Retirement Annuity Contract (RAC)
Coverage
Voluntary insurance
- RACs are generally available to all persons who have or have had, at some stage, ‘relevant earnings’ including non-pensionable employment, or earnings from self-employment.
Financing
General finances
- The RAC is a capital-funded scheme financed through contributions and capital revenues.
Contribution payments
- Contributions are paid by individual.
- Employers may pay a contribution but this is not mandatory.
- Insurance companies may set their own minimum contribution limits in order for a person to take out an RAC.
State support & incentivising strategies
- Tax relief is available on contributions for those who or have ‘relevant earnings’ defined as: non-pensionable employment, self-employed trade or profession. The tax relief is dependent on age and earnings. This is referred to as the ‘age-related earnings percentage limits’. Persons under 30 will get tax relief on contributions of up to 15% of their earnings. This increases with age e.g. 30-39: 20%; 40-49: 25%; 50-54: 30%; 55-59: 35% and 60 or over: 40%.
Administration
- RACs are administered by insurance companies who have been approved by the Revenue Commissioners. Pensions are regulated by the Pensions Authority.
Qualifying Conditions
- The terms will normally be dependent on the scheme itself but there are some statutory conditions, as well as other conditions which are common to most RACs. As private pension plans, these are generally more flexible than other pension schemes.
- Age: most schemes specify a normal retirement age which must be between the ages of 60 and 75 years.
- Early retirement/ill health: in cases of early retirement or ill health, certain benefits will be provided. In the case of ill health, benefits can be provided from any age. In certain occupations, benefits may be taken before age 60 but in no case before age 50, with the prior approval of the Revenue Commissioners. In cases of serious ill health, benefits may be taken at any age provided the insurance company has received medical evidence to show that the individual is permanently incapable through infirmity of mind or body of carrying on his own occupation or any occupation of a similar nature for which he is trained or fitted (Section 784(3)(b) Taxes (Consolidation) Act 1997).
Benefits
Pension payments
- The amount of the benefit received will depend on the level of contributions paid, the investment return earned on those contributions and the cost of buying the pension.
- Retirement lump sum: the person can take 25% of the retirement fund as a tax-free lump sum.
- Balance: the person can either purchase an annuity from an insurance company or set up an ARF/AMRF.
- If retirement benefits are not taken before the 75th birthday, the pension will automatically become a vested RAC. An individual has 30 days from their 75th birthday to fill in a benefit crystallisation event (BCE) certificate, or income tax at the higher rate (currently 40%) will be taken from the fund and paid to the Revenue Commissioners. Once vested, an individual no longer has access to their pension benefits.
Taxation and social security contributions
- Pension lump sums under EUR 200,000 are tax-free. The next EUR 300,000 of pension lump sum taken from all pension arrangements since 07/12/2005 is taxable at the standard rate of income tax (20% in 2021). Any lump sum over the EUR 500,000 limit will have Universal Social Charge deducted and will be taxed at the higher rate (40% in 2021). There is also a cap on the maximum value of retirement benefits that any individual can build up from 07/12/2005 onwards. This is called the Standard Fund Threshold (SFT) and is EUR 2 million.
- All pensions (annuities) in payment are subject to PAYE at source and the health levies.
Coverage
Financing
Administration
Qualifying Conditions
Benefits
Voluntary insurance
- RACs are generally available to all persons who have or have had, at some stage, ‘relevant earnings’ including non-pensionable employment, or earnings from self-employment.
General finances
- The RAC is a capital-funded scheme financed through contributions and capital revenues.
Contribution payments
- Contributions are paid by individual.
- Employers may pay a contribution but this is not mandatory.
- Insurance companies may set their own minimum contribution limits in order for a person to take out an RAC.
State support & incentivising strategies
- Tax relief is available on contributions for those who or have ‘relevant earnings’ defined as: non-pensionable employment, self-employed trade or profession. The tax relief is dependent on age and earnings. This is referred to as the ‘age-related earnings percentage limits’. Persons under 30 will get tax relief on contributions of up to 15% of their earnings. This increases with age e.g. 30-39: 20%; 40-49: 25%; 50-54: 30%; 55-59: 35% and 60 or over: 40%.
- RACs are administered by insurance companies who have been approved by the Revenue Commissioners. Pensions are regulated by the Pensions Authority.
- The terms will normally be dependent on the scheme itself but there are some statutory conditions, as well as other conditions which are common to most RACs. As private pension plans, these are generally more flexible than other pension schemes.
- Age: most schemes specify a normal retirement age which must be between the ages of 60 and 75 years.
- Early retirement/ill health: in cases of early retirement or ill health, certain benefits will be provided. In the case of ill health, benefits can be provided from any age. In certain occupations, benefits may be taken before age 60 but in no case before age 50, with the prior approval of the Revenue Commissioners. In cases of serious ill health, benefits may be taken at any age provided the insurance company has received medical evidence to show that the individual is permanently incapable through infirmity of mind or body of carrying on his own occupation or any occupation of a similar nature for which he is trained or fitted (Section 784(3)(b) Taxes (Consolidation) Act 1997).
Pension payments
- The amount of the benefit received will depend on the level of contributions paid, the investment return earned on those contributions and the cost of buying the pension.
- Retirement lump sum: the person can take 25% of the retirement fund as a tax-free lump sum.
- Balance: the person can either purchase an annuity from an insurance company or set up an ARF/AMRF.
- If retirement benefits are not taken before the 75th birthday, the pension will automatically become a vested RAC. An individual has 30 days from their 75th birthday to fill in a benefit crystallisation event (BCE) certificate, or income tax at the higher rate (currently 40%) will be taken from the fund and paid to the Revenue Commissioners. Once vested, an individual no longer has access to their pension benefits.
Taxation and social security contributions
- Pension lump sums under EUR 200,000 are tax-free. The next EUR 300,000 of pension lump sum taken from all pension arrangements since 07/12/2005 is taxable at the standard rate of income tax (20% in 2021). Any lump sum over the EUR 500,000 limit will have Universal Social Charge deducted and will be taxed at the higher rate (40% in 2021). There is also a cap on the maximum value of retirement benefits that any individual can build up from 07/12/2005 onwards. This is called the Standard Fund Threshold (SFT) and is EUR 2 million.
- All pensions (annuities) in payment are subject to PAYE at source and the health levies.
Legal Basis: Taxes (Consolidation) Act 1997; S.I. No. 187 of 2007 - Trust RACs (Registration) Regulations, 2007; S.I. No. 186 of 2007 Trust RACs (Trustee) Regulations 2007; S.I. No. 768 of 2007 - Trust RACs (Fees) Regulations, 2007; S.I. No. 182 of 2007 - Trust RACs (Disclosure of Information) Regulations, 2007; S.I. No. 185 of 2007 -Trust RACs (Investment) Regulations, 2007; S.I. No. 184 of 2007 - Trust RACs (Cross-Border) Regulations, 2007.