The European Union single market is based on “four freedoms”, the free movement of goods, services, capital and people (labour). Like the single market in the United States, goods, services and capital generally move freely across the bloc. In an efficient EU single market, anyone should be able to move employment from Dublin to Prague to Berlin with ease. Whilst larger companies like Google or Pfizer can typically facilitate this, for smaller companies and individuals the current complexity makes movement very difficult. Thus the single European labour market is quite inefficient in a way that other single markets are not.
One of the biggest issues that prevents free movement of labour across the EU is that retirement benefits are very localised, complex and difficult to move. Not being able to move pensions easily undermines the free movement of labour. However the EU has made the process of pension transfers easier than it was and more policy changes are on the way.
The Irish pension system has numerous structures so lets examine how mobile pensions actually are.
Overseas transfers are primarily legislated for under the Occupational Pension & PRSA (Overseas Transfer Payments) Regulations 2003. Statutory preserved benefits from an Occupational Pension Scheme(OPS) and a PRSA fund are transferable to an approved overseas arrangement that provides “Relevant Benefits”. Relevant Benefits is defined in Section 770 of the Taxes Consolidation Act (TCA) as “any pension, lump sum, gratuity or other like benefit…….”. The scheme trustees or PRSA provider must verify relevant benefits are payable from the overseas pension.
Under the provisions of the regulations transfers may be made to “facilitate bona fide transactions only”. Prior to transferring to an oversea pension arrangement, an individual must sign a declaration confirming the transfer meets the regulatory and Revenue requirements and is for bona fide reasons and is not primarily for the purpose of circumventing pension tax legislation and Revenue pension
rules and conditions.
In addition to these regulations, the Revenue Pensions Manual sets out additional requirements. When transferring from an OPS to another pension within the EU, the receiving scheme must be an IORP (Institution for Occupational Retirement Provision). If the receiving scheme is outside the EU, the individual must be employed in that country.
In case of a Buy-Out-Bond, the Revenue Pensions Manual only permits transfers between buy out-bonds and UK Statutory Schemes, UK exempt approved occupational pension schemes and UK personal pension arrangements.
In the case of a PRSA, under Section 787G of the Taxes Consolidation Act (TCA) where the assets of a PRSA are made available to the individual or to any other person, the PRSA provider must deduct tax under the PAYE system. There are number of exemptions to this tax charge such as transfers to other PRSAs, approved schemes or ARFs but overseas transfers are not exempt.
It is important to note that any transfer to an overseas pension arrangement is a Benefit Crystallisation Event (BCE). The value of the pension at the point of transfer is tested against the Standard/Personal Fund threshold so If the value of the pension is greater than €2,000,000, the excess above the threshold will be taxed at 40% prior to transfer.
In the case of an ARF/AMRF or Vested PRSA transfer overseas, the Revenue Pension Manual states transfers are not permitted once benefits come into payment.
Therefore the most straight forward pension arrangement to transfer from is an OPS. Where an individual has a PRSA or BOB, finding a route to get those benefits into an OPS will provide the most flexible and tax efficient way of transferring benefits to an overseas pension arrangement.
What does the future hold?
Based on the existing Irish system, there are a lot of issues to consider from the most appropriate pension structure, meeting the bona fide test and ultimately the tax implications of a transfer depending on where the individual is resident when it comes to drawdown benefits.
However a solution maybe be coming in the form of the Pan European Personal Pension (PEPP). As part of the Capital Markets Union, the European Commission in 2017 put in place regulations that established the legal foundation for a PEPP market.
The PEPP is a voluntary personal pension scheme that will offer consumers a new pan-European option to save for retirement. It will be a simple, flexible and cost-effective product with strong consumer protection rules.
The main benefits envisaged by the European Commission in creating a PEPP are as follows[1]:
A flexible product – Standardisation of core features will be combined with flexibility to cater for national differences, so that savers can benefit from national incentives, where these exist.
A competitive product – Savers will benefit from increased competition between PEPP providers. In addition, the possibility for savers to switch providers regularly, every five years, at capped costs will further stimulate competition in the market, ultimately resulting in better quality products.
A more attractive product – PEPP will be a modern product that can be distributed and purchased online, which will make it more attractive for young Europeans.
A more portable product – Providers will be able to offer PEPPs on pan-European basis, allowing savers to continue saving in the same product, when they change residence across borders in the EU. In case portability is not available, consumers can switch provider free of charge or can continue to contribute to the PEPP of the previous country residence.
Full mandatory advice – Consumers will also benefit of full mandatory advice, to enable them to make an informed decision before purchasing a product. They will also benefit of personalised advice before retirement in order to choose the most suitable form of out-payments to their needs.
Full transparency on the product, including on costs and fees –Fees and costs will be transparent, disclosed via a simple Key Information Document (KID) supplied before the purchase, as well by a standardised pension benefits statement during the product lifetime.
A simple and affordable default investment option (called the Basic PEPP) – with costs capped at 1% of the accumulated capital per annum. The Basic PEPP will offer a capital protection that can take the form either of a capital guarantee or of other risk mitigation techniques with the objective to ensure that savers recoup the capital invested.
The features of the PEPP look attractive from a consumer point of view, the area that will prove the most difficult is harmonising tax rules across member states so a lot of work will be required to find a consensus on the tax elements of this product.
From an Irish point of view any PEPP product will most likely be facilitated through our PRSA product. The report from the Interdepartmental Pensions Reform and Taxation Group (IDPRTG) published in 2020 makes reference to the PEPP and recommends “As far as possible, and consistent with the objective of rationalisation and simplification, the transposition of the PEPP Regulation should aim to align with existing PRSA legislation. Any PRSA or contract-based pension reforms introduced prior to PEPP transposition should be cognisant of PEPP and aim to avoid anomalies or the duplication of product legislation.”
This would be a positive step forward and give individuals the flexibility to move their pension benefits within the EU in the same way goods, services, capital and people are allowed move without restriction.
Blue Oak Counsel offer wealth management and investment advice to professionals
[1] Capital Markets Union: Pan-European Personal Pension Product (PEPP) - European Commission - Fact Sheet
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