Part of the roadmap for pensions in Ireland involves the implementation of the IORPs (institutions for occupational retirement provision) II Directive. This brings with it the general development of international pension transfers in the Irish marketplace, with a particular focus on the UK (inbound) and Malta (outbound).
What is IORPS?
The original IORPs Directive in 2003 brought a greater focus on overseas transfers across Europe. It led to the creation of the QROPS regime in the UK.
In Ireland, the freedom to transfer benefits to other EU jurisdictions was reflected in the terms of the Overseas Transfer Payment Regulations (SI 716 of 2003).
This created a legislative basis for transfers from PRSAs and from Occupational Pension Schemes to similar arrangements available elsewhere in the EU. Note this does not apply to Personal Pensions, Buy out Bonds s or Approved Retirement Funds.
Note also, that due to a quirk in the tax legislation, no exemption from tax exists for transfers from PRSAs overseas i.e. it is potentially treated as a taxable withdrawal. In these circumstances, therefore, it is advisable for any transfer to be made from an occupational scheme only.
This change was also reflected in Chapters 13 and 24 of the Revenue pension manual.
The IORP II Directive, due to come into force in January 2019, sets common standards ensuring the soundness of occupational pensions and better protects pension scheme members and beneficiaries, through a number of means, including:
- new governance requirements;
- new rules on IORPs’ own risk assessment;
- new requirements to use a depositary; and
- enhanced powers for supervisors.
Furthermore, it facilitates IORPs’ cross-border activities by introducing new transfer rules and by clarifying procedures, including the roles of authorities in home and host Member State and how they shall communicate with each other. It encourages IORPs to invest long term in growth, environment and employment-enhancing economic activities by modernising investment rules.
The Directive has four objectives, applying to Occupational Pension Schemes only:
- clarifying cross-border activities of IORPs;
- ensuring good governance and risk management;
- providing clear and relevant information to members and beneficiaries;
- ensuring supervisors have the necessary tools to supervise IORPs.
Revenue Requirements for Overseas Transfers
The Revenue require that transfers outside the EU must be to a State in which the pension holder is resident and to a pension structure that broadly equates to the equivalent Irish arrangement.
For intra EU transfers, the Revenue requirements are that the transfer must be:
- to an IORP;
- established in a Member State that has implemented the IORPs Directive;
- with scheme administrator resident in EU State.
In addition, the Revenue require that the transfer should be a Bona Fide transfer which has been evidenced by a Declaration by the Member.
If these conditions are met, specific Revenue Approval is not needed. If not, Revenue approval will be required.
Key Features of Malta Pensions
Malta is a key market for overseas transfers from Ireland. It has a similar language and legal system and has established itself as a key player in the international transfer market.
Malta permits benefits to be accessed from age 50. This is an age only requirement i.e. retirement, disposal of shares or other conditions aren’t required to be met.
On initial drawdown a lump sum up to 30% of the fund is available. Under current tax rules this lump sum may not be taxable in Ireland, even if the recipient continues to be resident here for tax purposes.
The balance is available as a regular drawdown typically set at levels from 0% up to 5-8% per annum, depending on age and needs.
This sum is paid gross from Malta to residents of the EU or of other countries with which it has a Double Tax Agreement in place. Tax on this income is therefore accounted for under the self-assessment system.
The imputed drawdown provisions inherent in Irish ARF legislation do not apply to overseas pensions.
On first death the remaining value of the fund is available to be paid as a lump death benefit to the beneficiaries of the deceased. No Inheritance Tax is payable in Malta on this benefit.
The ability to transfer benefits to another EU jurisdiction such as Malta is likely to appeal to the following types of individuals:
- concerned by the €2m Fund Limit;
- with overseas benefits looking to consolidate;
- that are non-residents or potential future non-residents who wish to drawdown in an administratively more convenient manner. Irish Revenue will not permit PAYE exclusion orders to apply to ARFs. Therefore, an Irish non-resident faces the prospect of initially paying tax twice on the same income and then applying for a refund of same;
- clients concerned about the security of their pension benefits with Irish institutions and/or with the Irish State;
- International Executives who can fund benefit in different jurisdictions and wish to base their benefits in the most flexible jurisdiction.
IORPs II took quite a while to be negotiated between the different bodies in the EU. As a consequence, some of its original proposals were diluted or dropped altogether.
The creation of a vast number of cross border schemes remains an aspiration rather than a reality for the EU. The most significant impact of these provisions is on individual transfers. The Directive does contain provisions dealing with bulk transfers and it remains to be seen how successful these are in practice.
In practice, the most common international transfer cases we experience are clients intending to retire overseas and those who are concerned by the €2m Fund Limit. However, each case is unique and brings with it its own financial planning challenges. The introduction of the IORPS Directive and, subsequently, IORPS II means that international pension transfers are becoming more carefully regulated and more accessible. As such, a thorough understanding of this area is proving more and more important for those in the financial planning space.
Author: Eve Nolan, Business Development Executive at Independent Trustee Company www.independent-trustee.com. For further information on the IORPs Directive and transfers under it, please contact Eve Nolan by emailing Eve.firstname.lastname@example.org or call 01 661 1022.