Your money - 23 May 2012

Q. I am a senior citizen in my 70’s and a holder of a full medical card.  I am in receipt of a contributory pension and a small pension from my old job.  I am a medical card holder and I am just wondering what my position is in relation to the payment of the Universal Social Charge on my employment pension.

A. Unfortunately, regardless of the fact that you hold a full medical card you are liable to the Universal Social Charge on your employment pension. The contributory old age pension and all Department of Social Protection payments are exempt from the Universal Social Charge.  

However, individuals in possession of a full medical card, including a Health Amendment Act card, will only pay Universal Social Charge at a maximum rate of 4% irrespective of the level of their income from employment/pension.  This treatment does not apply to individuals who hold other types of ‘medical card’, such as GP Visit Card, a Drugs Payment Scheme Card or a Long-Term Illness Scheme Card.

Certain individuals who are ordinarily resident in Ireland automatically qualify for an Irish medical card under EU Regulations.  However, they still need to submit the appropriate application form to the HSE before a medical card is issued to them.  The European Health Insurance Card which provides for access to hospital care similar to that provided in public hospitals is not regarded as a full medical card.  

Individuals do not need to hold the medical card for the full year to qualify for the 4% maximum USC.  It is due as long as the individual holds a full medical card for some period during the year.

I set out below the Universal Social Charge rates as applicable for 2012 to both employees and self employed.  

The USC exemption threshold is €10,036.  The USC is paid on gross income, before the deduction of capital allowances or pension contributions.  It does not apply to social welfare payments, including contributory and non-contributory social welfare payments.

Q. I am writing in the hope that you can enlighten me with my pension situation.  I have worked with the same company for 37 years and for 33 of those years I have contributed to the company’s pension scheme.  It was a defined benefit scheme which guaranteed me a pension of two thirds of my finishing salary.  

However we were informed recently that the pension fund was now insolvent and had been wound up, to be replaced with a new scheme which will be a defined contribution scheme.  

I have asked what this scheme will produce in the way of a pension and have been told that it is impossible to say at this time.  This is an unsatisfactory answer as you need to have some idea of what pension will be available at retirement time in order to plan for the future.  

Also are all my contributions to date lost and am I starting from scratch?

A. Many defined benefit pension funds are finding themselves in the position where they are no longer able to pay the pensions which were originally promised at the outset of an employee’s entry into the scheme.  You find yourself in a very difficult position and the firm or company for whom you have worked should be providing information to you to ensure that you understand your overall position.  I would imagine that the company will arrange for their pension advisors to discuss with each individual their overall position.  

In general, if a pension scheme does not have enough funds to pay members their benefit entitlements, some benefits must be reduced.  The order of priorities outlined below determines how trustees reduce the benefits.  The trustees must follow this list when paying benefits until all funds are used.

The Pensions Act 1990, as amended requires trustees to wind up a scheme without undue delay.  The Act also requires that pension benefits be paid in the following order:

1. Benefits relating to additional voluntary contributions (AVCs) including AVCs that were transferred from another scheme

2. Benefits owed to members who have reached normal retirement age (NRA) (excluding future pension increases)

3. Benefits owed to members who have not yet reached NRA

4. Future increases on benefits.

For example, the trustees first pay all benefits relating to AVCs and then benefits to members who have reached NRA.  If no funds then remain, the trustees cannot pay any benefits to members who have not reached NRA.

When a scheme is wound up, the trustees must ensure that all assets of the scheme are under their control.  In particular, they must pursue any outstanding contributions.  

In relation to the members entitlement to information trustees must notify members as soon as possible that their scheme is being wound up and it must be no later than 12 weeks after the scheme become aware of the decision to wind up the scheme.  

In relation to the members’ entitlement to information trustees must also notify The Pensions Board and any authorised trade union that represents the scheme members.

During the wind up process, Disclosure of Information regulations also require trustees to provide members with:

• Information about their rights and options regarding their benefit entitlements

• An explanation of how a scheme surplus or deficit is handled

• Details of who pays member benefits after the scheme is wound up, including an address for enquiries.

For more detail on your information rights see The Pensions Board website www.pensionsboard.ie

In relation to the proposed defined contribution scheme, basically under a defined contribution scheme, an employee accumulates a fund.  This accumulation occurs during your working lifetime with a particular employer

The fund in the defined contribution scheme determines the ultimate retirement income of the employee.  The employee will only know the exact level of retirement income at retirement.   Part of the account may also be applied for dependants on death in retirement.

The employer, and possibly the employee, contributes to the defined contribution scheme at an agreed rate.  The benefits on retirement will be secured by the final value of contributions paid.

The ultimate value of the fund available to you will depend on:

(a) The level of contributions paid to the defined contribution scheme by and in respect of the employee,

(b) The investment return on those contributions,

(c) The costs incurred by the scheme to the extent they are applied against the employee’s account, and

(d) The effects of inflation in the years to retirement.

The ultimate income from the defined contribution scheme will depend on the amount of pension the account will buy after allowing for a tax free lump sum.  The pension will be for the member’s lifetime but may include pensions for dependants on death in retirement.

A member of a defined contributions scheme is now permitted to transfer the account to an approved retirement fund/approved minimum retirement fund.  

As stated earlier you need to obtain more information from the pension advisors to ensure you fully understand your ultimate position following the wind up of the defined benefit scheme.

If you have any queries on money or taxation matters which you would like answered, please send them to "Your Money", c/o Examiner Publications (Cork) Ltd., City Quarters, Lapps Quay, Cork