taken since 7/12/2005 €225,000

Available Tax Free Amount €200,000 - €200,000 = nil

Available Standard Chargeable Amount € 375,000 - €25,000 = €350,000

Current lump sum of €450,000 € 350,000 @ standard rate€ 100,000 PAYE & USC

Tax free amount

Standard chargeable amount Balance

10

Tax free amount

Standard chargeable amount Balance

€200,000 €375,000

Standard rate tax

PAYE & USC

7th December 2005

‘excess lump sum’

11

€200,000 ‘tax free amount’ (TFA) is hard coded into legislation

€375,000 standard chargeable amount 25% x Standard Fund Threshold – TFA No compulsion by Minister to index SFT.

12

13

“ ...a lump sum that is paid to an individual under the rules of a relevant pension arrangement by means of

commutation of part of a pension or of part of an annuity or

otherwise.”

‘Otherwise’ seems to capture ..

• Separate lump sum entitlement (e.g. 3N/80ths )• PRSA lump sums, which are not ‘commutation’ of part of any pension or annuity?• 25% lump sums paid under ARF option• Taxable lump sums paid under ARF option?

14

Lump sum paid following death to: widow or widower (or civil partner??) Children Dependants Personal reps

Balance of lump sum paid under public service Incentivised Early Retirement Scheme

Full commutation in exceptional circumstances of serious ill health

15

Tax on standard chargeable

amount (SCA)

PAYE & USC on balance over

SCA

Standard rate income taxSchedule D Case IV

Schedule E emoluments

Tax free amount

Standard chargeable amount Balance

‘excess lump sum’16

Fixed standard rate income tax charge No USC or PRSI No reliefs or allowances or tax credits

‘Administrator’ and member have a ‘joint and several’ liability for tax

17

Paying the tax Increase by 25% unless:▪ lump sum reduced by tax due, or▪ Member reimburses administrator

Administrator power to reduce lump sum? Specific power for PRSAs and statutory schemes Other schemes???

18

Administrator must Pay & File tax due to Collector General Within 3 months from end of month in which lump

sum was paid to member Interest at 8% pa accrues from end of 3 month period Return must be :▪ In a ‘form specified or authorised’ by Revenue▪ Include ‘amount and basis of calculation of the excess lump

sum’▪ Include ‘Declaration’ that return is ‘correct & complete.’

19

Administrator must apply PAYE, USC and PRSI (Class S)

Must deduct higher rate tax Unless in receipt of Certificate of Tax Credits &

Standard Rate Cut Off Point

20

Ask prospective retiree for details of all lump sums ‘paid’ to him/her since 7th Dec 2005

Tax free amount

Standard chargeable amount Balance

21

Administrator ‘reasonably believed..’ No tax liability Lower tax liability

Therefore important administrator asks the right questions of prospective retiree Records to support application for discharge

22

Do prior taxable sums count? Seems like they do

Taxable lump sums under ARF option Benefit from Standard Chargeable Amount or

not? Conflicting legislation

23

Taxable withdrawals from PRSA? Benefit from Standard Chargeable Amount or

not? Conflicting legislation

Pensions Adjustment Orders? Silent

24

Takes 25% (tax free) €200,000

Transfers to AMRF €119,800

Next €480,200 PAYE at marginal rate

OR

€375,000 @ standard rate, and€105,200 at PAYE?

25

S787G

S790AA

Part 30, Chapter 2C, Taxes Consolidation Act, 1997Schedule 23B, Taxes Consolidation Act, 1997Revenue Practice Chapter 25

26

Approved retirement benefit scheme Includes Buy Out Bonds

Statutory scheme Public service pension scheme Retirement annuities RAC trust schemes PRSAs Qualifying overseas pension plan Migrant member relief

27

Threshold amount

Chargeable excess

Schedule D, Case IV41% tax

7th December 2005

Standard :€2.3mPersonal : > €2.3m

28

7th to 31st December 2005 €5,000,000

2006 €5,000,000

2007 €5,165,000

2008 €5,418,085

2009 €5,418,085

1st Jan to 7th December 2010 €5,418,085

7th to 31st December 2010 €2,300,000

2011 €2,300,000

29

Standard Fund Threshold : €2.3m Was €5.4m before 7th December 2010

Personal Fund Threshold 2005: > €5.0m Value of uncrystallised benefits at 7/12/2005

Personal Fund Threshold 2010: €2.3m ~ €5.4m Value of uncrystallised benefits at 7/12/2010 Obtain before 7th June 2011

30

31

‘Becomes entitled’ to : A pension An annuity A lump sum

Transfer of retirement funds to ARF AMRF Member, as taxable sum

32

Retention of funds in a PRSA after taking 25% Vested PRSA

Transfer to an overseas arrangement Under transfer regulations

Increase in pension payable Pay parity increases ignored! Greater of (5% pa and CPI + 2% pa) increases also

ignored33

Pension : 20 x AP Pension payable in first 12 months

Annuity : Purchase Price Lump Sum: amount paid Gross or net of tax deduction?

34

ARF/AMRF transfer : amount transferred Funds retained in PRSA: value after 25%

taken Transfer to overseas arrangement : transfer

value paid

35

Previous BCE amounts taken since 7/12/2005

Nil

Standard Fund Threshold €2,300,000

Available threshold €2,300,000

Chargeable excess €2,600,000 - €2,300,000 = € 300,000

Tax € 300,000 x 41% = €123,000

36

Previous BCE amounts taken since 7/12/2005 Nil

Personal Fund Threshold €2,500,000

Available threshold €2,500,000

Chargeable excess €2,500,000 - €2,500,000 = nil

37

Previous BCE amounts taken since 7/12/2005

€1,450,000

Standard Fund Threshold €2,300,000

Available threshold €2,300,000 - €1,450,000 = €850,000

Chargeable excess €1,500,000 - €850,000 = € 650,000

Tax € 650,000 x 41% = €266,500

38

Previous BCE amounts taken since 7/12/2005 nil

Standard Fund Threshold €2,300,000

Available threshold €2,300,000

BCE : €130,000 pa pension + €200,000 lump sumBCE amount = €130,000 x 20 + €200,000

€2,800,000

Chargeable excess €2,800,000 - €2,300,000 = € 500,000

Tax € 500,000 x 41% = €205,00039

Previous BCE amounts taken since 7/12/2005 nil

Personal Fund Threshold €2,450,000

Available threshold €2,450,000

BCE : €130,000 pa pension + €200,000 lump sumBCE amount = €130,000 x 20 + €200,000

€2,800,000

Chargeable excess € 350,000

Tax € 350,000 x 41% = €143,50040

20:1 fixed Does NOT vary by: Period of deferment NRA Escalation Reversion Sex Guarantee period

41

Standard Fund Threshold : €2.3m Was €5.4m before 7th December 2010

Personal Fund Threshold 2005: > €5.0m Value of uncrystallised benefits at 7/12/2005

Personal Fund Threshold 2010: €2.3m ~ €5.4m Value of uncrystallised benefits at 7/12/2010 Obtain before 7th June 2011

42

DC scheme benefits Cash + ‘market value of any other assets’ @

7/12/2010 Issues? Gross or net of borrowings? With profit/guaranteed fund values▪ Ignore MVAs?

43

DB scheme benefits: 20 x AP + LS▪ AP : annual pension member would be entitled to on

7/12/2010▪ LS : lump sum member would be entitled to on 7/12/2010

44

The annual amount of pension to which the individual would ..be entitled .. on 7tH

December 2010 if... the individual acquired an actual rather than a prospective right to receive a pension on that date..

Assuming

the individual has reached such age, if any, as the individual is required to have reached under the ..arrangement..to avoid any reduction in the benefits on account of age

Right to receive benefits not occasioned by incapacity of mind or body

Schedule 23B, TCA 1997

Pension expectation or voluntary early retirement pension or preserved leaving service pension? 45

How do I establish the capital value of my Defined Benefit pension(s) on 7 December 2010?

... Establish from your administrator what gross annual pension you would have been entitled to under the rules of the DB arrangement if you had retired on 7 December 2010 at your salary and service on that date and

on the assumption that you had attained normal retirement age on that date.

Revenue PFT Notification Feb 2011

Voluntary early retirement?

46

Joan is a member of a defined benefits scheme with an accrual rate of 1/40th of pensionable earnings for each year in the scheme. She has no other pension rights from earlier employments.

....she is aged 50, is still in pensionable service, has pensionable earnings of £90,000 and has completed 20 years pensionable service. ... her normal retirement age under the scheme is 60.

For the purposes of the valuation .... she is assumed to be 60 and she has a pension of £45,000 (20/40 x £90,000) with a value of £900,000 (20 x £45,000).

HMRC

47

BCE amount calculated as if PAO never made No reduction for ‘designated benefit’ TV notionally added back

Beneficiary also treated as having a BCE amount when taking their benefits?

48

Administrator ‘may’ request prospective retiree to complete a BCE Declaration Past BCE events and values, since 7/12/2005 Expected BCE events and values Personal Fund Threshold certificate

If prospective retiree refuses to provide BCE Can withhold certain benefit payments

Administrator must retain BCEs for 6 years Available for Revenue inspection

49

Fixed 41% income tax charge No USC or PRSI No reliefs or allowances or tax credits

‘Administrator’ and member have a ‘joint and several’ liability for tax

Administrator options Reduce benefits ‘to fully reflect the amount of tax

paid’, or Member reimburses the administrator; or Otherwise another ‘chargeable excess’ and 69%

increased tax liability! 50

Administrator must Pay & File tax due to Collector General Within 3 months from end of month in which BCE

occurred Interest at 8% pa accrues from end of 3 month period Return must be...▪ In a ‘form specified or authorised’ by Revenue▪ include ‘amount and basis of calculation of the excess lump

sum’▪ Include ‘Declaration’ that return is ‘correct & complete.’

51

Administrator ‘reasonably believed..’ No tax liability Lower tax liability

Therefore important administrator asks the right questions of prospective retiree Have records to support application for discharge? Did you obtain a BCE Declaration?

52

Do you always seek a BCE? No right to withhold benefits if you don’t

PAOs Ignoring PAO .. tax could be greater than member’s

benefits! Scheme rules provision to reduce benefits S 772(3F) TCA 1997 Power to ‘commute’ members benefits to pay tax?

53

Valuing DB pension for Personal Fund Threshold purposes Current members Deferred members

How DB pension is reduced to ‘fully reflect the amount of tax paid’

Lump sums Gross or net of any taxes deducted?

54

55

Tax on standard chargeable

amount (SCA)

PAYE & USC on balance over

SCA

Standard rate income taxSchedule D Case IV

Schedule E emoluments

Tax free amount

Standard chargeable amount Balance

‘excess lump sum’56

Threshold amount

Chargeable excess

Schedule D, Case IV41% tax

7th December 2005

Minimum €2.3m

57

Administrator is jointly and severely liable for any taxes due

Seek relevant information before paying out retirement benefits BCE Declaration

58

Know how to calculate tax liability Know when to Pay & File tax due Decide on method of recovery of tax Benefit reduction? Do schemes rules need to be changed?

Seek discharge if dispute arises over correct tax amount

59

The administrator!

60

Unisex Annuity rates from 1st March?

61

Tony Gilhawley FSAI FIIPMTechnical Guidance Ltd.