Pensions in Ireland can be structured in different ways. The following are simplified examples of the different types of Retirement plans available on the market.
There are four main types of Pensions in Ireland:
1) Executive Pension Plans / Occupational Pension schemes.
2) Personal Pension Plans
3) PRSA / Personal Retirement Saving Accounts.
4) Buy-Out-Bond / Retirement Bonds.
Tax relief on all types of Pensions in Ireland:
All personal pension contributions can get Income Tax relief subject to a maximum amount according to your age and your income. In simple terms, for any contribution of €1,000 into your pension, the real cost for you is €600 if you are a 40% Income Tax payer or €800 if you are a 20% Income Tax payer.
You have made a personal contribution of €10,000 in total into your pension fund.
For a 20% Income Tax payer: your contribution of €10,000 only costs you €8,000 net due to the 20% Income Tax relief.
For a 40% Income Tax payer: your contribution of €10,000 only costs you €6,000 net due to the 40% Income Tax relief.
1) Executive Pension Plan / Occupational Pension scheme:
This type of plan is set up by Employers who want to contribute into their Employees’ pension fund. Your Employer will choose the provider and what is the charging structure. You will decide the amount you wish to contribute and in what fund you want to invest your money into.
The Employer has to make a meaningful contribution on behalf of the employee i.e. 10% of the employee’s contribution is considered as ‘’meaningful’’.
This means that if you contribute €1,000 gross per month into your pension, then, your Employer will contribute an additional €100 per month into your pension fund. All contributions will be deducted from your gross wages before any Income Tax, USC & PRSI are taken. Income Tax will be due from the net amount left. Currently, there is no tax relief on USC or PRSI.
2) Personal Pension Plan:
This type of plan can be set up for you if you are a Sole Trader or an Employee with no access to an Executive Pension Plan / Occupational Pension Scheme. This is a private pension. This is not linked to any Employer/Company and all contributions going into it are from you. Your Employer cannot contribute into this type of plan.
You will have the choice between different providers, investment funds and charging structures. There is no limit in relation to the number of Pensions in Ireland that a person can hold, therefore, you can have numerous Personal Pension Plans with different providers if required.
If all contributions are taken from your Sole trader bank account before the Income Tax deadline, it is taken off from your earnings before personal income tax is calculated.
3) PRSA / Personal Retirement Saving Accounts:
The PRSA plan is considered to be highly flexible and cost effective. This type of plan can be set up for you in two ways:
a) PRSA set up by you as a Sole Trader:
This is a private pension and it is not linked to any Company or specific occupation/trade. You can continue to contribute into it, even if you change trade/occupation. All contributions come from you as a Sole Trader. Where a contribution is made before the tax deadline it is taken off from your earning before tax is calculated. This is a private pension and you you will be able to search the market for the best options and change providers, charging structures, funds you are invested in if required
b) PRSA set up by an Employer for you as an Employee:
As opposed to the Executive Pension Plan, your Employer does NOT have to contribute into your Employee PRSA. Your Employer only has to facilitate access to a PRSA and facilitate deductions from your salary if the Executive Pension Plan is not an option for you.
All contributions will be deducted at source from your gross wages. As Income Tax relief is already applied there is no tax back to claim afterwards. Your Employer decides which company will be the PRSA provider.
4) Buy-Out-Bond / Retirement Bond:
This plan can only be set up for you when a Company Pension i.e. Executive Pension Plan / Occupational Pension Scheme is being wound up by your Employer or if you leave service with an Employer where you have been a member of an Occupational Pension Scheme.
Many people change careers or Employers during their lifetime. You may have accumulated different retirement plans over the years linked to different employments. Sometimes, your previous or current Employer may be unable to maintain your pension scheme and will decide to have the scheme wound up.
In all cases, you will have to decide what to do with your pension fund. One of the options is to transfer your pension into a Buy-Out-Bond / Retirement Bond.
This type of plan allows you to keep the same retirement benefits as the one you had with the Company scheme. It will follow the same rules and same retirement age. The main difference is that the Employer will not be in charge of administrating your pension fund anymore and will not have to contribute into it either. You will become the only owner of the plan and all decisions will be taken by you.
A Buy-Out-Bond only exists in order to carry your pension fund until retirement, you cannot make any new contributions into it.
I hope that the above explanation helps you to understand the different types of Pensions in Ireland.
Please note that I only dealt with pre-retirement pension plans and did not go through Defined Benefit scheme in this article.