In Ireland, the taxation of an Approved Retirement Fund (ARF) is a multi-layered process that primarily focuses on the income and withdrawals you take from the fund, rather than the growth within it.
Here’s a breakdown of the taxes you need to be aware of:
1. Income Tax, USC, and PRSI on Withdrawals
Any money you withdraw from your ARF, whether it’s a regular payment or a one-off lump sum, is treated as income for tax purposes. This means it is subject to:
• Income Tax: Your withdrawals will be taxed at your marginal rate, just like a salary. The amount you pay will depend on your total income, including your ARF withdrawals and any other sources of income, such as a State Pension or private pension.
• Universal Social Charge (USC): USC is applied to your gross income, including ARF withdrawals. The rates vary based on your income level.
• Pay Related Social Insurance (PRSI): If you are under the age of 66, you may have to pay PRSI on your ARF withdrawals. PRSI is not generally paid on pensions for those over 66.
Your ARF provider will act as your “employer” for tax purposes and will deduct these taxes from your withdrawals under the PAYE (Pay As You Earn) system. It is crucial to ensure that your tax credits and standard rate cut-off point are allocated correctly to your ARF provider to avoid being taxed at the emergency rate.
2. Tax on Death
When you die, the tax treatment of the remaining ARF depends on who inherits it.
• Surviving Spouse or Civil Partner: If the ARF is transferred into an ARF in the name of your surviving spouse or civil partner, there is no Income Tax or Capital Acquisitions Tax (CAT) (inheritance tax) on the transfer. They will then pay tax on any future withdrawals.
• Children (aged 21 or over): If an ARF is inherited by a child who is 21 or over at the time of your death, it is subject to a flat rate of 30% Income Tax. It is not subject to Capital Acquisitions Tax. This is often a more favourable tax treatment than other types of inheritance.
• Children (under 21): The fund is not subject to Income Tax but is subject to Capital Acquisitions Tax (CAT), with the standard tax-free inheritance thresholds applying.
• Other Beneficiaries: If the ARF is inherited by any other person (e.g., a sibling or friend), it is subject to Income Tax at the deceased’s marginal rate and is also subject to Capital Acquisitions Tax.
It is highly recommended to seek professional financial advice to manage your ARF and to plan your estate to minimise the tax burden for your beneficiaries.