Should we move UK pensions to Ireland?
Your questions answered
Query: My husband and I worked in Britain in the past and each of us have a frozen defined benefit (DB) pension over there as a result. My husband built up 25 years of service in Britain while I built up 20. We both work in Ireland now and both have defined contribution schemes through our work. With Brexit fast approaching, we're unsure what to do with our British DB pensions. Should we transfer the frozen DB pensions to Ireland - and if so, into what? Geraldine, Co Dublin
With Brexit around the corner, now is a good time to review these British pensions. Many people choose to transfer their pensions from Britain to Ireland as it may be more convenient and easier to administer a pension here.
Whether or not it is wise for you both to bring your pensions home will depend on the source of that pension. You don't say if either pension is a private pension or a public pension.
Most private sector pensions will allow an overseas transfer from Britain (including to Ireland) but since April 2015, most public sector schemes will not. You should ask your British pension provider if you have the option to transfer your pension overseas.
If you are allowed to bring a pension home to Ireland, you will first have to request an overseas transfer value (which will be in sterling).
If you decide to proceed to transfer your pensions to Ireland, you would have to put them into a Qualifying Recognised Overseas Pension Scheme (QROPS) - which is a pension that can accept pensions from Britain without triggering a British tax charge. If your British pension scheme has a value in excess of £30,000 (which is likely given your service of 20 and 25 years respectively), you will also be required to take advice from an adviser regulated by the British financial regulator, the Financial Conduct Authority.
You also say that the British pensions are both defined benefit (DB) pensions. This means that you will get a guaranteed pension income based on your salary and service - and subject to the solvency of the British pension scheme.
You will have to weigh up the guarantees a DB pension provides as you will only be able to transfer these DB pensions to the equivalent of a defined contribution (DC) scheme here in Ireland. Therefore you may have to consider investment risk as you would be losing the guarantees of a DB pension - though bear in mind, these guarantees are only based on the solvency of your British pension scheme.
There are other pros and cons to consider.
For example, many of the pension differences between Britain and Ireland have been harmonised - but there are still areas where one jurisdiction may be more beneficial than the other. You may be entitled to a higher tax-free lump sum by transferring a pension to Ireland. The maximum tax-free lump sum from all pensions in Ireland is €200,000 per person and this limit includes the potential tax-free lump sum from your existing Irish DC pensions.
If the potential tax-free lump sum on retirement from your British fund that is transferred to Ireland brings you over this €200,000 maximum, then the part of the lump sum in excess will be taxed in Ireland - whereas it could be paid to you tax-free in Britain.
If you transfer your pension to Ireland, you may be able to retire with the proceeds of that pension earlier than the normal retirement age of the British pension - subject to a minimum retirement age of 55. (Most DB schemes have a normal retirement age, usually from age 60 or later. The only way to move a DB scheme to Ireland is through a QROPS but this means the DB scheme becomes a DC scheme using the transfer value from the DB. If you have left employment in a company DC scheme in Ireland, you can normally access the pension from the age of 50 through early retirement. However, British transfer rules only allow access from the age of 55.)
If you transfer your pension to Ireland, your transfer value is tested against the British lifetime allowance of £1m. If your pension fund is higher than this, there may be an immediate exposure to British tax and this would be deducted before the transfer is made.
If you keep your pension in Britain, a paid-up DB pension will only provide a pension for a dependent in the event of premature death - so there is no death benefit entitlement. If you move it to Ireland, the transfer value or value of the pension on date of death is payable to your estate and your pension won't be liable to British inheritance tax. If you have been resident in Britain in the current tax year or any of the previous 10 British tax years, you may be liable to British tax on your transfer payment to Ireland. If you withdraw from your QROPS within the first five years of the transfer, the transfer will be subject to British tax rules.
Cashing in pension early
Query: I have a defined contribution (DC) pension of about €30,000 built up over the last six years. I'm 40 and need to pay off some debts. Can I cash my pension in now? John, Gorey, Co Wexford
You can normally access the benefits of an occupational pension scheme between the age of 60 and 70. Most pension schemes will allow members to retire early - generally from the age of 50 onwards and 40 is some time away.
When you do access your benefits, you will be given a number of options.
One is to take a portion of your pension fund as a tax-free lump sum (commonly 25pc of the value of the pension fund) and you can draw down the balance as income which is subject to tax under the Pay-As-You-Earn (PAYE) system so the process is the same as that applied when you were being paid your salary.
In the meantime, you will continue to benefit from tax relief on your contributions and tax-free growth on your €30,000 fund.
Benefit of pension tax relief
Query: I am in my early thirties and have not yet opened a pension. I'm a higher-rate taxpayer. A friend has advised me to open a pension and emphasised the tax benefits of doing so. As far as I can see, I'd get income tax relief of 40pc on my pension contributions. However, am I right to say that pension tax relief doesn't extend to the Universal Social Charge (USC) and PRSI? Also, is there really a benefit to pension tax relief in the long run given that I will be taxed on my pension anyway when I draw it down in my retirement? Imelda, Co Roscommon
You are correct that you would receive tax relief at your marginal rate. Whilst you do not get tax relief on USC or PRSI, there are numerous other benefits of starting a pension. The first is that your pension savings grow tax-free. Non-pension savings invested in a similar asset could be subject to 41pc exit tax; 33pc Capital Gains Tax, or income tax - so your pensions savings would grow at a faster rate.
Furthermore, the effects of compound interest would also be greater as interest is being added to your non-taxed savings each year. At retirement, you could get back up to 25pc of your accumulated pension savings as a tax-free lump sum and the balance can be used to provide a pension income.
On your last question, in many cases, pensioners find that when they draw down their pension in retirement, their pension is much smaller than their salary - and therefore it may be taxed at a lower rate than the tax relief they obtained.
- Gerry Stewart is a partner with Fagan & Partners
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