The Irish High Court recently considered the transferability of personal retirement savings accounts (“PRSAs”) to overseas jurisdictions. This decision could have important implications for the Irish pensions industry, which in 2012 held assets in excess of €80 billion, as the judgment removes a significant obstacle for those seeking to transfer certain pension funds abroad.
In the case of Michael O’Sullivan - v - Canada Life Assurance (Ireland) Limited, the Court examined whether a PRSA provider could reject the transfer request of a PRSA contributor on the grounds that there is no employment connection with the jurisdiction of the receiving PRSA provider. The Court also considered the implications of the bona fide (good faith) requirement for such transfers.
PRSAs are private pension savings accounts governed by Ireland’s Pensions (Amendment Act) 2002 and designed to give individuals a low-cost and flexible way to save for retirement. PRSAs offer a number of tax benefits to contributors, who are entitled to tax relief at the marginal rate on contributions up to a certain limit, which is connected to an age-related percentage of the individual’s net relevant earnings. In addition, PRSAs enjoy tax free returns on funds invested and, upon retirement, the first €200,000 of any retirement lump sum is tax free.
The flexibility afforded by PRSAs under the relevant legislation includes permitting contributors to transfer their pension assets to another PRSA provider without incurring any charges. A PRSA contributor who directs a provider to transfer assets to an overseas provider must satisfy the transfer rules contained in the Occupational and Pension Schemes and Personal Retirement Savings Accounts (Overseas Transfer Payments) Regulations 2003 (the “Regulations”) and the pension rules of the Irish Revenue Commissioners (the “Revenue”). Before an overseas transfer can take place, the Irish PRSA provider must: (i) be satisfied that the transaction is bona fide (the PRSA contributor will accordingly be required to sign a declaration confirming that the transfer is for bona fide reasons and not primarily for the purpose of circumventing pension tax legislation and Revenue pension rules) and (ii) that the receiving PRSA provider provides “relevant benefits” as defined in section 770(1) of the Irish Taxes Consolidation Act 1997 (“TCA”).
In the case under consideration, a PRSA contributor (the Plaintiff) opened a PRSA with a PRSA provider (the Defendant) and later instructed the provider to transfer the PRSA to a provider in Malta (a receiving PRSA provider). The Irish PRSA provider sought the approval of the Revenue in relation to this transfer, who determined that it was for this provider to decide whether the transfer was permissible under the Regulations. The PRSA provider subsequently rejected the transfer on the grounds that the PRSA contributor was neither resident nor employed in Malta and that it was not satisfied that the bona fide purpose of the transfer had been established. The Revenue also joined the proceedings as amicus curiae, i.e. someone who is not party to the proceedings but who believes that the Court’s decision may affect its interests.
The central issue for the Court to decide was whether the definition of “relevant benefits” requires a PRSA contributor to have an employment connection with the jurisdiction of the receiving PRSA provider, and in this case, the PRSA provider argued that the Regulations prevented the PRSA contributor from transferring the fund in the absence of an employment connection.
The Court’s decision focused on:
Whether a transfer is bona fide and if a PRSA provider is obliged to make further enquiries regarding and evaluating the validity of a signed declaration from a PRSA contributor.
Whether a PRSA provider can prevent a PRSA contributor from transferring a PRSA to an overseas provider on the grounds that the contributor is not resident or employed in the overseas jurisdiction.
The Court rejected the argument that a PRSA provider is required to evaluate the validity of a signed bona fide declaration form, determining that a provider is not obliged to investigate the motives of a PRSA contributor who is requesting an overseas transfer, provided that the provider is not aware of any circumstances or has any information on file that may give rise to suspicions as to the bona fides of the transaction. Therefore, in the absence of such suspicions, a PRSA provider will be prevented from restricting an overseas transfer on the grounds of the bona fide requirement where it receives a bona fide declaration from the PRSA contributor.
The Court decided that this is not a general rule and should be decided on a case-by-case basis. However, in this case, the fact that the PRSA contributor wanted to transfer his PRSA to another EU Member State was not an indicator of any suspicious circumstances and therefore his declaration was sufficient to demonstrate the bona fides of the transfer.
Connection with employment in the overseas jurisdiction
The Court determined that although the definition of “relevant benefits” is connected with employment, the definition applies only to occupational pension schemes, ruling that PRSAs are not intended to be related to employment and that many of them (if not most) are not connected with employment and so cannot comply with this definition, and therefore this definition was never intended to cover PRSAs. The Court ruled that PRSAs do not require PRSA contributors to have an employment connection with the fund manager and therefore there cannot be a requirement for an employment connection as a prerequisite for overseas transfers.
The Court’s ruling eliminates any notion that overseas transfers of PRSAs can only be made to a country where the PRSA contributor is employed and therefore Irish PRSA providers will be prevented from blanket rejections of applications on the ground that there is no employment connection with the overseas jurisdiction. Where there are concerns relating to the bona fides of the transfer, they may continue to be prevented, however.
This decision should make it easier to transfer private pension assets out of Ireland and the Revenue has noted an increase in overseas transfers raising concerns over the potential flight of pension funds.
Transferring pension assets overseas
Once a PRSA is transferred to an overseas provider the locally applicable rules in that jurisdiction will be relevant. Such rules may be preferable, from the perspective of the beneficiary, to those applicable in Ireland on a number of potential grounds including :
(i) The age that pension benefits can be obtained.
(ii) The maximum lump sum which can be withdrawn tax-free (the “Pension Commencement Lump Sum”).
(iii) The percentage of the fund which must be used to provide an income for life.
(iv) Manner of payments to the contributor’s estate upon death.
(v) The potential to obtain loans via security against the funds.
Looking at Malta as an example, as it was the focus of this potential case, Maltese pension schemes can offer the following relevant benefits in accordance with the Malta Special Funds (Regulation) Act or Retirement Pensions Act 2011:
Benefits may be taken between the ages of 50 and 70.
The maximum Pension Commencement Lump Sum is 30%.
Benefits are payable to the spouse (or nominated beneficiary) upon the death of the contributor.
Other jurisdictions such as the UK and Luxembourg may also constitute attractive destinations for those wishing to transfer their PRSAs from Ireland.