Age and Pensions are pretty much inextricably linked. Many of our conversations with clients must include a reference to their age as a starting point.

Age colours the extent of tax relievable contributions which a client can make, may influence the overall scope for company contributions and is likely to have a very significant influence on the investment strategy to be pursued by a client.

In fact, two ages are generally discussed, both present age and a future nominated ‘retirement’ age. This is referred to a ‘NRA’ (Normal Retirement Age).

There are various rules applicable to when retirement benefits may be taken and age is a key determinant in setting out the implications for a client.

For instance, ‘early retirement’ from a company pension scheme can be taken from age 50. This is relatively straightforward where an employee leaves his employment after age 50. But a bit more complicated if the individual in question happens to own and control more than 20% of the voting rights in the company. Revenue rules in this case require that he/she disposes of his/her interest in the company and properly demonstrates that he/she has severed all links with the business.

Of course, pensions wouldn’t be pensions unless they were confusing and very often mind-blowingly frustrating.

John's story

John, who is self-employed and is investing in a pension through a Personal Retirement Savings Account (‘PRSA’) cannot take his retirement benefits until he reaches age 60 (he can continue to work thereafter if he wishes).

Lucy's story

 Lucy, who is employed and investing her pension fund through a PRSA can take her benefits from age 50 if she leaves employment, subject to certain conditions (one of which bizarrely requires that she hasn’t taken up further employment before drawing benefits). This interpretation is entirely different from other options available to Lucy and which would allow her to take benefits whilst still being gainfully employed.

So, a potential minefield for both clients and for advisers too. And confusing!

One of the most significant ages I want to highlight in this article, and one which brings with it potentially massive implications for a holder of a Personal Pension (also known as a ‘Retirement Annuity Contract ‘RAC’) or a PRSA, is age 75.

In our work, we often find ourselves reviewing many different pension arrangements accumulated by a client during their working lives. In many of these cases, we are dealing with self-employed individuals who make pension contributions annually at the ‘Pay & File’ tax deadline. 

In our experience, they are likely to have accumulated a bundle of single contribution pensions (PRSAs/RACs) across the full swathe of providers. In many cases, they have no idea of how many different pension pots they have. Consolidating in these circumstances makes huge sense, especially in order to put in place a coherent investment strategy and for ease of administration later.

And that’s the point I want to raise.

Since the passing of the Finance Act, 2016, the latest age that you can access benefits from a PRSA/RAC is age 75. If you don’t take benefits by then, potentially nasty things happen! And if your eye is not on the ball, hard-earned money which has been set aside may not be yours to enjoy!!

So, consolidating, and having someone review all your accumulated plans has another good reason to justify it.

So, what are the implications of not taking benefits by then?

• Your PRSA/RAC is thereafter treated as having ‘vested’ (essentially like a post-retirement ARF but with side effects!) but the PRSA/RAC holder has NO ACCESS to benefits. ie No Lump Sum, No Income from drawdowns.
• In the event that the PRSA/RAC holder hasn’t completed a Benefit Crystallisation Certificate within 30 days of their 75th birthday, Chargeable Excess tax will be deducted from their fund at a rate of 40%. In other words, it will be assumed that the value of the PRSA/RAC would bring the total value of all pensions crystallised beyond the Standard Fund Threshold (SFT) of €2.0m.
• PRSAs (but not RACs) are subject to annual Imputed distributions. In other words, the required taxable drawdowns are made and this tax is remitted to Revenue but the PRSA holder doesn’t receive the net amount as ‘Income’.
• On death, the Vested PRSA/RAC is treated like an ARF. It can pass as an ARF to a surviving spouse, or with tax consequences to children (not as an ARF).

It’s easy to forget a pension plan that you took out 10 years ago (trust me!) That it could unwittingly deprive you of accessing its benefits is not so pleasant so it is, therefore, VITAL that clients are aware of this and act by age 75.

The Covid lockdown has been bad enough. A Pension lockdown could be even more unpalatable.

Finally, I also want to draw your attention to another age-related event that is of great significance.

Age 75 is also a very relevant age in AMRF/ARF world too as it is the latest age that an AMRF can be retained. The significance of this is that AMRFs are not subject to mandatory taxable drawdowns.

AMRFs/ARFs are post-retirement funds, generally opted for in lieu of a formal ‘pension’. An Approved Minimum Retirement Fund (‘AMRF’) is required where the retiree does not have guaranteed income for life of €12,700 pa at the point at which benefits are taken. €63,500 must be set aside in an AMRF in these circumstances.

Tax drawdowns

However, in the event that the AMRF/ARF holder has guaranteed specified income for life of €12,700 pa SUBSEQUENTLY, the AMRF which they may have set up at the point of taking retirement benefits MUST be treated as an ARF and potentially subject to mandatory taxable drawdowns.

The onus is on the AMRF holder to inform the AMRF/ARF provider that their AMRF should now be treated as an ARF AND subject to taxable drawdowns. Clearly, not doing this could leave the AMRF/ARF holder with a potential tax issue.

Regular (at least annual ) reviews of your circumstances with your ARF provider should be a mandatory calendar item.

The FULL state pension, which is paid from age 66, exceeds the €12,700 pa income threshold and this should trigger a change in the AMRF for most clients at that stage.

Having been sensible and diligent in setting up and growing a pension fund to see you through retirement years, don’t let a lack of engagement as you get older potentially destroy or impact your latter years.

Contacts 

brewin.ie

For further information, contact Brewin Dolphin’s Cork office at 1 Albert Quay or ring us at 021-2373820,