The normal retirement age for the majority of pension schemes is 60 years of age. In more recent years, people are continuing to work well into their 70’s and 80’s. Where this is the case, there is not always an immediate requirement to draw down pension funds as they have sufficient income from other sources. Others may prefer not to access their retirement benefits in order to leave the pension as an asset which will form part of their estate.
Revenue became aware of Retirement Annuity Contracts (“RACS”) and Personal Retirement Savings Accounts (“PRSAs”) where retirement benefits were not being drawn down in the lifetime of the holder. Where there is no income being drawn down from the pension by an individual, this leaves Revenue at a disadvantage as it reduces the amount of income tax which can be collected. This has now been rectified through recent changes made to the pension legislation.
An RAC or PRSA where retirement benefits have not commenced on or before the date of an individual’s 75th birthday is treated as becoming a vested RAC and a vested PRSA. This means that on an individual’s 75th birthday, the RAC and PRSA are deemed to have been retired and Revenue will tax a certain percentage of the value of the pension each year. An individual has the option to take an income from the pension as required.
Up to recently, where the benefits in the PRSA had not been accessed, the full value of the PRSA would pass under the PRSA holder’s estate on death and could pass tax free to the person’s spouse or would be subject to Capital Acquisitions Tax (“CAT”) in the hands of another beneficiary.
The recent amendments now mean that once a PRSA becomes vested, at whatever age, PRSA assets may no longer automatically pass directly through the deceased’s estate, but may pass tax-free to a surviving spouse Approved Retirement Fund (“ARF”) or pass subject to CAT or income tax at 30% if received by a child.
The assets in a vested RAC on death are treated similar to the assets of an ARF as above.
For any additional information or help contact a member of our tax team.