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Additional contributions paid by a member of an occupational pension scheme in order to secure benefits over and above those set out in the rules of the scheme. Where an occupational pension scheme does not provide access to an AVC facility, a standard PRSA must be offered for this purpose.
A person regarded by Revenue as responsible for the management of a pension scheme. In a less formal sense, it means the person or body which manages the day-to-day administration of the scheme. See also Registered Administrator.
This is the percentage of your money that is used to buy units in a pension or other type of investment fund. For example, an allocation rate of 97% means that for every €100 you invest, €97 is actually used to buy units. So in effect you pay €3 (or 3%) as a charge to the firm you invest with.
A guaranteed retirement income for life paid at stated intervals until a particular event (usually the death of the person receiving the annuity). Annuities are normally purchased from a life assurance company at retirement in return for a lump sum payment (from your pension fund).
The level of retirement income you receive will depend on annuity rates at the time of your annuity purchase.
An Approved Retirement Fund (ARF) is a post-retirement investment fund for the proceeds of any:
- defined contribution scheme,
- additional voluntary contributions,
- Personal Retirement Savings Account,
- Retirement Annuity Contract,
- buy-out bond (where the benefits from a defined benefit or defined contribution scheme were transferred into a buy-out bond), or
- in the case of a 5% Director, other retirement benefits that are not taken in the form of a lump sum or pension on retirement.
Certain qualifying conditions must be met in order for you to be eligible to transfer your retirement funds to an ARF. You must have a guaranteed income of at least €12,700 per year or you must have set aside at least €63,500 in an Approved Minimum Retirement Fund (see above). Money is invested with a qualifying fund manager and may be invested in any manner you choose. ARF funds accumulate tax-free. Income tax is payable on any withdrawals from the ARF. A minimum withdrawal is assumed for tax purposes even if no withdrawal is made in any given year.
An Approved Minimum Retirement Fund (AMRF) is a post retirement investment fund for individuals under age 75 who do not meet the specified income amount (currently €12,700 per year) and wish for their residual retirement funds, after taking a retirement lump sum, to remain invested after retirement. In this case, the lesser of the residual retirement fund or €63,500 can be invested in an AMRF. An AMRF can accumulate tax-free. A maximum of 4% of the AMRF value may be withdrawn annually and withdrawals are subject to tax. An AMRF automatically becomes an ARF (see below) when an individual reaches age 75 or meets the specified income requirement, if earlier.
An occupational pension scheme is approved by Revenue under Chapter I of Part 30 of the Taxes Consolidation Act, 1997 (previously Chapter II, Part I of the Finance Act, 1972). See also ‘exempt approved scheme’.
This is a fee you pay to a financial services firm for a service or product. All regulated firms have to give you details of administration and other fees before you buy a service or product.
A person who is entitled to benefits under a pension scheme or who will become entitled on the happening of a specified event (e.g. on the death of a member).
This is a statement giving details of your pension plan that is sent out to you, usually once a year.
Benefit given other than in cash which forms part of remuneration; if taxed under Schedule E, it may be included for pension purposes under Revenue rules (but may or may not be included in pensionable pay by the scheme rules).
This is an investment charge and refers to the difference between the buying and selling price of a unit in an investment or pension fund. A typical bid-offer spread would be 5%. For example, if you invest €100 in a pension or investment fund, its value would become €95 (€100 less 5%) if you withdrew the money immediately. The buying and selling price of the units in a fund depend on the value of the assets in the fund.
The purchase by the trustees of a pension scheme of an insurance policy or bond in the name of a member or other beneficiaries following termination of service, retirement, or on winding-up of a scheme. The bond is bought in substitution of the members rights under the pension scheme. Under the Pensions Act, 1990, purchase of such a bond on leaving service may be at the option of the member or, in certain circumstances, at the option of the trustees. See also ‘personal retirement bond’.
A pension scheme that does not accept new members.
This is a payment that a financial services company gives to a financial intermediary, such as a broker or financial advisor for selling their financial product.
The mathematical factors used by the trustees to determine the amount of pension which needs to be given up in order to provide a given lump sum benefit.
An annuity must be purchased on retirement for a member of an insured pension scheme or for the holder of a personal retirement bond.
A company which acts as a trustee.
A scheme established in one EU member state, which authorises an employer to operate a cross-border scheme and to accept members and contributions from an employee located in another EU member state.
The type of trust document used when the employer is also intending to act as sole trustee, but the actual content is comparable with the trust deed and rules. This type of document is commonly used when the assets of the pension scheme are totally invested and administered by an insurance company.
An additional trust document enabling a new employer to participate in an existing scheme.
A trust document by which a trustee is appointed.
An automatic investment strategy required by law to be applied under a PRSA contract unless the contributor indicates otherwise. The default investment strategy for each individual PRSA product is based on general good investment practice in saving for retirement and approved by the PRSA actuary. Trustees of a defined contribution scheme may specify a particular strategy as a default if they are offering members a choice of alternative strategies or funds.
An annuity which commences from a future date.
Any pension benefit, payment of which is delayed, e.g. until a person reaches normal pensionable age. Most often used to refer to benefits that accrue to a scheme member on leaving service.
A person entitled to a pension payment at a future date. Normally this would be an early leaver, but the term is sometimes used to describe someone whose retirement is being postponed.
Defined benefit schemes provide members with retirement and death benefits based on formulae set out in the rules of the scheme. Benefits are often based on a member’s salary close to retirement (or earlier if leaving service) and on their completed pensionable service. For this reason, these schemes are sometimes known as ‘final salary’ schemes. However, defined benefit schemes may also be ‘career average’ schemes in which the pension calculation is typically based on the member’s average earnings while a member of the scheme.
Defined contribution schemes provide retirement benefits based on the accumulated value of contributions paid to a pension scheme by or on behalf of a member, including the investment returns earned on those contributions less any charges. As such, it is the contributions that are ‘defined’ or known, as opposed to the benefits that the member will receive at retirement.
A person who depends financially on a scheme member or pensioner. Children are generally regarded as dependants until they reach the age of 18 or leave full-time education or vocational training, if later. A spouse/civil partner is always regarded as a dependant and a cohabiting partner is generally considered a dependant also. The definition of a dependant for any particular scheme is typically set out in the rules of the scheme, available from the trustees.
A benefit is payable to an employee who is unable to work for medical reasons. This may be paid from a pension scheme as an ill-health early retirement benefit or it may be payable by the employer either directly or under the terms of an insurance policy or income continuance plan (which are not part of the pension scheme). A disability benefit can also arise under a voluntary disability insurance scheme, paid for in full by its members. Not to be confused with social welfare disability benefit.
This is a payment that some public companies pay to their shareholders as a way of distributing some of their profits. The payment may be in cash or shares.
The ECB is the central bank for Europe’s single currency, the euro. Its main task is to maintain the purchasing power of the euro and price stability in the euro area. One of the functions of the bank is to set interest rates for the 13 member countries in the eurozone. The Central Bank and Financial Services Authority of Ireland (CBFSAI) is a member of the European System of Central Banks.
A person who ceases to be an active member of a pension scheme, other than on death, without becoming entitled to an immediate retirement benefit.
The retirement of a member, with immediate retirement benefit, before normal pensionable age. The benefit may be reduced because of early payment. See also ‘ill-health early retirement’.
A limit, currently €115,000 per year, on earnings from all sources for the purpose of calculating allowable tax relief on personal contributions to all forms of pension arrangements, including PRSAs. Separate or simultaneous employments or self-employment no longer generate separate allowances.
A system whereby pensions in payment and/or preserved benefits are increased regularly at a fixed or variable percentage rate. The percentage increase applied may be limited to the increase in a specified index. Escalation may be promised and paid for in advance of or may be granted on a discretionary basis after the pension has commenced.
This is where a stockbroker is simply instructed to buy or sell a particular investment on your behalf. The broker has no say about the trade and does not provide you with any advice.
Also known as an early encashment or exit charge, this is a charge applied by a financial institution when you cash in an investment or repay a loan within a set number of years or before a specific maturity date.
The pensionable earnings, at or near retirement or earlier leaving service, on which a defined benefit pension is typically calculated. This may be fixed at a particular date or averaged over of a number of years and will typically be defined in the member’s handbook and the trust deed and rules of the pension scheme.
The term used by Revenue for the maximum amount of earnings which it will permit to be used for the purpose of calculating maximum approvable benefits. The permissible alternatives are set out fully in the Revenue Pensions Manual.
A defined benefit scheme whose benefits are generally calculated by reference to salary at, or close to, retirement or earlier leaving service.
A qualified financial adviser is regulated by the Central Bank of Ireland to give advice to individual members of the public on pensions, life assurance, loans and investments. Advisers can be ‘tied’ and only able to advise on products of the product producer or can be ‘independent’ and able to advise on a range of providers and products. It is important when selecting an adviser that you understand whether or not they are independent, how they are being paid for the advice that is being given, what products and services they are qualified to advise on and what impact any commission being paid will have on your pension or investments. In the context of occupational pension schemes and personal pension products, you should seek to know the adviser’s experience of relevant issues, particularly in relation to defined benefit scheme funding (if applicable to you).
A scheme which provides benefits only for members whose service has terminated; or a scheme where continuing service in employment does not entitle members to accrue new pension benefits, and to which no new members are admitted.
This is an annual charge you have to pay to get a fund manager to manage your investment. A typical fund management charge would be 1% per annum. The management charge is often higher if the bid-offer spread is low or zero.
If a defined benefit scheme does not meet the funding standard requirements set out in by the Pensions Act, 1990, the scheme trustees must submit a funding proposal to the Pensions Authority setting out how the scheme’s funding level will be restored by a future date. A funding proposal will include details of the proposed rates of contributions from the employer and members, as well as plans for the investment of the scheme’s assets.
The rate of which contributions are payable to support the liability for benefits. Often used as shorthand for recommended contribution rate.
The Pensions Act, 1990, sets out a funding standard for funded defined benefit pension schemes. The funding standard provisions of this Act sets out the minimum assets that a scheme must hold and the rules that apply if a scheme falls short. The funding standard is designed to provide a level of protection for scheme members of the pensions they have already built up or ‘accrued’ in a defined benefit scheme.
A tax-free lump sum payment, payable at pension age or on death, which may be subject to abatement. See also ‘short service gratuity’ and ‘marriage gratuity’.
An insurance policy issued to cover more than one individual.
A right to apply the proceeds of an insurance policy to purchase an annuity at a rate guaranteed in advance in the policy.
A period of time after the commencement of a pension, normally five or 10 years, for which payment of a pension would be guaranteed to be paid, whether the pensioner lives or dies in that period. If the pensioner dies during the guaranteed payment period, a lump sum equal to the balance of pension payments due over the remaining guarantee period would be payable to their dependant(s).
A scheme which combines features of two or more types of pension design e.g. a defined benefit scheme with a defined contribution element.
Retirement on medical grounds before normal retirement age. The benefit payable on ill-health early retirement may be greater than that paid to a member retiring early in normal health. The qualification criteria and benefits payable will be set out in the trust deed and rules of a pension scheme.
A system whereby pensions in payment and/or preserved benefits are increased automatically at regular intervals by reference to a specified index of prices or earnings.
A pension scheme with only one member whose documents relate only to that member. Also called a ‘one-member arrangement’. The term individual arrangement can also refer to an individual contract-based retirement savings such as a Personal Retirement Savings Account (PRSA) and a Retirement Annuity Contract (RAC).
IORP is an EU law term to cover the diverse range of entities in the member states that provide retirement benefits but in Ireland IORPs are occupational pension schemes or trust RACs.
A pension scheme where the sole long-term investment medium used by the trustees is an insurance policy. All of the benefits are provided by an insurance company with whom the trustees have taken out a contract to pay regular premiums.
In relation to a pension scheme, the process by which contributions and net income of a scheme are used with a view to increasing the value of pension scheme assets by means of the purchase and sale of equities, bonds, property and other assets directly or through collective investment undertakings. The investment of pension scheme assets is subject to the trust deed and rules of the pension scheme, the investment provisions of the Pensions Act, 1990, and the investment regulations (explained below).
A person or body to which the investment of the whole or part of the assets is delegated by the trustees in accordance with the provisions of the trust document.
The comparison of the rate of return of a given pension fund with the notional return of a hypothetical fund, or the actual rates of return of other funds, over the same period.
A set of regulations made under the Pensions Act, 1990 setting out certain investment and borrowing rules that trustees of schemes must comply with when investing the assets of a pension scheme. These include investing predominantly in regulated markets (while keeping other investments to a prudent level) and diversifying investments so as to minimise the risk of large losses owing to excessive concentration of risk. The investment rules and borrowing restrictions do not apply to ‘one-member arrangements’. The investment regulations are formally called the Occupational Pension Schemes (Investment) Regulations, 2006, as amended. The relevant statutory instrument references are SI No 294 of 2006, SI No 188 of 2007 and SI No 455 of 2010.
An asset allocation strategy used mainly in defined contribution schemes, in which members investments are adjusted automatically by the pension provider according to the member’s age and term to retirement so that risk exposure declines as the member ages. Typically, assets are invested in equities for younger members and systematically switched to less risky assets in the years before a member’s expected retirement date.
Funds managed for you by others namely, investment professionals such as fund managers. Managed funds can invest in a variety of assets including shares, property and bonds or a combination of these.
An earnings limit imposed by Government to determine eligibility for the State Pension (Non-Contributory) and other social welfare payments including widowed and surviving civil partner pensions and dependent relative allowances.
A person who has been admitted to membership of a pension scheme and who is entitled to benefits under the scheme. This includes active members, pensioners and deferred pensioners.
These are broadly defined as earnings from a trade or professional employment, less certain allowable expenses.
The naming by a member of a person or persons to whom they wish any death benefit, payable from a pension scheme, to be paid in the event of their death. Also called a ‘wishes letter’ or ‘expression of wishes’. Such a letter or expression of wishes cannot bind the trustees, but trustees would normally try to give effect to the deceased member’s wishes.
A pension scheme which does not require contributions from active members, i.e. the employer is liable for all contributions needed to support the scheme.
Normal pensionable age means the earliest age at which a pension scheme member is entitled to receive immediate retirement benefits from a scheme in normal circumstances, or age 60, whichever is later. Normal pensionable age usually coincides with normal retirement age, i.e. the age at which retirement benefits normally become payable under a scheme. Normal retirement age will typically be defined in the member’s booklet and the governing documents of a pension scheme.
A pension scheme set up by an employer to provide retirement and/or other benefits for employees. It is sometimes called a ‘company pension scheme’.
An arrangement under which a dependant’s pension comes into immediate payment on the death of a pensioner, while a minimum guaranteed period of payment of the main pension is still running.
A benefit secured for an individual member under a contract of insurance whose contributions have ceased to be payable in respect of that member. One form of deferred benefit.
A style of portfolio management that links the investments to a particular index or indices, so that their value tracks changes in that index or those indices.
Service completed before a given date, usually the date of a pension scheme valuation.
An order made following a decree of judicial separation or divorce whereby the court adjusts a member’s pension rights in favour of their spouse/civil partner/qualified cohabitant or a dependent child.
This is the assets of the pension scheme, but the term is very often used for the scheme itself.
An individual or body corporate involved with pension schemes and accepted under Revenue requirements as a trustee of a small self-administered scheme or small member controlled scheme.
The Pensions Authority is the statutory body that supervises compliance with the requirements of the Pensions Act, 1990, as amended, by trustees of occupational pension schemes and trust RACs, PRSA providers, registered administrators and employers. The Pensions Authority also provides guidance and information to these parties on their duties and responsibilities and advises the Minister for Social Protection on pension matters.
Also known as a ‘buy out bond’ or BoB, a personal retirement bond (PRB) is a special type of personal pension contract, where the only premium payment comes from a transfer payment from an occupational pension scheme. Rules around accessing PRB funds reflect the rules of the transferring pension scheme. The value of a PRB at retirement depends on the transfer payment amount and the investment return achieved over the term to retirement. Generally, individuals can take a tax-free lump sum from a PRB and use the remaining funds to buy an annuity (pension) or invest in an Approved Retirement Fund (ARF). Revenue restrictions apply.
A PRSA is a personal pension contract that you take out with an authorised PRSA provider. It is an investment account that you use to save for your retirement. Your savings can be accessed at retirement. PRSAs are a type of defined contribution arrangement. You get tax relief on your contributions to your account within Revenue limits. A register of authorised PRSA providers and their approved PRSA products is available here.
Also referred to as a ‘5% director’, means a person who, within three years of retirement, death or leaving service, held more than 5% of the voting shares in the employer or its parent company. Shares held by a spouse/civil partner/qualified cohabitant and minor children are counted, as are shares held by a trust to which the director concerned had transferred shares. Proprietary directors qualify to invest in ARFs on retirement regardless of whether the scheme is a DC or DB scheme.
An annuity purchased privately by an individual is different from the type of annuity purchased by pension scheme trustees, which are often described as ‘compulsory’ annuities. A purchased life annuity is purchased from personal assets rather than from the proceeds of a pension scheme. Therefore, the legislation provides that part of the instalment payments of a purchased life annuity are exempt from income tax, being treated as a return of those personal assets.
A term defined in the Pensions Act, 1990, as the service which a pension scheme member must complete before becoming entitled to a preserved benefit on leaving service. Currently, it is two years’ service including any period in a previous scheme from which a transfer value was received.
The percentage change in the value of an investment over a period, taking into account the income from it and the change in its market value, often expressed as an equivalent annual rate. See also ‘time weighted return’, ‘money weighted return’ and ‘real rate of return’.
Relevant earnings are broadly defined as income from a trade or profession or from an office or employment other than a pensionable office or employment.
A term used by Revenue to denote retirement or death benefits in respect of an employee’s earlier service with a former employer or an earlier period of self-employment. These may have to be taken into account in computing maximum approvable benefits.
An individual pension policy which can only be effected by individuals who are in non-pensionable employment or who have taxable earnings from a self-employed trade or profession. Also known as ‘personal pension plans’ or ‘personal pension contracts’.
This means any payment arising under a pension scheme, payable to the member spouse/member civil partner/member qualified cohabitant or to others, at and following retirement.
Revenue restrict either the amount of benefits ultimately payable to an individual and/or the contributions payable by or in respect of an individual.
Any threat to the accumulation of benefits or the solvency of a pension fund which can often arise from the variability of investment returns. Investments with a greater degree of risk built in must offer higher returns to attract investors.
A pension scheme where the assets are directly invested in stock markets, etc. They may be managed by an in-house manager or an external investment manager. The term is not used to indicate the method by which benefits and contributions are administered, but is now almost exclusively used to refer to the way in which the investments are managed.
Socially responsible investing, also known as sustainable, socially-conscious, or ethical investing, describes an investment strategy which seeks to maximise both financial return and social good. In general, socially responsible investors favour corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some (but not all) avoid businesses involved in alcohol, tobacco, gambling, weapons, and/or the military.
The Taxes Consolidation Act, 1997, as amended, imposed a maximum allowable retirement/pension fund for tax purposes by imposing a lifetime limit on the total capital value of pension benefits that an individual can draw in their lifetime from tax-relieved pension arrangements. This applies where those benefits are taken or come into payment for the first time on or after 7 December 2005. The limit is called a standard fund threshold. It is currently €2 million (reduced from a previously higher limit). It may be possible to apply for a higher personal fund threshold (PFT) in certain circumstances. Any excess above the threshold is subject to an upfront income tax charge.
A Standard PRSA can only invest in pooled funds except for temporary cash holdings. There is a maximum charge of 5% on each contribution you pay and a maximum 1% annual fund management charge, based on your fund value.
The minimum age at which people can qualify for the State Pension (Contributory) or the State Pension (Non-Contributory). The State pension age is currently 66.
The Pensions Authority is the statutory body that supervises compliance with the requirements of the Pensions Act, 1990, as amended, by trustees of occupational pension schemes and trust RACs, PRSA providers, registered administrators and employers. The Pensions Authority also provides guidance and information to these parties on their duties and responsibilities and advises the Minister for Social Protection on pension matters.
A member of a pension scheme who has a preserved benefit is entitled to take a transfer payment from that pension scheme to:
(a) another pension scheme of which they are a member or prospective member,
(b) a buy-out bond (BoB), also known as a personal retirement bond (PRB), with an insurance company, or
(c) a Personal Retirement Savings Account (PRSA) with a PRSA provider (subject to certain restrictions),
in lieu of the benefits payable to the member from the scheme from which the transfer payment relates.
In the case of a defined benefit scheme, the transfer payment will be the actuarial value of the deferred pension (preserved benefit). This may be reduced to reflect the funding position of the scheme. In the case of a defined contribution scheme, the transfer payment will be the accumulated value of contributions paid by or in respect of the member.
A pension which is small enough that it can be fully commuted (converted to a cash lump sum) without prejudicing the approval of the scheme by Revenue. The present triviality limit is €330 per year.
An arrangement under which a person or a group of people (trustees) hold and look after property on behalf of others. In the case of a pension scheme, the assets are held by the pension scheme trustees for the benefit of the members of the pension scheme and their dependants, and for the purpose of providing income in retirement.
The legal document, executed in the form of a deed, which establishes, regulates or amends a trust.
A proprietary director who, with other specified connected persons, owns or controls more than 20% of the voting shares of the employer or its parent. The benefits that can be provided to 20% directors are somewhat restricted by Revenue.
This has different meanings for different people.
(a) For active members, benefits to which they would unconditionally be entitled on leaving service, which may
or may not include statutory rights to preserved benefit.
(b) For deferred pensioners who have already left the employment, their deferred/preserved benefit.
(c) For pensioners, the pension which they are receiving, including, where appropriate, the related benefits for
spouses/civil partners and other beneficiaries.
This is the period of membership of an occupational pension scheme, which you must complete in order to be entitled to deferred benefits on leaving service.
The frequency and magnitude of price changes of assets.
The process of terminating a pension scheme, usually by applying the assets to the purchase of immediate and deferred annuities or buy-out bonds; by transferring annuities already purchased to the ownership of the payees; or by transferring the assets and liabilities to another pension scheme, PRSA or buy-out bond in accordance with scheme documentation. A scheme is not wound up until no further assets remain under the control of its trustees.
The naming by a member of a person or persons to whom he or she wishes any death benefit to be paid in the event of their death. Also referred to as ‘nomination’ or ‘expression of wishes’. Such a letter or expression of wishes cannot bind the trustees but they would normally try to give effect to the deceased member’s wishes.
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