Self Administered
Revenue Pensions Manual SSAPs
Tax and Duty Manual Pensions Manual
Reviewed April 2015
SMALL SELF-ADMINISTERED SCHEMES
Pensions Manual CHAPTER 19
Document last updated/reviewed on May 2017
Table of Contents
SMALL SELF-ADMINISTERED SCHEMES ……………………………………..1
Pensions Manual CHAPTER 19…………………………………………………1
Document last updated/reviewed on May 2017 ………………………..1
General……………………………………………………………………………….2
19.1 Definition of “Small” Scheme …………………………………………..2
19.2 Pensioneer Trustee………………………………………………………..2
19.3 Scheme Approval & Compliance Requirements…………………..4
19.4 Investment of Funds in Small Self-Administered Schemes …….4
19.5 Benefits………………………………………………………………………..7
19.6 Death Benefit………………………………………………………………..7
19.7 Full Commutation of Pension …………………………………………..7
19.8 General Enquiries…………………………………………………………..7
General
This Chapter explains the special requirements that these types of schemes must comply
with in order to achieve and maintain exempt approved status. These special requirements
are additional to the normal approval requirements. Their purpose is to ensure that the
scheme is in fact “bona fide established for the sole purpose of providing relevant benefits”,
(Section 772 (2)(a), Taxes Consolidation Act, 1997) and not a scheme designed for tax
avoidance.
Usually, the sole members of “small” schemes are 20%Directors. Revenue concerns relate to
the potential for conflicts of interest, as the individuals involved are the owners of the
business, scheme trustees and scheme members.
19.1
Definition of “Small” Scheme
A scheme with less than 12 members will generally be regarded as “small”. A scheme
designed primarily for a few family directors, to whom are added some relatively low paid
employees with entitlement to only insignificant benefits, included to bring membership to
12 or more, OR a scheme with more than 12 members where most or all of the members
are 20% directors will both be regarded as small.
Conversely, it might not be necessary to regard a scheme with fewer than 12 members as
small if all the members are at arm’s length from each other, from the employer and the
trustees. A small-insured scheme which becomes self-administered after approval must,
from the changeover date, comply with the special requirements.
Irrespective of the number of members involved, a scheme will be regarded as small at any
time when 65% or more of the value of the investments of the scheme relate to the
provision of benefits for 20% directors of the sponsoring employer(s) and their spouses, civil
partners and dependants.
19.2
Pensioneer Trustee
The trustees must include a Revenue approved “Pensioneer Trustee”. The duties of the
Pensioneer Trustee are set out in the following undertaking that must be given:
“ I undertake that in relation to any pension scheme, approved under the Taxes
Consolidation Act 1997, of which I am a Trustee that I will:
Tax and Duty Manual Pensions Manual
Reviewed April 2015
a) Not consent to any action which is contrary to any Revenue regulations. I will report
immediately to Revenue full particulars of any action to which I am requested to
consent which I consider may be contrary to Revenue regulations.
b) Supply annual accounts, periodic actuarial reports, or any other information required
by Revenue.
c) Not agree to the termination of any scheme of which I am Pensioneer Trustee
otherwise than in accordance with the terms of the approved winding up provisions.
Nor will I delegate powers to any other Trustee of such a scheme or to any outside person
or body on behalf of any other Trustees so as to circumvent the foregoing undertaking.
I further undertake to advise Revenue immediately I cease to be a Trustee of any such
approved Scheme.”
It is a precondition of Revenue approval that at all times the scheme must have a Revenue
approved Pensioneer Trustee. The Trust Deed must provide that the Pensioneer Trustee
cannot be removed without prior Revenue approval and that the Pensioneer Trustee must
be a co-signatory on all financial transactions.
Prior to a resignation by a Pensioneer Trustee, it is the responsibility of the other Trustees to
arrange for the appointment of a replacement. In cases where this does not occur within 30
days of a resignation, Revenue will withdraw approval from the scheme.
If the trust instrument establishing a scheme provides for the trustees to act on majority
rather than unanimous decisions, this provision must be qualified so that it does not apply
where the question for decision relates to the termination of the scheme.
It is clear from the above that quite onerous obligations are placed on the Pensioneer
Trustee. These are in addition to the normal obligations that apply under trust law.
In order to qualify for Pensioneer Trustee status, the applicant must be widely involved with
occupational pension schemes and their approval. Experience in processing approval of
schemes, administration of small self-administered schemes and a good working knowledge
of Revenue Practice, are necessary qualifications. Arrangements should be in place for the
provision of a complete range of services: actuarial, legal, investment and administration.
Where a corporate body wishes to act as a pensioneer trustee, it is essential that the
directors, or a majority of them, should be acceptable as pensioneer trustees in their own
right. The directors regarded as acceptable should have the power to determine how the
corporate body will vote in any proceedings of the pension scheme trustees.
Applications for approval to act as a Pensioneer Trustee should be sent to the Pensions
Business Unit. The application should include a full “pensions C.V.” together with details of
any self-administered schemes established and administered by the applicant.
A list of Revenue approved Pensioneer Trustees is available on request.
19.3
Scheme Approval & Compliance Requirements
Practitioners are encouraged to agree a “standard” trust document and announcement
letter with Revenue. The covering letter with each approval application should include:
1. Confirmation that the scheme is documented by the standard deed.
2. Confirmation that the announcement letter has issued.
3. An outline of the scheme’s investment policy
4. The member’s PPS number
5. Confirmation that the scheme member is an employee of the employer sponsoring
the scheme.
The supporting documentation required is:
1. Funding Report with full details of retained benefits
2. Copy of the relevant pages of the Trust Deed showing employer name, trustee
details, scheme title and commencement date.
Incomplete submissions will be returned.
As a condition of approval, Revenue will expect actuarial reports to be made at intervals not
greater than 3 years, and will examine the assumptions that have been used as a basis for
funding the scheme. A further condition of continuing approval is a requirement to submit
annual accounts within 9 months of the end of the year.
In view of the significance attaching to the investment policy of the trustees, Revenue will
need to know, when the application for approval is first considered, and in conjunction with
the examination of annual accounts and later actuarial reports, how the funds are to be or
have been invested.
19.4
Investment of Funds in Small Self-Administered Schemes
All scheme investments must be on an arm’s length basis. The investment powers of
Trustees are circumscribed in a number of areas which are detailed below. The list is not
exhaustive and is merely intended as a guide. A ruling on any specific proposal can be
requested.
(i) Loans
Tax and Duty Manual Pensions Manual
Reviewed April 2015
Loans to members of schemes or to any other individual having a contingent interest
in the scheme or to the employer are prohibited.
(ii) Property Investments
A proposal to acquire property as an investment can be approved subject to the
following:
(a) The vendor is at arm’s length from the scheme and the employer including its
directors and associated companies;
(b) The purpose of the acquisition is not for disposal or letting to the employer,
including its directors and associated companies;
(c) Disposal of the property is on an arm’s length basis
(d) The scheme has sufficient liquid investments to ensure that the requirement
to provide benefits, including ill-health and early retirement benefits, can be
met. Where the main or only asset is property, it is considered that the
concentration of investments in an asset not readily realisable does not
satisfy the overriding need to match investment of the assets with a scheme’s
liabilities with particular reference to the requirement to provide benefits.
The situation could arise when the first or subsequent individual retirements
take place that a scheme would be compelled to realise its only or main asset
in order to comply with the requirement to provide benefits.
(e) Purchase of overseas property will only be permitted where there are
appropriate arrangements in place to enable the Pensioneer Trustee to
maintain control of the asset to ensure that Revenue rules are complied with.
(f) A transaction which involves the scheme trustees directly in the acquisition
and development of property with a view to its disposal will not constitute an
investment to which the exemption in Section 774 (2), Taxes Consolidation
Act ,1997, will apply.
(g) Any proposal that involves the diversion of the sponsoring employer’s taxable
activity into the scheme is not acceptable.
(iii) Self-Investment
The following type of self-investment is not acceptable:
(a) Acquisition of property or other fixed assets from the employer
(b) Acquisition of shares debentures, etc. in the employing company whether by
subscription, bonus issue or by purchase from existing shareholders or by any
other means,
(iv) Pride in possession articles
Schemes are not permitted to invest in personal chattels such as works of art,
jewelry, vintage cars, yachts etc. Schemes can invest in choses in action which are
not tangible, moveable or visible. Examples are company shares, copyrights, and
financial futures.
(v) Private Companies
Investments must be limited to 5% of scheme assets and to 10% of the private
company’s share capital.
(vi) Transactions deemed to be pensions in payment
Certain transactions made by an Approved Retirement Fund, as detailed in 23.5, are
deemed to be a distribution from the ARF. A similar provision now applies to pension
schemes. When certain transactions occur, the use of scheme assets are treated as a
pension payment from the scheme. Any amount treated as a pension payment is no longer
regarded as a scheme asset. The transactions are:
Loan made to the beneficial owner or connected person.
Acquisition of property from the beneficial owner or connected person.
Sale of ARF asset to the beneficial owner or connected person.
Acquisition of residential or holiday property for use by the beneficial owner or
connected person.
Acquisition of property which is to be used in connection with any business of the
beneficial owner, or of a connected person. The distribution arises on the date such
use commences. The distribution is the amount of the value of the ARF assets used
in connection with the acquisition and any expenditure on improvement or repair of
the property.
Acquisition of shares in a close company in which the beneficial owner, or
connected person, is a participator.
Tax and Duty Manual Pensions Manual
Reviewed April 2015
A close company means a company under the control of 5 or fewer participators, or
of participators who are directors. Please refer to Sec.430, Taxes Consolidation Act,
1997, for a complete definition.
A participator in relation to any company, means a person having a share or interest
in the capital or income of a company. Please refer to Sec.433, Taxes Consolidation
Act, 1997 for a complete definition.
Definitions of “connected persons” and “relative” are contained in Sec.10, Taxes
Consolidation Act, 1997.
19.5
Benefits
A final funding review must take place before any benefits are paid. The scheme rules
should provide that benefits be secured by either the purchase of an annuity from a Life
Office or in accordance with Section 772 (3)(A) Taxes Consolidation Act 1997.
19.6 Death Benefit
All death-in-service benefits should be insured from the outset insofar as they exceed the
value year to year of the member’s interest in the fund, based on his accrued pension and
other retirement benefits.
19.7
Full Commutation of Pension
Where the rules include a provision for the full commutation of pension where the member
is “in exceptional circumstances of serious ill-health” it has always been practice to leave the
application of the rule in particular cases to the trustees. In large schemes the arm’s length
relationship, and in insured schemes the interest of the Life Office, each provide a
reasonable assurance that the facility will not be abused. Neither factor is present in the
context of small self-administered schemes and the rules should, therefore, provide for full
commutation on serious ill-health grounds to be subject to the agreement of Revenue. In
such cases Revenue would seek to establish that proper medical evidence has been
obtained (see paragraph 7.5) and that its terms appeared to warrant a conclusion that the
member’s expectation of life was very short.
CHAPTER 5
Revenue Pensions Manual Funding and Investments
General
5.1
The tax advantages of exempt approved schemes are controlled by the imposition of
limits on benefits. The other important control is to ensure that excessive funding
does not take place. The basic requirement is that scheme assets should not amount
to more than what is required to provide the benefits which the scheme has a
commitment to pay.
Actuarial Reports
5.2
It is the duty of scheme trustees and administrators to monitor the scheme’s funding.
In the case of self-administered schemes, appropriate actuarial advice should be
obtained at commencement and at regular intervals thereafter. Actuarial reports are
not required for insured schemes where contributions are invested exclusively in a
policy or policies that provide benefits according to a predetermined scale of
premium rates. Particular attention should be paid to employee’s additional
voluntary contributions.
Surpluses
5.3
There is no objection to a scheme holding a reasonable reserve. In any case, where a
valuation discloses a surplus in excess of 10% of the value of the fund assets, the
matter should be brought to the attention of Financial Services (Pensions) District,
Large Cases Division. Cases will be reviewed on an individual basis. It is important
to protect the Revenue interest by prohibiting the build-up of monies in a tax-exempt
fund that could not be used for the purposes of providing relevant benefits.
Normally, a scheme surplus should be disposed of by augmenting benefits within
approvable limits or by reducing or suspending contributions to the scheme. In
exceptional cases, part of the surplus might have to be refunded to the employer,
and taxed as a trading receipt.
Investments
5.4
The sole Revenue interest in scheme investments is to ensure that schemes are “bona
fide established for the sole purpose of providing relevant benefits”, section
772(2)(a). Certain investments may prevent approval or prejudice ongoing Revenue
approval. These could include investments used for tax avoidance purposes and
assets not used to provide “relevant benefits”.
Specific investment rules for Small Self-Administered schemes are detailed in
Chapter 19.
Transactions deemed to be pensions in payment
Certain transactions made by an Approved Retirement Fund (ARF), as detailed in
Chapter 23.8, are deemed to be a distribution from the ARF. A similar provision
applies to pension schemes. When certain transactions occur, the use of scheme
assets is treated as a pension payment from the scheme. Any amount treated as a
pension payment is no longer regarded as a scheme asset. The transactions detailed
in Chapter 23.8 include the following:
Loan made to the beneficial owner or connected person.
Acquisition of property from the beneficial owner or connected person.
Sale of ARF asset to the beneficial owner or connected person.
Acquisition of residential or holiday property for use by the beneficial owner
or connected person.
Acquisition of property which is to be used in connection with any business
of the beneficial owner, or of a connected person.1
Acquisition of shares in a close company in which the beneficial owner, or
connected person, is a participator.
A close company means a company under the control of 5 or fewer participators, or
of participators who are directors. Please refer to section 430 Taxes Consolidation
Act (TCA) 1997, for a complete definition.
A participator in relation to any company, means a person having a share or interest
in the capital or income of a company. Please refer to section 433 TCA 1997 for a
complete definition.
1 Where property is acquired for residential or holiday purposes, or for use in connection with any business, the
distribution arises on the date such use commences. The amount of the distribution is the aggregate of the value
of the ARF assets used in connection with the acquisition and any expenditure on improvement or repair of the
property.
Definitions of “connected persons” and “relative” are contained in section 10 TCA
1997.
Borrowing
5.5
Section 772 (3E) TCA 1997 provides that:
“A retirement benefits scheme shall neither cease to be an approved scheme nor
shall the Revenue Commissioners be prevented from approving a retirement
benefits scheme for the purposes of this Chapter because of any provision in the
rules of the scheme which makes provision for borrowing by the scheme”.
The following rules apply to scheme borrowing:
1. Only assets purchased by the borrowing may be used to provide security to the
lender.
2. Assignment of rental income to the lender is not permitted.
3. Life cover on the amount of the debt may only be provided outside the scheme.
4. No cross collaterisation.
5. Interest only loans and loans for a period of more than 15 years are not
permissible. The loan should be repaid in full prior to normal retirement age.
6. Use of other scheme assets to clear residual debt is not permissible.
Geared Property Investment Vehicles
5.6
In relation to investments made via geared investment funds and unit trusts, it is
possible to link a scheme investment to a particular property, within a collective
investment fund, provided the arms length rules apply. In other words, all
acquisitions, disposals and lettings must be on a totally arms length basis.
Calculation of Maximum Contributions
5.7
In order to standardise benefit and funding calculations, the following methodology
and capitalisation factors should be used. Current annuity rates form the basis for
the calculation. Both the factors and the methodology have been determined
following consultation with The Society of Actuaries in Ireland. The capitalisation
factors will be reviewed on a regular basis.
The methodology to obtain the maximum ordinary annual contribution to be paid
by or on behalf of an individual employee (combined employer and employee) is as
follows:
Contribution = B X CF – (value of assets plus retained benefits)
Term in years to normal retirement date, minimum 1 year
Or = N/60ths pension X CF- value of assets
Term in years to normal retirement date, minimum 1 year
whichever is the greater.
B is the revenue maximum pension based on current remuneration but with service
to normal retirement date.
CF = Maximum benefit capitalisation factor as detailed in the table below.
N/60ths pension is the pension that can always be provided from a scheme
regardless of retained benefits.
This maximum ordinary annual contribution includes administration costs but not
the cost of death in service benefits. The cost of death-in-service benefits may be
added to amount calculated using the above formula.
The maximum ordinary annual contribution for a group scheme would be the sum
of the individual maximum allowed contributions
Tax relief in respect of contributions in any one tax year is subject to the limits for
employee contributions, as detailed in Chapter 3. Relief for employer contributions
is subject to the rules in Chapter 4. The limits on Tax Relieved Pension Funds also
apply, please see Chapter 25. Care must be taken to ensure that overfunding does
not occur, as surplus funds may have to be refunded to the employer and taxed as a
trading receipt. Details of maximum retirement benefits are contained in Chapter 6.
Additional Voluntary Contributions (AVCs) can be made if the total of employer
Contributions and employee normal contributions do not exceed the above limits
and the total employee contribution limits as outlined in Chapter 3.
In the case of defined benefit plans where the value of pension assets are not readily
available or earmarked at an individual level the following formula would be
applicable
Contribution = B X CF – (SchB X SchCF plus retained benefits)
Term in years to normal retirement date, minimum 1 year
SchB is the scheme pension based on current remuneration but with service to
normal retirement.
SchCF is the Scheme benefit capitalisation factor.
Example 1
A male employee with a dependant spouse has a salary of €100,000 and has 15 years
to go to retirement at age 60. He has accumulated assets of €1,000,000 in his pension
plan. The maximum normal annual contribution the employer and employee can
pay in total is
2/3 X €100,000 X 32.4*-(€1,000,000) = €1,160,000 = €77,333 or 77.3% of salary.
15 15
* This factor is taken from Table 1, line 1.
Example 2
A male employee has 20 years to go until retirement at age 65. His gross salary is
€60,000, his pensionable salary is €50,000 and he has an AVC fund of €120,000. His
scheme provides a 50% spouse’s pension and fixed increases of 3% per annum.
Salary /
pensionable
salary Benefit Pension
Capitalisation
factor
Value of
benefits
Revenue maximum
benefits 60,000 66.66% 40,000 28.4* 1,136,000 A
Scheme benefits 50,000 66.66% 33,333 22.6** 753,326 B
Current AVC fund
plus value of retained
benefits
120,000 D
Maximum benefit to
be funded by AVCs 262,674 E=A-B-D
Maximum AVC rate
as % of salary 21.9% (E/20)
60,000
* This factor is taken from Table 1, line 6.
** This factor is taken from the Table 5, allowing for a 50% spouse’s pension and 3%
pension increases.
Example 3
A married, male civil servant will have forty years’ service on retirement at age 60
and also has 20 years to go until retirement and has €100,000 AVCs accumulated.
The public sector scheme provides a spouse’s pension of 50% and parity increases.
Salary /
pensionable
salary Benefit Pension
Capitalisation
factor
Value of
benefits
Revenue maximum
benefits 60,000 66.66% 40,000 32.4* 1,296,000 A
Scheme benefits 60,000 50% 30,000 28. 3** 849,000 B
Gratuity 90,000 C
Current AVC fund
plus retained
benefits
100,000 D
Maximum benefit to
be funded by AVCs 257,000 E=A-B-CD
Maximum AVC rate
as % of salary 21.4%
(E/20)
60,000
*The factor 32.4 is from Table 1, line 1.
**The factor 28.3 is from Table 5 for a scheme providing 50% spouse’s or civil
partner’s pension and the earnings indexed figures are used as the public sector
scheme provides parity increases.