Personal Retirement Savings Accounts (PRSAs), traditionally viewed as restrictive, are now at the forefront of retirement planning in Ireland thanks to the Finance Act 2022. The Act was enacted on 15th December 2022, effective 1st January 2023, removed the Benefit in Kind (BIK) charge on employer contributions to a PRSA.
Potential impact for Business Owners
Currently our interpretation is that the legislation does not place any upper limit on an employer contribution to a PRSA as would exist with occupational pension schemes under the Revenue guidance for Ordinary Annual and Special Contributions. Therefore, an employer can make a contribution to a PRSA for an employee i.e. someone who is registered as an employee of that entity, receiving a salary under Schedule E with PAYE deductions applicable at source. However thereafter, the level of salary paid, service to date and level of pension benefits already accrued are not factored into the ability of that employer to contribute to the PRSA. There is no maximum funding calculation to determine the ability of the employer to contribute as would exist within occupational pension schemes. The only limits now seem to relate to the Lifetime Pension Fund Limit (Standard Fund Threshold, which currently stands at €2M) – and the employer’s capacity to fund a significant contribution and the profits or corresponding tax that the employer is paying.
For many company directors the new PRSA changes will be seen as a positive, notably for those on low salaries with little or no scope to fund under an occupational pension scheme and those on larger salaries who have large profits which they want to extract now and obtain tax relief immediately. Another key advantage of the PRSA some directors may find attractive is the more simplistic approach to a death benefit claim for an active member as there is no lump sum payment limit on death in a PRSA while an occupational scheme is limited to a lump sum of 4 times final remuneration where the balance of the fund must be transferred to Approved Retirement Funds (ARF) or an annuity for the beneficiary’s benefit. As with occupational pension schemes, employers funding for an employee’s retirement using a PRSA should always ensure they are compliant with Revenue’s Salary Sacrifice rules.
Potential impact for 20% Directors of Investment Companies
The Revenue have been quite clear that a 20% director of a company that is treated for tax purposes as an investment company, could not be accepted into membership of an occupational scheme in relation to that employment. That continues to be the case for occupational pension schemes, however no such restriction currently exists in respect of PRSAs. As a result, the current interpretation within the industry is that where a 20% director of an investment company is registered as an employee of that company and receiving a salary under Schedule E then the employer could make an employer contribution to a PRSA for the benefit of that director.
|PRSA||One Member Arrangement (OMA) under a Master Trust|
|Contributions from employer||No upper limit on employer contributions and no requirement to spread forward tax relief||Subject to maximum funding calculation and potential requirement to spread tax relief|
|Accessing Retirement Benefits||Phased retirement possible through multiple PRSAs linked to the same employment||Benefits from multiple Occupational Pension Schemes (OPS) linked to the same employment must be taken at the same time|
|Tax Efficient Lump Sum||Retirement lump sum 25% of fund||Retirement lump sum 25% of the fund or Retirement Lump Sum based on salary and service (revenue maximum 1.5 times salary)|
|Age to Access Benefits||Access between 60 and 75 (no restrictions). From 50 onwards where employment has terminated||Access at Normal Retirement Age (NRA). Drawdown before NRA (with restrictions). 20% Directors must sever all ties with the business|
|Death Benefit||Full value paid to the estate. All death benefits are subject to inheritance tax, except where inherited by the deceased’s legal spouse or registered civil partner||Active member - Lump sum limited to 4 * final remuneration plus a refund of member contributions. Residual fund used to buy an annuity or ARF Deferred member - where the member has left service or terminated pensionable service the fund is seen as preserved and payable in full to the estate|
|Trustee||Not a trust-based arrangement. Client is the policy owner||Yes, set up under trust|
|IORP II applicable||IORP II requirements do not apply||Yes, subject to IORP II requirements|
Further Revenue guidance and legislative changes
We expect the pensions manual will be updated soon to include further guidance on the operation of PRSAs and how these new rules will interact with other pension arrangements. It’s also expected that further legislative changes will be made this year for pensions in Ireland which may include further changes as recommended by the interdepartmental group looking at pension reform in Ireland. As a result, this is an area of retirement planning which could be subject to further changes and will therefore need to be closely monitored.
The need for professional retirement advice has never been more important. Cantor Fitzgerald can work with you to review your pension arrangements and formulate a cohesive retirement and investment strategy. We understand that retirement can mean different things to different people and have a range of pension solutions to suit your individual retirement planning needs. To speak with a Portfolio Manager or Account Executive, phone the Cantor Fitzgerald dealing desk on 01 633 3800.
“Have you worked in the UK previously and paid the equivalent of our social insurance there?” If the answer is yes, there is a special concession available until the 5th April so you may top up your pension from the UK. The priority now is for people to at least submit an application to HM Revenue and Customs for voluntary contributions ahead of the deadline. The best next step is to go to the Future Pension Centre website (run by the UK government) for questions about the UK State Pension or to ask for a forecast.