July 28, 2023
Employers in Ireland set up occupational pension schemes to support employees in retirement. Explore its types, membership criteria, setup, claims, and more.
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Employers in Ireland offer occupational pension schemes to provide financial security to employees in retirement.
Some of these Irish workplace pension schemes allow employers to make contributions on behalf of employees, while others require both employee and employer payments.
What are these schemes? Who can join them?
And what do employers need to do to offer them?
Let’s find out.
Irish employers offer occupational pension schemes, or company pension plans, to provide employees with a regular income during retirement.
Some schemes may even offer employees a tax-free lump sum payment when they retire — in addition to the regular pension income.
Should all employers provide occupational pensions?
Irish employers are not legally required to offer an occupational pension scheme to their employees. However, employers that don't provide an occupational pension scheme must provide employees with access to at least one standard personal retirement savings account (PRSA).
The Irish government also plans to introduce the auto-enrolment pension scheme, which will auto-enrol eligible employees to an occupational pension scheme. Under this scheme, while it's not mandatory for employers to set up an occupational scheme, they will be required to facilitate payroll deductions for contributions.
The auto-enrolment pension scheme will be introduced in 2024. It will cover all eligible employees (23-60 years old and earning more than €20,000 per year) who aren't already a part of an occupational pension scheme. It aims to offer retirement support to the 750,000 Irish workers who currently don't have access to occupational pension plans.
Occupational pension schemes fall into four categories:
Contributory and Non-Contributory Pensions
Funded and Unfunded Pensions
Defined Benefit and Defined Contribution Pensions
Here’s a quick overview of the different types of occupational pension schemes:
Employees and employers contribute a fixed percentage of their pensionable pay towards the pension fund.
Pensionable pay is the earnings or salary used to compute contributions, pensions, and lump sum benefits in a pension scheme.
Some employees may make Additional Voluntary Contributions (AVCs) to their occupational pension scheme on top of the regular employee/employer contributions for extra retirement benefits.
The employer must contribute to the employee’s pension fund, while the employees don’t have to contribute.
It’s a means-tested payment — Ireland’s Department of Social Protection examines the employee’s income sources to assess their eligibility for pension.
Employers and employees contribute a fixed percentage of their monthly income towards an occupational pension plan in a funded pension scheme.
The scheme's trustees add these contributions to a trust fund established outside the company to cover the payment of retirement benefits. This ensures the assets are available to pay members' pensions if the employer goes out of business.
Employees don’t make any pension contributions in an unfunded pension scheme. Instead, the employers pay out the benefits their employees are entitled to whenever they are due, alongside their regular salary.
This type of arrangement is called 'pay as you go', where employees don’t pay contributions in unfunded plans, and employers don’t have to set up a trust.
These are popular in the non-commercial public sector, such as civil services.
Defined Benefit Pension Scheme:
In a defined benefit scheme, an employee’s pension entitlement depends on the length of their service and their salary when they retire.
Irish employees can contribute a pre-approved amount to their DB or final salary schemes. However, the employer must contribute the remaining amount if there’s an insufficient amount or shortfall in the pension pot when the employee retires.
Defined Contribution Pension Scheme:
In a defined contribution scheme, the employee and the employer contribute a fixed percentage of their earnings to the pension fund, and trustees of the fund invest that amount in shares or stocks.
Members of DC schemes must make employee and employer contributions. Typically some schemes require employees and employers to make matching contributions of 5% of their monthly earnings to the pension fund. However, some schemes are flexible and can allow employers and employees to choose their own contribution level.
A hybrid workplace pension scheme combines elements of defined benefit (DB) and defined contribution (DC) schemes.
In a hybrid scheme, the employer and the employees are responsible for meeting contribution requirements to sustain employees in retirement.
There are many types of hybrid benefit schemes:
Underpin scheme: Members can receive benefits based on a DB or a DC scheme in an underpin scheme. So when employees retire, they will receive the higher benefit amount out of the two.
For example, an underpin scheme might have the employer and employee contributing 6% each to a plan with a guaranteed minimum pension of 1% per year for the length of their service at retirement.
Self-annuitising defined contribution schemes: These schemes operate similarly to a DC scheme until the employee retires. Post-retirement, the accumulated amount is converted into pension income based on the scheme’s rules instead of the market (annuity) rate.
Final salary lump sum schemes: Employees can collect the retirement benefit as a lump sum at retirement rather than regular pension payments. The scheme's rules may offer a lump sum of 20% of the final salary for each year of employee service at retirement.
Let’s understand who can become members of occupational pension schemes in Ireland.
Salaried employees, as well as part-time and temporary workers of employers who offer occupational pension schemes, can get membership to the occupational pension plans.
The spouse or civil partner of a 20% director, of the proprietor, or one of the company's partners may get occupational pension cover if they're regular business employees.
20% directors are people who directly or indirectly owned more than 20% of the voting rights in the company they currently work for or its parent company in the past three years.
An employee who is temporarily absent or seconded to another employer but remains a resident in Ireland may continue to be a full member of an approved scheme.
However, this is only possible under two conditions:
There is a guarantee that the employee will return to service, and
The employee doesn’t become a member of another approved retirement benefits scheme.
An employee who is absent due to incapacity for work can continue to be a member of a workplace pension scheme. This is regardless of whether they're receiving sick pay or permanent health insurance, even when there’s no guarantee of return to service.
20% directors of investment companies.
However, certain exemptions may exist for directors whose investment companies act as holding companies for a group of trading companies. If the holding company serves as the group's coordinator, the amount of directors' remuneration allowed as a tax deduction of the company is pensionable.
Agents, consultants, proprietors, single traders, and others assessed to income tax on their earnings under Schedule D rather than Schedule E aren't eligible for benefits under an approved plan.
Schedule D is the heading in the tax code where business income is taxed. Schedule E is the heading where employment income is taxed — this can include salaries, pensions and wages.
Employers set up company pension plans for their employees under trusts, and the trustees monitor the members’ assets on their behalf.
There are three types of members in an occupational scheme:
Active members: Employees currently employed in an organisation and making regular contributions.
Deferred members: A former employee who is still a member of the pension scheme by default. They have not decided whether to leave the plan, but they're not contributing.
Pensioners: Pensioners are plan members past their retirement age and receiving pension payments.
Sometimes, trustees may take help from an insurance company or a pension provider to handle operations while acting as a watchdog to ensure members and employers comply with the scheme’s rules and regulations.
It’s up to the employer to decide the type of occupational pension scheme they want to offer between a defined contribution, a defined benefit scheme, or a hybrid scheme.
Occupational pension scheme members are entitled to two rights:
The right to information
The right to be involved in a pension scheme
Let’s learn about each right in detail.
The pension scheme administrator must inform the members about:
The pension scheme
How it works
Members' rights and employer’s obligations
Where member contributions are invested
Members have the right to know if over 5% of the scheme's assets have been invested in their employer's business or other investments.
The members have the right to participate in selecting trustees if an occupational pension scheme has:
50 or more qualified members OR
More than 12 qualified members in a directly invested scheme
A 'directly invested scheme' is a scheme whose assets are not solely invested in specific investments such as insurance policies, managed funds, cash deposits, or unit trusts. The trustees can also invest the employee’s assets in stocks and bonds.
But who are “qualified members"?
Qualified members are employees currently working in the organisation, pension plan members, and pensioners.
Members of occupational pension schemes can elect half of the trustees (excluding the chairperson), with each member being allowed to select a minimum of two trustees. The employers appoint the remaining trustees after consulting with qualified members.
An employee’s pension options at retirement include:
Taking a Tax-Free Lump Sum: Employees can collect a tax-free lump sum payment from their pension funds when they retire. The amount depends on their pension scheme and whether they received any tax-free lump sums from other pension plans.
Receiving a Pension Through Annuity: A retirement annuity is a regular pension income purchased with all or a portion of the retirement fund. In exchange for transferring the retirement funds to a life assurance firm, the company will pay employees a guaranteed monthly income for the rest of their lives.
Transferring the Retirement Savings to an ARF: An Approved Retirement Fund (ARF) is a personal retirement fund where employees can invest their pension fund after receiving it as a lump sum payment. They can withdraw money from it regularly.
Providing for Dependents: Some plans pay pension benefits to dependents when pension scheme members die while working. Others provide benefits to employees' dependents if the employee dies post-retirement. They receive payment in lump sums or as a regular pension income.
Here are some frequently asked questions on occupational pension schemes:
There is a cap on the total value of the pension fund for which an employee can receive tax relief. This is called the Standard Fund Threshold, which is €2 million.
If the fund exceeds this limit, a 40% tax will be levied on the excess when it’s withdrawn from the fund.
An annual pension limit is also set on the amount of pension contributions employees claim as tax relief in a year based on the maximum percentage of their income and age. The maximum gross income considered to calculate this percentage is €115,000.
If scheme members leave employment, change jobs, or become self-employed, they have three options:
Preserve the benefits within the existing scheme: If an employee has been a pension scheme member for two or more years, they can leave their benefit amount in the scheme until they retire (a preserved benefit).
Transfer benefits to a new pension scheme: Employees can move their pension benefits to other pension arrangements. For instance, employees can move their retirement annuity contract (RAC) benefits to another RAC or a personal retirement savings account (PRSA).
Get a refund of their contributions: If employees are pension scheme members but have less than two years of qualifying service, they can obtain a refund based on the value of their contributions at the basic tax rate of 20%.
When an employee is terminated, employers must provide specific information about the pension plan to their employees, as per the rules set by Ireland’s Pensions Authority.
In a defined contribution scheme, the employer must inform the employee about:
The total value of employer contributions paid on behalf of the employee.
The rights and claim options available to them when leaving service.
The procedure for claiming pension benefits.
In a defined benefit scheme, the employer must inform the employee about:
When their benefits will be paid.
The amount of preserved benefit the employee is entitled to upon retirement.
Any other extra benefits to be paid to the employee under the pension scheme rules.
Employees can join a private pension (aka personal pension) plan if the employer doesn’t offer an occupational pension scheme.
There are two main types of personal pension plans:
Personal Retirement Savings Account (PRSA): Employees below the age of 75 can open a PRSA. Employees must deposit a portion of their salary into their PRSA account, which will be invested in shares and stocks to guarantee that inflation doesn’t decrease the fund's value.
Retirement Annuity Contract (RAC): Only people with “relevant earnings” can join an RAC. Relevant earnings are incomes from trade-related services, such as those working as export managers, trade analysts, or self-employed persons. The amount in the RAC pension funds is invested in shares or stocks, and its value may rise or fall based on their investment performance.
Most employers in Ireland offer employees occupational or company pension schemes to support them in retirement and supplement their State Pension.
But offering occupational pensions is timely and expensive.
The good news?
You can use Kota to enrol, automate and scale your retirement benefits effortlessly.
With Kota, you can:
Offer flexible and portable retirement benefits in the UK and Ireland.
Know how your retirement plan competes locally with geo-based data.
Automate pension benefit rollout without extensive paperwork.
Connect Kota with your existing HR & payroll tools to reduce admin costs.
We offer a defined contribution pension plan via Irish Life (the Irish Life EMPOWER Personal Lifestyle Strategy). This scheme allows employees to manage risks and allocate their investments to suitable funds that align with their needs.
You can easily onboard your employees to Kotaand set up their retirement benefits in four easy steps:
Step 1: Create an account and add your employees.
Step 2: Select the matching contribution you want to add to your employee pension. For example, a 5% matching contribution, where the employer and employee contribute 5% of their pensionable salary to the pension fund.
Step 3: Enrol your employees in the pension plan.
Step 4: Add payment and billing details.
Kota lets you enrol employees in a corporate Master Trust and give your team complete control over their contributions — all in one digital app.
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