PRSA Pension – New Rules
Due to European directives under the IORP II regulations in recent years we have seen plenty of changes in the pensions industry. The main aim of these regulations has been to simplify pensions and make them more broadly available across the workforce. The ultimate goal is to achieve a greater take up in private pensions to help supplement our state pension. Some of the latest innovations in the pension space have seen the introduction of Auto-enrolment, the Master Trust system and the curtailment of single person schemes.
Because of the language used and some of the rules, pensions seem complicated but in essence a pension is a long-term tax efficient savings plan.
Business owners are one group of workers have long been aware of pension planning as a means to take money from their business in a tax efficient manner. However, they have not always been in a position to contribute on a regular basis. This is usually down to the time it takes to get their business on a sound financial footing, making sure staff wages were paid first, achieving positive cashflow and then finally being able to pay themselves a proper wage. Having a pension plan to suit this scenario has proved difficult. Under the new PRSA rules however, a greater degree of flexibility has been introduced.
We would normally have used Executive Pension Plans to cater for company directors and key employees. This type of pension allowed both personal and company contributions to be made based on their age, years of salaried service, salary amount and retirement age. If you had paid yourself a salary as a company owner and had plenty of years’ service this system could be quite flexible but it could be very restrictive if you didn’t meet these criteria.
With the recent changes announced in the finance act which came into force on January 1st 2023 these rules have been eased. Under the old rules, if you started a PRSA pension you were limited in what could be paid into it by the level of your salary and your age. For example, if you were aged 40 and on a salary of € 50,000 you could contribute a total 25% to your pension from either your personal or company contributions. If your company was making the contributions and exceeded the 25% of salary you would be charged BIK on the excess amount.
This has now changed and I have detailed a number of the key points from the Finance Act 2022 below.
Employers will from 1st January 2023 be able to pay unlimited BIK free contributions to a PRSA for an employee or director. The contributions will not be limited by salary/service, existing scheme funding or retained benefits, as scheme funding is. They will however be limited to the overall pension Standard Fund Threshold (SFT) of €2M and perhaps most importantly, affordability.
The current BIK charge on employer PRSA contributions will be lifted so that from 1st January 2023 such contributions will not attract a tax charge for an employee.
| Revenue practice restriction on level and incidence of employer funding | No and only subject to Standard Fund Threshold of €2M |
| Access to retirement benefits on ill health | Yes, on becoming permanently incapable through infirmity of mind or body of carrying on his or her own occupation or any occupation of a similar nature for which he or she is trained or fitted |
| Access to retirement benefits from 50 and before 60 | Yes, on termination of the PRSA holder’s current employment |
| Access to retirement benefits from 60 | Yes, from 60; no requirement to terminate that employment. |
| Latest date retirement benefits can be accessed | 75 |
| Death in service | Full PRSA value payable as lump sum to estate. No requirement to transfer any part of the funds to an ARF. |
| Tax relief on employer contributions | All contributions allowed in accounting period in which they are paid. No distinction between
ordinary annual and special contributions. |
Larger contributions can be made to a PRSA for an employee/director with low salary and/or short service, than could be made under an Executive Pension Plan.
No spreading of tax relief will apply for once-off employer PRSA contributions, regardless of size, as there is no distinction for tax relief purposes between ordinary annual contributions and special contributions paid to a PRSA.
Relief will be allowed in the company’s accounting period in which the contributions are paid. This gives greater certainty therefore on employer tax relief, than under EPPs, as no max funding calculations have to be done.
There is a good bit to take in around this and as with all pension related activity it is important to speak with your financial advisor. There is an opportunity however for businesses with cash balances to make contributions to the owners and key employees in a tax efficient manner. Reach out to us for further details and to review your personal situation.
Conor Harte BFS QFA CFP® of Wealthwise Financial Planning with offices in Carrick on Shannon, Co Leitrim & Oranmore Co Galway, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141
