Benefits
Revenue Pensions Manual
CHAPTER 6
TOTAL BENEFITS ON RETIREMENT AT NORMAL RETIREMENT AGE
General
6.1
This chapter sets out the maximum total benefits that may be provided under approved schemes for
members who remain in a particular employment until retirement. Please refer to Chapter 25: Limits
on Tax Relieved Pension Funds as additional tax charges occur when individual benefits exceed
specified monetary amounts.
Other Schemes of Same Employer
6.2
In determining whether the benefits to be provided under a scheme for a particular employee or class
of employees are within approvable limits, they should be aggregated with benefits for those
employees from all schemes relating to the same employment.
Benefits on Retirement – Other Conditions
6.3
No pension shall be assignable and no pension shall be capable of being surrendered, except to the
limited extent explained in paragraph 11.5 in order to provide pensions for spouses or dependants.
These conditions apply to all pensions payable under approved schemes. See paragraph 11.2 as
regards pensions for persons other than employees.
Maximum Total Benefits
6.4
The aggregate benefits payable to an employee who retires at normal retirement age after 40 or more
years’ service with the same employer, when expressed as an annual amount payable for life (or for
life subject to a guaranteed minimum period not exceeding 10 years) and taking into account any
benefits paid as lump sums, should not exceed 2/3rds of his final remuneration. A basic maximum
accrual rate of 1/60th of final remuneration for each year’s service is approvable for any period of
service of 40 years or less (a pension on this basis is commonly described as a pension of N/60ths).
It may be desired to set up a scheme that does not express the benefits on retirement as a pension of
which part may be commuted, but which gives all members a lump sum of a specified amount plus a
separate non-commutable pension. Such schemes are common in the public sector and, in practice
for the purpose of determining whether the total benefits under a scheme of this kind are within the
approvable maximum, the ratio between pension and lump sum commonly found in public sector
schemes will be used, i.e. the accrual rate of the lump sum benefit will normally be divided by the
figure 9 to arrive at its pension equivalent. Thus a lump sum of 3/80ths of final pay for each year of
service will represent a pension annual accrual rate of 1/240, and the approvable maximum rate at
which the non-commutable pension may accrue for an employee with 40 years’ service will be 1/80th
of final pay for each year, i.e. 1/60th less 1/240 = 1/80th.
Other Benefit Formulae
6.5
Schemes may calculate benefits by reference to other formulae provided that such benefits are within
maximum limits (e.g. defined contribution schemes).
Late Entrants
6.6
Benefits in excess of those which would be produced by a basic rate of 1/60th of final remuneration for
each year of service can normally be approved under Pensions Business Unit discretion for employees
who cannot, by reason of the date of their entry to employment, complete 40 years’ service before
normal retirement age. A pension of two-thirds of final remuneration cannot be approved for very short
periods of service but, subject to any deduction required for retained benefits from previous
employment, approved schemes may provide a pension of two-thirds of final remuneration for service
of not less than 10 years to normal retirement age. An improvement on an accrual rate of 60ths is
usually also permissible for employees with less than 10 years service to normal retirement age as in the
following scale known as “uplifted 60ths”:
Maximum Pension
Years of service to Expressed as a fraction Expressed as a fraction
normal retirement age of maximum approvable of final remuneration
pension for a full career
1 1/10th 4/60ths
2 2/10ths 8/60ths
3 3/10ths 12/6oths
4 4/10ths 16/60ths
5 5/10ths 20/60ths
6 6/10ths 24/60ths
7 7/10ths 28/60ths
8 8/10ths 32/60ths
9 9/10ths 36/60ths
10 or more 40/60ths
Maximum pension means pension before any commutation and including –
(i) The annuity value of any separate lump sum entitlement, and
(ii) Any pension derived from voluntary contributions paid by the member.
There is no objection to incorporation of this scale in the rules of a scheme if provision is made for
any necessary restriction e.g. for retained benefits or service which does not qualify for benefits.
Alternatively, the rules may provide for pensions to accrue at a rate of 1/60th of final remuneration for
each year of service (N/60ths) “or such higher fraction as will not prejudice approval by the Revenue
Commissioners for the purposes of Chapter I, Part 30, Taxes Consolidation Act 1997″ (or some similar
wording). A higher rate may be permitted in suitable cases where it is necessary to adopt an
unusually early age for normal retirement.
Normal Retirement Age (NRA)
6.7
(a) It is a condition of approval that the rules of a scheme should specify the age at which
members will normally retire.
(b) Any age within the range of 60 – 70 is acceptable. The NRA may differ for categories of
member and may also be agreed on an individual basis.
(c) Revenue may be prepared to accept an NRA outside the above range for exceptional
occupations. Submissions should be made on an individual basis but 20% directors must be
within the 60-70 range.
(d) All schemes/arrangements in respect of the same employment that provide benefits for an
individual must have the same NRA.
Increases of Pensions in Payment
6.8
(a) A pension in course of payment may be increased up to the level of the maximum
approvable at retirement (after deducting the annuity value of any pension exchanged for
lump sum benefit or allocated to a spouse or dependant).
(b) Increases in benefit after retirement must be in the form of non-commutable pension.
(c) Scheme rules may provide for increases in pensions to counteract the effects of inflation.
(d) Discretionary increases may be made to maximum pensions up to the level of increases in
CPI or other similar agreed index.
(e) Guaranteed increases may be made by using either of the following formulae –
(i) Fixed increases of not more than 3% p.a. compound (regardless of CPI levels), or
(ii) Increases linked to CPI or other similar agreed index.
A combination of (i) and (ii) is not acceptable.
(f) Augmentation of existing pensions to put the recipients on a par with current holders of the
same employment will normally be approved.
(g) Please refer to 25.4 as increases in excess of the” permitted margin” may trigger a tax charge.
Life Cover After Retirement
6.9
Life Assurance cover that continues after retirement or leaving service may be provided as a
retirement benefit. Where such cover is provided, the annuity equivalent of the single premium cost
required to secure the cover (other than cover extending up to normal retirement date only, where
early retirement takes place on grounds of incapacity) must be taken into account for the purposes of
determining aggregate maximum benefits.
CHAPTER 7
LUMP SUM BENEFITS AND COMMUTATION
General
7.1
This chapter sets out the maximum lump sum benefits that may be provided under an approved
scheme. The level of lump sum benefits that is approvable is calculated by reference to an employee’s
length of service and final remuneration with the relevant employer.
Lump sum benefits must only be paid once, normally at the time of retirement (i.e. the date on which
the pension becomes payable).
Please refer to Chapter 25: Limit on Tax Relieved Pension Funds, as the payment of a lump sum
benefit in excess of a specified monetary amount may trigger a tax charge.
Maximum Lump Sum Benefits
7.2
Lump sum benefits greater than 3/80ths of final remuneration for each year of service may be given on
retirement at NRA in accordance with the table set out below provided that the aggregate of the value
of non-pension retirement benefits in respect of service with the current employer and any retained
benefits does not exceed 1.5 times final remuneration.
Years of Service Eightieths of final remuneration
9 30
10 36
11 42
12 48
13 54
14 63
15 72
16 81
17 90
18 99
19 108
20 or more 120
Please refer to 23.8 for details of the calculation of lump sum benefits for retiring employees taking
“ARF options”.
Commutation Factors
7.3
If an approved scheme permits a retiring employee to commute pension up to the amount required to
provide a lump sum within the permitted maximum, the reduction in pension must be
commensurate with the amount of the lump sum. The relationship between lump sum and pension
may be calculated on any one of the different bases explained below:
(a) If it is desired that the relationship between lump sum and pension should not vary with age
or sex or take into account any other considerations, the rules may provide for the same fixed
relationship prescribed in paragraph 6.4 for schemes with an independent lump sum, e.g. €1
of pension may be commuted for a lump sum of €9.
(b) A scheme may use a specifically designed table that will be subject to actuarial review at
intervals. Continued approval of the scheme will be dependent on the table being changed if
any of the assumptions on which it is based have to be varied.
(c) A scheme may provide for individual calculations by a qualified actuary for every
commutation. These must be consistent with other calculations made for the same individual
and for other purposes of the scheme having regard to changing financial conditions.
A uniform basis should apply to all members (subject to variations of age) of one scheme and to all
schemes that have a substantial common membership.
Commutation factors fall within two broad categories depending on whether or not they take account
of the value of any entitlement to cost of living post-retirement increases on the pension. Factors that
do take account of such increases are commonly referred to as ‘enhanced’ and are not appropriate to a
scheme giving no such entitlement (but see below in relation to schemes which provide for regular
reviews and an expectation of resultant increases).
For schemes not using enhanced factors, commutation factors in the range 10.2 to 11.0 at age 60 and
9.0 to 9.8 at age 65 may be used for members. Values for other ages within the acceptable range for
normal retirement may be calculated by adding or subtracting 0.02 per month of age difference. The
factors are acceptable whether pensions are guaranteed for 5 or 10 years or not guaranteed at all,
irrespective of whether payments are in advance or in arrears and regardless of the frequency of
payments.
If the rules of the scheme provide for pensions to be reviewed regularly and increased (within the
limit of the rise in the cost of living) at the discretion of the employer or trustees if funds permit,
enhanced commutation factors may be used provided that a certificate by an actuary is furnished
stating the anticipated percentage rate of future increases on the basis of the current annual
contributions without taking into account any future special contributions which the employer might
make.
The pension equivalent of a lump sum taken from a defined contribution scheme is determined by
application of the annuity rate used to determine the balance of the pension.
Where scheme rules permit the application of enhanced commutation factors and where postretirement
increases are not applicable on commuted pensions, the commutation factor may be
calculated by reference to current open market annuity rates despite the amount of pension prior to
commutation not being dependent on open market annuity rates.
Trivial Pensions
7.4
An approved scheme may permit full commutation of a pension if the aggregate benefits payable to
an employee under that scheme and any other scheme relating to the same employment do not
exceed the value of a pension of €330 per annum. Pensions for spouses and dependants may also be
commuted at the same time as commutation of the member’s pension if they are independently
trivial. If commutation of part of a greater pension than €330 per annum leaves a residual pension
within the triviality limits then this residual pension may not then be commuted on triviality
grounds.
In a defined contribution context, for the purposes of establishing whether or not benefits come
within the triviality limit ,the calculation should be based on the cost of a single life annuity with no
escalation.
The 10% tax rate under Section 781(3) Taxes Consolidation Act 1997 also applies where members’
pensions are fully commuted on the grounds of triviality. The chargeable part of the payment may
be calculated in the same manner as indicated for lump sum payments under the section dealing with
serious ill-health (see paragraph 7.5). However, when calculating the maximum commutation ( in the
context of triviality), potential service should not be taken into account.
Where a trivial pension is a deferred pension, it may not be commuted until it begins to be payable.
Furthermore, if such a pension is secured by an annuity contract or a policy which has been bought in
the name of the employee, or assigned to the employee, because the scheme has been wound up or
the employee has left service, commutation will be possible only if satisfactory arrangements have
been made with the Life Office concerned for payment out of the policy proceeds of any tax due. For
the purposes of the €330 limit, a deferred pension will be that pension as increased by virtue of the
preservation requirements of the Pensions Act, 1990.
As an alternative to the above, and with the agreement of the scheme beneficiary and trustees, there
is no objection to the payment of once-off pensions. This may take place where the total of all funds
available for pension benefits, following payment of any lump sum benefit, is less than €20,000. The
quantum of retirement benefits from all sources must be taken into account for the purpose of
calculating the €20,000 limit. In a defined benefit context, the pension benefit needs to be converted to
a fund value to determine if the benefits are within the €20,000 limit. This should be done by
reference to the scheme commutation factors. The rates of tax and PRSI to be applied are those which
apply to any other pension payment. Prior Revenue approval is not required.
The above option may be offered to all scheme members, including buy out bond holders, as an
alternative to annuity purchase. Holders of RACs and PRSAs are obliged by legislation to comply
with the AMRF requirements. However, if due to the size of the fund, it is not possible to establish an
AMRF, the above option may be used. The above treatment may also be applied to residual funds
available to secure spouses’ and dependants’ pensions.
Serious Ill-Health
7.5
An approved scheme may include a rule that permits for commutation of a pension if at the time it
becomes payable the recipient is in “exceptional circumstances of ill-health”. This phrase is to be
interpreted strictly and narrowly. It is not intended to refer to the kind of ill-health which prevents
somebody from working but to cases where the expectation of life is unquestionably very short. In
other words, commutation on these grounds should not take place unless the administrator has been
satisfied by receipt of adequate medical evidence that terminal illness is in point and that the
expectation of life is measured in months rather than years. Whether a particular individual is in this
position is a matter for decision by the administrator (with the exception of cases involving 20%
directors and members of small self-administered schemes which should be reported to Pensions
Business Unit) but the inclusion of a rule on these lines in an approved scheme is accepted on
condition that it will be interpreted invariably in this sense.
To arrive at the taxable part of the payment, there may normally be deducted an amount (inclusive of
the aggregate of any lump sums already permitted) not exceeding 3/80ths of the employee’s final
remuneration multiplied by the number of years of service with the relevant employer. In this context
final remuneration will, irrespective of any definition in the rules, be taken as the average annual
remuneration of the last 3 years’ service (clearly this deduction will frequently eliminate any tax
liability where a trivial pension is commuted). The rate to be applied is 10%.
An alternative deduction in arriving at the taxable part of the payment is the largest amount which
could have been received apart from the special circumstances i.e. the triviality of the pension or the
employee’s exceptionally serious ill-health. In calculating the largest amount one must look at the
rules of the particular scheme; if it is one that does not permit commutation except on serious illhealth
grounds for the category of employee concerned, or ordinarily restricts the lump sum to 3N/80
or some lower amount, then no alternative deduction can be made. Where the rules leave the trustees
or the employer discretion to determine (within approvable limits) to what extent an employee may
normally commute his pension, or to increase the lump sum part of the benefits, it may be assumed
for the purpose of calculating the tax charge that they would have exercised their discretion to permit
the maximum lump sum.
Example
An employee with 40 years potential service retires 10 years early because of serious illness as a result
of which his life expectancy is extremely short. His final salary is €12,000, but the average of the last 3
years is €10,800. The actuarial value of the amount of his pension is €54,000, payment of which sum
is, in the circumstances, permitted under the rules of the scheme. The general rule of the scheme
permitting commutation specifies that every employee may have a lump sum of 3/80ths of final
remuneration (defined in the scheme rules so as to include remuneration for the final 12 months’
service) for each year of service.
Section 781(1)(i) permits an automatic deduction of
30 x 3/80 x €10,800 = €12,150
but Section 781(1)(ii) which applies in this case increases the permitted deduction to
30 x 3/80 x €12,000 = €13,500
Tax at 10% will therefore be charged on €54,000 less €13,500 = €40,500.
If the general rule of the scheme had given the scheme trustees discretion to approve, in normal
circumstances, commutation of a greater amount, (see paragraph 7.2) the deduction under
Section 781(1)(ii) would have been increased to
120/80 x €12,000 = €18,000
(leaving tax to be charged on €36,000 of the commutation payment) since it is proper to take account
of the fact that the employee is retiring on grounds of incapacity, and that the maximum lump sum
would have been based on his 40 years potential service (see paragraph 9.4) rather than his 30 years
actual service.
7.6
Where the scheme provides for a lump sum 3N/80ths of final remuneration separately from the
pension (and not in commutation of it), and the pension itself is commuted, e.g. because the
employee is seriously ill, the whole of the commutation payment will be chargeable to tax.
Lump sums receivable by way of commutation in special circumstances of pensions under two or
more separate schemes relating to the same employment are to be aggregated for the purposes of
determining the taxable part.