IBM Mercer Pension

[murphaph1]

Hi all,
I have a small IBM DC pension fund accumulated while I worked there in the late 90's, early 2000's. It's worth 66k right now. It was worth up to 80k last year but the markets went where they went for the time being. I do not need this money or at least I do not believe I will ever need it. I will have a 39/40ths COAP from Ireland and a ca. €500 state pension from Germany but most of my income in retirement will continue to come from rental properties as it does now.

I am 45 this year and I am aiming towards just moving this entire pension fund into an equities based ARF. I will NOT be taking a tax free lump sum because I am tax resident in Germany and this payment would be taxable income like any other. The ARF distributions on the other hand are only taxable in Ireland (Germany being one of the few countries where the Irish DTA specifically covers ARFs and gives the taxation rights solely to Ireland), which suits my situation.

So, I am hoping to do the following:
Buy an ARF at age 50 (in 5 years). Why? Because I want to get the 52 PRSI credits towards the COAP from the distributions. At present I buy these credits voluntarily. Is there a minimum amount I need to withdraw from the ARF to be entitled to PRSI credits? I do not want to withdraw large amounts from the ARF just to get "free" PRSI credits. They are only costing €500 a year so needlessly depleting my ARF to buy them is not part of the plan.

Ideally I would like to withdraw say just 1% from the ARF each year from age 50 until I reach 61 when I believe I will face essentially compulsory withdrawals of 4% and 5% from age 70. That's ok as it gives the pension fund->ARF another few years to grow (hopefully). Is it possible to withdraw such a small amount and still get the PRSI credits? Is there a minimum withdrawal amount before it is possible to receive 52 credits per year?

Even if the above is a non-runner and I will be leaving the ARF fully invested until compulsory withdrawals at 61, am I correct in assuming that the current "Long Term Growth Fund" is not the best match for someone like me that wants to invest the pot in an equities based ARF anyway? There are only about 50% equities in that fund and I am thinking it makes more sense to move it to a purely equities based fund, like the "Global Developed Market Equity Fund" which has fees of 0.08% and is presumably essentially an ETF type passive investment similar to an MSCI World Index. This is the sort of ARF I would end up investing the pension fund in anyway so wouldn't it make sense to move to that sort of risk profile already? (I am comfortable with the associated risk of investing the entire fund in a well diversified equity based fund)

Here's the current fund I am in: https://www.merceroneview.ie/Content/DCPension/ICs/1363543IBMMGILongTermGrowthFund.pdf

 

[S class]

Zurich has received confirmation from DSP that a minimum ARF withdrawal of 5000 euro per year is required to gain 52 S class contributions. These are not credits, they are full paid contributions.

 

[Sarenco]

If a person under the age of 66 is receiving a distribution from an ARF then any income of €5,000 or more will incur a PRSI (Class S) charge of 4% or €500, whichever is greater. Class S contributions may be used to qualify for the State Pension (Contributory).

As €500 is the minimum PRSI charge, you might as well draw down €12,500 per annum, which is below the income tax and USC thresholds.

 

[NoRegretsCoyote]

Why? Because I want to get the 52 PRSI credits towards the COAP from the distributions.

Are you credited these as a non resident?

 

[murphaph1]

Thanks a lot folks. I will have to have a wee think about the best sequencing. I already have Irish rental income so if I took the 12,500 it would be taxable for sure. I was rather hoping to take less and I think I may just leave the pension fund invested as a pension fund until I have to convert it to an ARF at regular retirement age.

Are you credited these as a non resident?

I would assume so as I currently already pay the €500 annually for the 52 contributions under the voluntary scheme.

 

[NoRegretsCoyote]

I would assume so as I currently already pay the €500 annually for the 52 contributions under the voluntary scheme.

But that’s for people who have left Ireland and don’t contribute to another social insurance scheme in the EU.

It’s a while since I checked but IIRC non-resident landlords don’t pay Class S PRSI so I would assume same principle for ARF income (open to correction).

 

[S class]

If a person under the age of 66 is receiving a distribution from an ARF then any income of €5,000 or more will incur a PRSI (Class S) charge of 4% or €500, whichever is greater. Class S contributions may be used to qualify for the State Pension (Contributory).

As €500 is the minimum PRSI charge, you might as well draw down €12,500 per annum, which is below the income tax and USC thresholds.

I don't think that the 500 euro minimum is being applied. In my case for 2022 I have an ARF drawdown of over 5000 but a lot less than 12500 euro. Zurich has charged the 4% Prsi and the total for the year is less than 500 euro. I have received 52 S class contributions.

 

[S class]

.

 

[murphaph1]

But that’s for people who have left Ireland and don’t contribute to another social insurance scheme in the EU.

It’s a while since I checked but IIRC non-resident landlords don’t pay Class S PRSI so I would assume same principle for ARF income (open to correction).

Yes the former applies in my case. I had over the 520 contributions when I left Ireland and I am no longer an employee in Germany, so I am not subject to German social insurance (for pension purposes) and making voluntary contributions to the German state pension system is a terrible deal for most people, so I do not contribute to it any more, choosing alternative investments instead. I am therefore eligible to make voluntary PRSI contributions at class V1 in Ireland. I do not pay any PRSI on my Irish rental income at all as I am non-resident.

Do you think the contributions made by my ARF provider to the DSP would be at some class other than A, because I am non-resident?

Interesting @S class about the minimum 500 not being applied. Thanks for that. There's a little bit more thought required about the sequencing on my side too as although Germany does not have any taxation rights to the ARF distributions thanks to the DTA, Germany does have and does make use of its right to apply that income to the progression clause, so my taxable German income is taxed at a slightly higher rate than it otherwise would have been without the ARF distributions being factored in.

 

[NoRegretsCoyote]

Do you think the contributions made by my ARF provider to the DSP would be at some class other than A, because I am non-resident?

My understanding is that ARF drawdowns are at Class S, not Class A. See here.

https://www.askaboutmoney.com/file:///D%3A/Users/enrigs/Downloads/38671_0aa2cf3d831a4076b1b6208e1287d9f9%20(1).pdf (Guidance)seems clear that non-residents do not pay Class S on unearned income:

Who does not pay Class S PRSI? The following people do not pay PRSI at Class S: • Prescribed relatives such as a son, daughter, parent, brother or sister, who help a self-employed person with their business but who are not partners in the business; • People whose total income from self-employment, earned and unearned, and employment is below a certain amount, currently €5,000 a year; • People classified by the Revenue Commissioners as non-residents who hold solely unearned income;

On the other hand I would imagine Mercer would by default deduct Class S PRSI and remit it to Revenue and it will show up on your DSP record. If you don't correct Mercer I doubt anyone will notice, the government generally isn't bothered when you pay them money, more the opposite.

 

[Sarenco]

I don't think that the 500 euro minimum is being applied. In my case for 2022 I have an ARF drawdown of over 5000 but a lot less than 12500 euro. Zurich has charged the 4% Prsi and the total for the year is less than 500 euro. I have received 52 S class contributions.

Interesting.

That seems to be a bit of a glitch in the system.

 

[murphaph1]

My understanding is that ARF drawdowns are at Class S, not Class A. See here.

https://www.askaboutmoney.com/file:///D%3A/Users/enrigs/Downloads/38671_0aa2cf3d831a4076b1b6208e1287d9f9%20(1).pdf (Guidance)seems clear that non-residents do not pay Class S on unearned income:



On the other hand I would imagine Mercer would by default deduct Class S PRSI and remit it to Revenue and it will show up on your DSP record. If you don't correct Mercer I doubt anyone will notice, the government generally isn't bothered when you pay them money, more the opposite.

Aha, so that is of course very interesting. I suppose the "income" was earned back when I was at IBM in Dublin, but payment of tax including PRSI was deferred until the pension is paid out. Are distributions from an occupational pension like this considered unearned income or deferred earned income?

I think it's a little too risky for me to chance the DSP turning around when I am 66/67 and saying "oh those contributions you've been making for the last 16/17 years don't count towards the COAP". The VC1 contributions I make are guaranteed to be reckonable for the COAP and are very inexpensive in the grand scheme of things. I would not want to jeopardise anything for the sake of €500 a year. The DSP knows I am non-resident so it may well come to light when it's far too late to do anything about it.

I suppose I could ask for written confirmation from the Department that such PRSI deductions for non-residents at class S would be reckonable for the COAP before taking my pension early at all. I can always leave it invested until I am 66/67. One advantage of buying an ARF at 50 however would have been the possibility of drip feeding the fund out of Ireland and investing the money into regular ETFs here in Germany, where the taxation is very straightforward. It would also keep the fund out of Revenue's clutches should I pop my clogs earlier than I can spend the money. The CAT regime is significantly more generous here and I already have property in Ireland to pass on.

I imagine there are actually quite a lot of early retirees who use their occupational pension distributions to maintain their PRSI contributions towards the COAP and that many of these in turn have retired to Spain already. These people would also be affected by their contributions not being reckonable I suppose but in reality they may just use an Irish address for correspondence and fall under the radar.

 

[S class]

Interesting.

That seems to be a bit of a glitch in the system.

The system is complicated. The Prsi is deducted by Zurich the "employer" at 4% under the paye system. This system does not allow the minimum 500 euro to be applied.
Any extra to make up the shortfall to 500 euro would have to be charged using a system other than paye.

Click on Find out more below.
There is no mention of a 500 euro minimum applying.

https://www.google.com/url?sa=t&source=web&rct=j&url=https://zurichlifeireland.newsweaver.com/toolstohelpyou/1vee1cp4bqa&ved=2ahUKEwj3p-SLiPf9AhXSUMAKHYN4A7kQFnoECA0QAQ&usg=AOvVaw1B1fXTAFva7Mp5qnthqs5w

 

[S class]

I suppose I could ask for written confirmation from the Department that such PRSI deductions for non-residents at class S would be reckonable for the COAP before taking my pension early at all.

I find that Zurich are very good at knowing the details regarding PRSAs and ARFs.
You could enquire from them that if you set up an ARF as a non resident, would you be liable to pay PRSI. If you are liable then the pension qualifications apply. Zurich should either know what applies or they will seek clarification from DSP.

 

[murphaph1]

I find that Zurich are very good at knowing the details regarding PRSAs and ARFs.
You could enquire from them that if you set up an ARF as a non resident, would you be liable to pay PRSI.

The pensions manual doesn't explicitly mention PRSI but does talk about PAYE:

13 Non-Irish residents and ARFs, AMRFs and retirement fund
balances
PAYE exclusion orders
Income and assets retained in an ARF (see paragraph 6) are beneficially owned by the
ARF owner. Distributions (including deemed distributions) from ARFs are generally2
treated and taxed as emoluments under Schedule E, regardless of the residence status
of the individual recipient.
As distributions from ARFs are not payments of pension, PAYE Exclusion Orders are not
issued in respect of such distributions.
PAYE Exclusion Orders are not issued where an individual takes the balance of his or her
pension fund as a taxable lump sum (see paragraph 5).

https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-23.pdf

Do people in Ireland aged 66+ have to pay PRSI on ARF distributions? I guess not? I don't mind paying PRSI if I get reckonable for COAP contributions credited. I would not like to have to pay PRSI if I get nothing from them.

 

[Sarenco]

The system is complicated. The Prsi is deducted by Zurich the "employer" at 4% under the paye system. This system does not allow the minimum 500 euro to be applied.
Any extra to make up the shortfall to 500 euro would have to be charged using a system other than paye.

Oh, I can completely understand why Zurich simply deduct and remit 4%. After all, they have no idea what other income the beneficiary has beyond the ARF distributions.

What surprises me is that DSP gives a full “stamp” without the €500 minimum being met. That seems a bit of a glitch in the system to me but it certainly presents an interesting planning opportunity in certain circumstances.

 

[S class]

People over 66 are M classed for Prsi. M class is not charged for.
So basically the over 66s are liable to Prsi on an ARF but are not charged for the privelige. M class have no benefits.

 

[S class]

Oh, I can completely understand why Zurich simply deduct and remit 4%. After all, they have no idea what other income the beneficiary has beyond the ARF distributions.

What surprises me is that DSP gives a full “stamp” without the €500 minimum being met. That seems a bit of a glitch in the system to me but it certainly presents an interesting planning opportunity in certain circumstances.

To collect any shortfall DSP would have to send a bill to the ARF holder.
This would be quite a shock to a pensioner.

There should be no PRSI liability on ARFs. They are a pension and should be treated the same as Occupational pensions and Annuities i.e M class which is not charged for.

Slapping PRSI on ARFs is a money grab by the government. Most ARF holders probably have 40 years of Prsi contributions before retirement. It is probably only ex public sector workers who paid B or D contributions for most of their lives who gain from having to pay S class contributions on their ARFs.

Also charging USC and PRSI is double taxation as both of these are charged on the payments into the pension scheme and also charged again on the drawdowns.

 

[murphaph1]

I don't think it's a glitch the "less than 5k" withdrawals resulting in 52 class S stamps. Our resident expert on this matter posted on this in an older thread. It is "expected behaviour" and the ARF drawdown can be as small as you like. The critical thing is that if it is under 12,500 that the withdrawals are made at least monthly! See here:

Retiring just short of 10 years contributions for Irish pension - options ?

I'm retiring shortly after having accumulated 8.5 years of contributions towards receiving an Irish pension. I already have a full UK pension (having 35 years UK contributions) to come but as I understand it I need to have 10 years contributions, in the Republic, in order to receive a small...

www.askaboutmoney.com

 

[NoRegretsCoyote]

I think it's a little too risky for me to chance the DSP turning around when I am 66/67 and saying "oh those contributions you've been making for the last 16/17 years don't count towards the COAP".

I think the chance of that happening round to about 0%. But in your shoes it makes more sense to pay the voluntary contributions as you already are.

I am 45 this year and I am aiming towards just moving this entire pension fund into an equities based ARF.

I agree at your age you should be in an all equities strategy for the DC fund. A mix of two state pensions, an all-equity ARF, and property is very well diversified retirement income.