Pensions for Pharmacy Staff – The Employer Obligations and The Staff Options Explained
A pension is a long-term savings plan that helps you save for your retirement. Crucially unlike a regular savings account money invested in your pension can be contributed tax free, enjoy tax free growth and present tax-free cash at retirement.
Current Environment Ireland’s State Pension (Contributory) stands at €238.30 per week, less than half the current average industrial weekly wage. While the State Pension (Contributory) can help you get by, it may not be enough to allow you to live the active and fulfilling retirement that you want. To be eligible for the state pension you will have to
- Have paid social insurance contributions before a certain age
- Have a certain number of social insurance contributions paid
- Have a certain average number over the years since you first started to pay
Your current eligibility level can be checked with the department of social protection via their online query form available at www.welfare.ie
Note that The Social Welfare and Pensions Act 2011 made a number of changes to the qualifying age for State pensions. The qualifying age will rise to 67 in 2021 and 68 in 2028, So
- If you were born on or after 1 January 1955 the minimum qualifying State pension age will be 67.
- If you were born on or after 1 January 1961 the minimum qualifying State pension age will be 68.
When looking at your income in retirement it is important to realise that the current payment level of the state pension is unsustainable and this burden will be increasingly passed back to you through potentially an auto enrolment scheme or higher taxes to compensate for the smaller pool of workers supporting an every growing retired sector of the population. By 2040 there will only be two working tax payers supporting every retiree compared to the current ratio of 5 to 1.
Considering the above it is vitally important to make some additional provision for retirement income yourself and the earlier you start the more you take advantage of the benefits of cumulative tax free growth on your fund. Pensions can get bad press but the simple truth is that a well-advised pension is the most effective way to save for your retirement.
There is no legal obligation on an employer to set up or contribute to a pension scheme. If your employer doesn’t have a pension scheme or if you are an ‘excluded employee’, your employer will need to provide you with access to at least one Standard PRSA via payroll deduction.
You are considered an ‘excluded employee’ if
- your employer does not offer an occupational pension scheme, or
- you are included in a scheme for death in service benefits only, or
- you are not eligible to join the scheme or will not become eligible to join the scheme within six months from the date you began work, or
- you are included in a scheme that does not permit the payment of Additional Voluntary Contributions (AVCs) by members.
An employer must enter into a contract with a PRSA provider and is obliged to:
- notify ‘excluded employees’ that they have a right to contribute to a Standard PRSA;
- allow the PRSA provider or intermediary reasonable access to ‘excluded employees’ at their workplace;
- allow reasonable paid leave of absence subject to work requirements so that excluded employees can set up a Standard PRSA;
- make deductions from payroll at the request of employees and remit these to the designated PRSA provider (employers cannot charge for deducting and remitting contributions);
- advise employees in writing (normally on their payslip) at least once a month of their total contribution including the employer’s contribution if any.
If you are working in an employed capacity and don’t own the business you work for then there are several pension options open to you. A Group PRSA would be the most common for pharmacy employees. A Group PRSA (Personal Retirement Savings Account) has individually-owned contracts where you and your employer can avail of tax-reliefs. It should be noted that employer contributions attract corporation tax relief for the employer in the year of the contribution and they do not have to pay PRSI on the contribution.
If there is no employer paid contributions and this group option is not available, then you can also choose from the following options
- Set up a personal pension contract and pay it through your own bank account by direct debit
- Set up a standard PRSA Pension contract and pay it through your own bank account by direct debit or payroll
- Set up a non-standard PRSA pension contract and pay it through your own bank account by direct debit or payroll.
If you do this you can send notice to the revenue of these monthly contributions and they will adjust your tax credits accordingly so you get the tax relief each month.
Personal Pensions, Additional voluntary contributions (AVCs) , PRSA’s and non-Standard PRSA’s are all terms that you will come across when researching your options but what do they mean and what are the pros and cons of each. Let’s deal with each in turn
PRSA: (Personal Retirement Savings Account) this is a personally owned pension that lets you save for retirement on your own terms which you can take out, regardless of your employment status. It’s flexible – you can contribute to it whenever you want and stop making contributions at any time. It’s portable – so you can take it with you If you move jobs, or opt for a career break. The charges are fixed from the outset and you have a limited choice of investment options to choose from which should reflect your attitude to risk. Access is on leaving employment form age 50 onwards
Non-Standard PRSA: Like a Standard PRSA except the charges are more discretionary, (this can mean less) and the investment options are much more flexible. Access is on leaving employment form age 50 onwards
Personal Pension: This is an option only available to the self-employed or those in non-pensionable employment and the contributions are paid personally. You can only access a personal pension from age 60 onwards. The advantages of this over a PRSA is typically access to a wider array of fund choices
AVC’s: This refers to supplemental contributions you can make personally to any employer sponsored pension scheme to top up your benefits, these are subject to revenue maximums which are detailed below.
What are the main benefits of all these pensions?
You can claim full tax relief on your contributions at your marginal rate of tax subject to contributions being within your maximum revenue limit which is age related as per the scale below up to a maximum of €115,000.
Aged Related Reliefs
If you are aged less than 30 this is 15%
Between 30-40 it is 20%
Between 40-50 it is 25%
Between 50-55 it is 30%
Between 55-60 it is 35%
Between 60-80 it is 40%
For example, a 45 on a salary of €150,000 could only contribute a maximum of €28,750 (€115,000 * 25%) to his scheme. With tax relief at 40% every contribution of €100 will only cost you €60. There is no other environment where you can avail of such a savings incentive.
What are your options at retirement?
- 25% of your fund up to a maximum of €200,000 can be taken as a tax-free lump sum
- The balance of your fund can then be moved into an Approved Retirement Fund (ARF) or used to purchase an Annuity (an income for life). The best option for you will depend on your circumstances and income requirements at that time.
This is a post retirement structure which allows you discretionary drawdown and these drawdowns are subject to normal income tax, funds inside the ARF continue to grow tax free. One of the main benefits of this discretionary draw down is that the first €18,000 of income for those over age 65 is tax free and this increases to €36,000 for couples.
This is where you purchase an income for life when you retire and the level of income you receive will depend on the prevailing annuity rates at the time. Single life annuities cost less than those with attaching widows/widowers pension and benefits like indexation will also impact on the rate on offer. Current annuity rates for a single life annuity for a 65 year old stand at 3.98% on a level term basis. This means if you had a pension pot of €200,000 after taking your tax free lump sum an insurance company would give you an income for life of €7,960. As you can see annuity rates are low and this is due to low sovereign bond yields in the market at present.
What happens on death.
If you die before retirement the full value of your PRSA or personal pension will go to your estate.
So, if you are an employer it is important to make sure you are compliant with current legislation and give notice to staff that the payroll deduction facility is available. Staff wishing to contribute should speak to a financial broker to advise on this matter. As with all financial matters it makes sense to seek unbiased independent advice on the best option for you.