Retirement Planning - Definitions

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Dynamisation

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Index-linking of earnings, either for calculating scheme benefits, or for determining final remuneration for the purpose of Revenue limitations.

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Notional service purchase

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Members of public sector pension schemes who are likely to have less than 40 years service by minimum retirement age, can buy back missing years of service through lump sum or regular payments as a percentage of salary.

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Cost Neutral Early Retirement

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Retirement option that allows public servants to retire early with immediate payment of pension benefits. The pension and lump sum payments are subject to actuarial reduction to take account of the early payment of lump sum and the longer period over which pension will be paid.

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Public Service Pension Reduction

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Emergency measure to reduce public service pensions in payment introduced in 2011. A further reduction for higher value pensions was introduced in July 2013.

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Public Service Transfer Network

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Enables an employee who transfers from one participating public sector employer to another, to transfer the earlier service and so be given the full pension credit by the new employer.

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Section 50A application

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Trustees can apply to Pension Board to ‘make such amendments to the scheme as they consider appropriate’ to ensure scheme wind up is not required because of deficit.

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Standard chargeable amount

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Portion of a lump sum(s) that is taxed at the standard of 20% rate. Currently, this portion is between €200k and €500k.

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Chargeable excess

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Tax on the amount by which the fund threshold is exceeded. Current threshold is €2M (€2.15M when allowing for the max tax credit of 20% of €300k SCA)

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Tax free amount

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Tax free lump sum, currently a maximum of €200,000

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Excess lump sum

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Amounts in excess of the tax-free limit (currently €200k). €200k to €500k taxed at standard rate 20%. €500k to €2M taxed at 40% (plus PRSI & USC). Excess above SFT taxed at 40%.

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Standard fund threshold

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Limit on the total capital value of pension benefits that an individual can draw down in their lifetime from tax-relieved pension products, where those benefits come into payment for the first time on or after 7 December 2005. The current limit is €2,000,000.

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Personal fund threshold

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If the aggregate value of your pension arrangements exceeds the SFT, it is possible to apply to Revenue for a Personal Fund Threshold (PFT) certificate in advance of your retirement date. Current maximum PFT is €2.3M.

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Benefit crystallisation event

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A BCE occurs on each occasion that, in relation to a “relevant pension arrangement” of which the individual is a member, any of the following takes place: 1. The individual takes a pension, annuity or retirement lump sum. 2. Transfer of retirement funds to: ARF, AMRF, or member as taxable sum

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Accrued pension amount (APA)

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Pension amount accrued by 1st January 2014, multiplied by a factor of 20 when calculating total pension benefits.

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Imputed distribution on ARFs

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Where the ARF owner is 60 years of age or over for the whole of the tax year and where an ARF is set up after 6 April 2000, an imputed distribution is calculated as a percentage (currently 5%) of the market value of assets in the ARF on 31 December each year. Tax is levied on this amount as if it had been drawn down. Actual distributions made during the year normally may be deducted from the "imputed distribution" to arrive at a "net" imputed distribution (if any).

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Earmarking (PAO)

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Get designated benefit when member draws their benefit, i.e. don't opt to split by taking transfer value.

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Pensions Preservation Order

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Order to trustees to ignore impact of Judicial Separation for purposes of benefit entitlements under scheme rules

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Close Company

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Generally speaking, a private company under the control of 5 or fewer participators, or under the control of its directors

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One member arrangement

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A DC scheme with one member, and which can only have one member (apart from PAO). Member has discretion as to how the resources of the scheme are invested.

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Exempt Unit Trusts

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Term used to refer to unit trust schemes which are typically used by pension providers as investment vehicles. The reference to “exempt” is a reference to exemption from certain tax obligations, available under Irish tax law on the basis that the investors in such trusts are either pensions or charities.

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Bomb Out Risk

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Risk that an investor who takes regular withdrawals and/or imputed withdrawals over the life of their retirement that the income needs of the investor may not be met by the value of his or her ARF.

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Sequence risk

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The impact of volatility of investment returns on the value of your investment. Sequencing is the order and timing of investment returns. The risk with sequencing and retirement income is that unfavourable investment returns close to retirement can result in less money for retirement.

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Salary sacrafice

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Any arrangement under which an Employee forgoes the right to receive any part of his or her remuneration due under his or her terms or contract of employment and in return his or her employer agrees to provide him or her with a benefit.

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Death’s Door Concession

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Revenue concession where an occupational pension benefit can be paid out in advance of death at a preferential tax rate of 10% (after tax-free lump sum). Life expectancy measured in months not years.

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EET

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Exempt contributions, Exempt investment returns in the fund, Taxed benefits on retirement.

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Maximum ordinary (regular) contribution

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B x CF – (value of assets plus retained benefits) / term in years to normal retirement date, min 1 year

OR

n/60ths pension x CF – value of assets /

term in years to normal retirement date, min 1 year

B = the Revenue maximum pension on uplifted scale based on current remuneration but with service to normal retirement date.

CF = maximum benefit capitalisation factor.

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Special Contribution

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Any employer or employee contribution not regarded by Revenue as an ordinary annual contribution.

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Pride in possession

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Tangible, moveable property such as fine art or vintage cars. Not permitted as investments within a self-administered pension scheme.

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Properly diversified

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Long-term mix of stocks, bonds and other investments that are allocated according to your goals, time horizon and risk tolerance. Diversification entails being diversified both among and within different types of stocks, bonds and other investments. At the heart of diversification is correlation. By diversifying among asset classes with low or inverse correlations to one another, you are likely to improve your risk-adjusted returns.

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Regulated markets

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Securities listed and admitted that trade on regulated markets for thepurposes of MIFID. These securities include equities, Govt. Bonds, CorporateBonds, investment funds, ETF’s and specialist funds.

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Certificate of Benefit Comparison

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Required in certain circumstances if you want to transfer a fund from an Occupational Pension Scheme (DB or DC) into a PRSA. It's a certificate prepared by a suitably qualified and insured actuary that compares your position before and after the proposed transfer.

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Uplifted scale

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Individual can, starting not less than 10 years from normal retirement age, fund for the maximum benefit of two-thirds of final remuneration.

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Fast accrual

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Ability of some public servants to achieve maximum pension and gratuity entitlement with less than 40 years' actual service, e.g. Gardai and Prison Officers can accrue a full pension with 30 years’ service.

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Sovereign Annuity

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An annuity contract issued by insurance companies where the annual income payment is linked directly to payments under bonds issued by Ireland or any other EU Member State. Risk of default passed to pensioner rather than held by life company.

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Pensioner Support Ratio

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Ratio of working age people to people 65 and over

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Relevant Benefits

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Any pension or lump sum given on retirement or death

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Revaluation (as applied to DB schemes)

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The application to preserved benefits of compulsory increases in their value prior to the date of payment.

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Standard Capital Superannuation Benefit (SCSB) formula

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A X B / 15 - C

A = average annual remuneration for the last 36 months service

B = number of complete years of service

C = value of any tax free lump sum received/receivable under an approved pension scheme

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Career Average DBScheme

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Level of pension at retirement is based not on the earnings close toretirement, but rather on the average earnings throughout the member’s entirecareer. These earnings may be revalued up to the point of retirement in linewith some index, for instance the Consumer Price Index (CPI)

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Cross Border Scheme

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Occupational Pension Scheme established in the State, under Trust, approved by the Pensions Authority to include employees in other EU States. An employer can sponsor and establish an IORP in one Member State to which its employees in one or more EU member states may belong. Supervision of the cross border IORP is by the home state regulator (in Ireland it’s the Pensions Board) but the scheme must comply with the social and labour law of the host state where the participating overseas members are located.

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Pay Parity

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The practice of increasing public service deferred pensions and pensions in payment in line with the increase in salary of the public service position from which the individual left service or retired.

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Discretionary Approval

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Retirement Benefit Schemes can be approved in one of 3 ways: Automatic, Discretionary or via Retirement benefit product approval. Discretionary Approval where scheme wishes to provide benefits above applicable to Automatic Approval (access to uplifted scale 10 years for max pension and 20 years for max lump sum). Virtually all schemes seek approval under Discretionary Approval system and become exempt by being set up under an irrevocable trust.

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Benefit Driven Asset Allocation

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As pension plans are considering their current and future liabilities after being hit hard by volatility, a new approach is being taken—also referred to as liability-responsive asset allocation—a dynamic approach to pension plan management, allowing a plan to adopt an appropriate level of equity investment at a particular funded status, while also allowing for automatic adjustment of that strategy if funded status changes materially.

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Contingent Benefits (in the context of divorce settlement)

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Benefit that is assigned to the ex-spouse of a scheme member under a PAO that is contingent on the death of the member before retirement. It must be sought within 1 year of date of decree of divorce order. Can’t be sought if wife has remarried. The order will specify: Each element of contingent benefit; The beneficiary; The % of the contingent benefit payable to each beneficiary.

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Longevity Insurance

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Insurance against unusually long life which could lead to an individual outliving their retirement capital. Longevity annuities are reverse life insurance meaning premiums are collected by the life insurance company from its policy holders to pay an income when a policy holder lives a long life. There is no pay out on death.

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Relevant Valuation Factor

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In the case of DB pension arrangements, the capital value of such rights drawn down after 1-Jan-14 is determined by multiplying the gross annual pension that would be payable to the individual (before commutation of part of the pension of lump sum) by the appropriate age-related valuation factor. Where part of the DB pension has been accrued at 1-Jan-14 and part after that date, transitional arrangements allow the capital value of the pension at retirement to be calculated by way of a “split” calculation, so that the “accrued pension amount” will be valued at a factor of 20 and the part accrued after that date valued at the appropriate higher age-related factor.

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Excluded Distributions

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In relation to imputed distributions from ARF’s and Vested PRSA’s Excluded distributions are are distributions that do not attract a tax liability in their own right, e.g. the transfer of assets from one ARF to another beneficially owned by the same individual, or a tax-free lump sum taken from a PRSA on vesting.

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Enhanced Transfer Value

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Offer from the Employer to members of a DB scheme to accept a higher transfer value that was previously on offer to incentivize the member to accept the transfer value and effectively remove the member’s associated liability from the DB scheme. ETVs are an option that companies can consider to help them control the financial risk and funding volatility of their DB plan.

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Regulated Advice

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Investment advice given on a professional basis about a financial instrument for financial reward.

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Financial Instruments

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RAC’s, PRSA’s, BOB’s, PHI & Section 785. All of these are Insurance policies and therefore ‘Financial Instruments’

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Not Financial Instruments

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ARFs & AMRF’s, OPSs, Small Self-administered schemes, Group RAC trusts and uninsured BOBs

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Automatic Approval

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Revenue “shall” approve an OPS if: bona fide for provision of relevant benefits, employer contributes, scheme recognised by EE/ER, there is a scheme administrator & conforms to a set scale of benefits: n/60ths pension and 3n/80ths lump sum plus DIS lump sum and Spouse benefits) – Rarely used because restrictive.

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Preserved Benefit

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There are specific rules about what happens if you leave a pension scheme, e.g. change jobs or you become self-employed or retire early without a pension. Your benefits from the pension scheme may be preserved within the scheme or transferred to another scheme. If you have at least 2 years of service, you are entitled to a preserved benefit if you leave before the normal retirement age.