The Pension System in Ireland Paul Kenny Retirement Course Leader Retirement Planning Council of Ireland

Who we are 40 years providing impartial advice. Lifestyle & financial focus. Weekly Dublin courses. Monthly regional courses. In-house & Executive Courses. Not-for-profit organisation. Voluntary board of Directors. About me. Use this opportunity to discuss the strength of the programme and to introduce yourself.

Pension Access in Ireland Pension provision by private sector employers is mostly voluntary, or negotiated by Trades Unions Only about 50% of the working population in Ireland has access to occupational pensions Disadvantaged groups include workers in agriculture, hospitality, the self-employed and “atypical” workers – part-time, fixed term, temporary So, many people have to rely on the two elements of the State pension

1. State Pension (Contributory) Based on contributions of employers, employees and self-employed Qualification conditions complicated Present system produces anomalies, often affecting women adversely Review and new system promised for 2020 Recent developments include raising age of payment: 65 to 2014, 66 to 2020, 67 to 2028, then 68

2. State Pension (non-Contributory) Means tested Intended for those who do not qualify for State Pensions (Contributory) or for reduced rate of pension Must be habitually resident in Ireland at time of application and thereafter

3. Public Service Pensions Defined Benefit pension schemes Originally based on United Kingdom legislation (1834) May be contributory or non-contributory Pension age generally 60-70, mainly 65 Benefits based on pay and service Maximum pension 50% of pay plus lump sum 150% of pay Membership of separate spouses’ and children’s scheme mandatory 360,000 active members in 2016 (Numbers given exclude police and Defence Forces)

4. Other Workplace Pensions Pension provision by employers is not compulsory Defined benefit provision mostly by larger employers – number of schemes decreasing 2016 - 69 schemes account for 104,000 active members out of a total of 111,500 Most employer-provided schemes are Defined Contribution – 300,000 active members in 2016 76 schemes for employers with >500 workers 57,666 one-member schemes of employers

Other Features Minimum age for early retirement is 50, except in ill health Minimum Normal Retirement Age is 60* Most common Normal Retirement Age is 65 Maximum retirement age is 70 * Exceptions for military, sportspersons, firefighters, etc

Tax Treatment Subject to certain limits, employer and employee contributions are allowed against tax liability Pension funds are not taxable on investment gains, whether income or capital With the exception of certain restricted lump sums, retirement benefits are subject to income tax on payment Generous limits on tax-free payment to survivors on death of a scheme member

Fiscal Regulation All schemes governed by the Taxes Acts and subject to approval of the Revenue Commissioners Except Statutory schemes in the public service Legislation limits maximum benefits and contributions Employers and employees may contribute to workplace pension schemes Maximum employee contributions are age-related

Employee Contributions These limits apply to employee contributions to workplace pension schemes and to contributions to individual private arrangements Tax-relieved, deducted from pay at source Maximum annual pay for tax relief is €115,000 Maximum contribution allowed: Under age 30, 15% Age 30-39, 20% Age 40-49, 25% Age 50- 54, 30% ( and professional sportspersons of lower ages) Age 55-60, 35% Over age 60, 40%

Individual Private Pension Provision Personal Pensions, formally called Retirement Annuity Contracts (RACs) Individual contracts with life assurance companies Intended for the self-employed and those in non-pensionable employment Always defined contribution in structure No standard terms or charges for these contracts Contribution limits same as for occupational pension schemes Numbers for these not available

Personal Retirement Savings Accounts PRSAs introduced in 2003 Originally intended to replace RACs Now the most common individual product Providers and contracts must be approved by the Revenue Commissioners and the Regulator (the Pensions Authority): Provider must be either an investment firm authorised under Directive 93/22EC, or an authorised insurance undertaking or a credit institution Two types of PRSA: Standard and Non-Standard

PRSAs (continued) All PRSAs must have a default investment strategy, regulated by the Pensions Act – pooled funds only All assets must be held by a custodian Provider may not require minimum contribution of more than €300 per year (other restrictions apply) No charge permitted for transfers between PRSAs Initial charges, charges on suspension or termination of contract forbidden PRSA may not be sold on condition that another product (e.g., risk benefit) must be purchased

PRSAs- 3 Any person may invest in a PRSA – employed, unemployed or self-employed For his/her own benefit only – not for a third party PRSAs are used extensively for Additional Voluntary Contributions (AVCs) by members of pension schemes – no specific link to scheme required Even if benefits being paid from a PRSA, owner may still make contributions Act provides for detailed reporting and disclosure requirements

PRSAs -4 Minimum age for payment of benefits: 60; Maximum, 75; - any age on permanent incapacity Standard PRSAs: Restriction on investment Caps on charges 5% of any contribution or 1% of the assets or Any combination of these, provided that 1% of assets not exceeded Higher charges and no investment restrictions in Non-standard PRSAs – may invest directly in assets

PRSAs -5 At end of 2016, there were 185,707 Standard PRSAs and 65,012 non-standard PRSAs Total Assets under management: €5,600,000,000 Employers who do not provide access to an occupational pension scheme within six months of an employee joining service must, by law, provide access to a standard PRSA and deduction facilities for employee contributions But employer not compelled to contribute

Taking the Benefits In Defined Benefit Occupational schemes, maximum tax free lump sum of 1½ times salary (depends on service completed) In defined contribution schemes, including RACs and PRSAs, maximum lump sum is ¼ of the fund Any lump sum over €200,000 is taxable In all DC arrangements, the balance is used either to purchase an annuity or invested in an Approved Retirement Fund (ARF)

Approved Retirement Funds An investment contract – alternative to buying an annuity – annuities expensive , low interest rates ARF Accessed with funds from: DC pension schemes; Retirement Annuity Contracts; PRSAs and AVCs Assets not taxed while invested Withdrawals subject to tax “Imputed withdrawals” – 4% per year to age 70, 5% after that age Minimum pension income required to access ARF

Advantages and Disadvantages ARF removes need to change investment options as retirement approaches Low interest rates make annuity unattractive Asset may be left to dependants on death Owner discretion on amount of withdrawal BUT Unlike an annuity, not guaranteed for life No “joint life” option, so no automatic reversion to dependants – must be dealt with in a will

Approved PRSA Providers Ark Life Assurance Ireland Ltd. Aviva Life & Pensions Ireland Limited. BCWM plc Davy Stockbrokers Friends First Life Assurance Co. Ltd. Goodbody Stockbrokers Independent Trustee Company Limited Irish Life Assurance plc Merrion Stockbrokers Ltd Newcourt Retirement Fund Managers Limited New Ireland Assurance Co. plc/Bank of Ireland Life Standard Life Assurance Limited Zurich Life Assurance plc.

Pension Providers - Insured New Ireland Assurance/Bank of Ireland Life Aviva Friends First Standard Life Assurance Irish Life Assurance /Canada Life Zurich Life Acorn Life Phoenix Ireland

Many fund choices For example: Zurich Life: 53 funds Aviva : 16 Standard life : 36 New Ireland/Bank of Ireland : 50 Acorn Life : 4 Irish Life: <70 Friends First : 46

Investment of pension funds Very large schemes directly invested in assets Most schemes using pooled funds Member investment choice, switching funds Traditional insurance contracts no longer available “Small Self-Administered Schemes” and “Self-directed” plans – Revenue oversight

The Future Government to review State Pension system by 2020 – proposed changes to eligibility conditions to make system more equitable Possibility of additional second-tier pension arrangement – “Auto Enrolment” proposed , to get more people into pension provision Pensions Authority trying to reduce the total number of separate schemes through use of “master trusts”

Thank You Any Questions? Please complete reflections from day 1 on page 9 Encouraging reflection is very positive for improving self esteem and realising the learning experience