The Late Entrant and the Funding Standard Deadline
Declan, aged 57, is the sole director and only member of a one-member occupational pension scheme set up in 2004. He has been contributing irregularly: €40,000 total accumulated fund at the last actuarial valuation 18 months ago, when the scheme's funding certificate showed a funding standard reserve of €0. He has now sold a business asset and wants to inject €250,000 as a special contribution this year, intending to retire at 62. His accountant has told him that as a one-member scheme with a sole director/trustee arrangement, he can simply take the fund as a tax-free lump sum at retirement because 'it's his own money'. The scheme's actuary has flagged that the scheme has never held a funding certificate renewal and the last actuarial valuation is out of date. Declan wants to know what he can actually do, and whether the €250,000 is safe from Revenue limits.
1. Assess the accountant's claim that Declan can take the entire fund as a tax-free lump sum. What are the correct Revenue constraints on the retirement lump sum?
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The accountant is wrong on two counts.
It is not 'his own money' for tax purposes. A one-member scheme is still an occupational scheme, and benefits are governed by Revenue limits, not by ownership of the assets.
The lump sum is capped. Under the standard regime, the maximum tax-free retirement lump sum is 25% of the fund, subject to the overall lifetime limit on tax-free lump sums (currently €200,000 at the standard rate, with amounts above that taxed at 20% up to a higher threshold). A €290,000 fund does not produce a €290,000 tax-free lump sum.
The €250,000 special contribution is not automatically allowable. It must satisfy the age-related percentage limit on total contributions (employer plus employee) relative to remuneration, and any excess is a tax charge on the member or disallowed. At 57, the relevant percentage is relatively high but the €250,000 must be tested against his actual Schedule E remuneration for the year, not against the fund.
So the answer is: a lump sum is available, but capped at 25% of the fund subject to the lifetime limit, and the contribution must be tested against his remuneration and the age-related percentage before it is paid.
2. What governance and funding-standard issues arise from the missing funding certificate and out-of-date valuation, and what should Declan do before making the contribution?
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Several issues:
Funding standard. The scheme must hold a current funding certificate and an actuarial valuation at least every three years (more frequently if a funding proposal is in place). An 18-month-old valuation with no renewal is a compliance gap. The trustees (Declan) are exposed.
Before the €250,000 is paid, the actuary should update the valuation to reflect the contribution and confirm the scheme's funding position. If the scheme is in deficit, the contribution may need to be structured as a funding proposal contribution rather than a discretionary special contribution.
Trustee duties. As sole trustee, Declan owes duties to the members (himself) and must act in accordance with the trust deed and the Pensions Act. He cannot simply treat the fund as personal property.
Practical steps: (a) commission an updated actuarial valuation; (b) confirm the scheme rules permit the special contribution and that it is within Revenue limits; (c) document the trustee decision; (d) obtain the funding certificate before or alongside the contribution.
The judgement point is that the contribution is not a fix for a governance gap - the gap must be closed first.