PENSIONS can be difficult to understand, use loads of terminology and would appear to impose restrictions that the ordinary punter just cannot get their head around. However, a recent change may put paid to all that and indeed a more accessible and understandable way of funding your later years may now be available from the most unlikely place.

It’s fair to say that PRSAs (Personal Retirement Savings Accounts) are the new kid in town for company directors since the passing of the Finance Act 2022 late last year. The stalls have opened for company directors/owners to consider this alternative planning tool to fund for their retirement years in a tax efficient manner. I believe a PRSA might now be considered the pension funding contract of choice for a company director.

Long-term investment

A PRSA is a long-term investment option that offers a very flexible, tax efficient way to save for one’s retirement. This savings vehicle was introduced in 2002 as a modern option for retirement savers to have a portable and self-owned pension vehicle. The take-up was poor initially, but the recent changes have been a game changer. Why has this come about, why the change? There was a multiplicity of one member Company Pension Schemes set up under a single trust over many years which were extremely difficult to monitor and police by Revenue and the Pensions Board.

There are several reasons why a PRSA might now be considered as a more viable alternative to consider for a company director to fund for his/her retirement, versus a Small Self-Administered Scheme (SSAP) or one member Company Pension.

BIK:

Section 22 of the Finance Act, which applies since January 1st 2023 provides for the removal of an income tax charge in respect of an employer contribution to an employee PRSA contract after that date. Basically, an employer can make a payment into a PRSA for an employee without BIK tax for that employee.

Death Benefits:

There is no lump sum payment limit on death in a PRSA i.e., the full fund value is paid to the estate on death. An Occupational Pension Scheme limits the payment to a lump sum of four times Final Remuneration. (Balance must be used to purchase an Annuity or ARF).

Contributions:

PRSAs are not subject to caps on employer contributions while an Occupational Pension scheme is subject to maximum funding limits based on salary and service. However, the €2m Standard Fund still applies to both. Tax relief for the contributions can be claimed in the accounting period. (No spreading of relief required as might be required under an Occupational Pension Scheme).

Retirement:

The use of multiple PRSAs allows for a phased retirement while all benefits related to an Occupational Pension Scheme must be retired at the same time for that employment.

Retirement age:

The latest retirement age for an Occupational Pension Scheme is 70, while it is up to age 75 in a PRSA.

IORPS 11:

This EU Directive that came into law in April 2021 applies to SSAPs and Occupational Pension Schemes but doesn’t apply to PRSAs. IORPS II is an EU directive that sets new pensions standards for SSAPs and Occupational Pension Schemes. The legislation makes it very difficult to purchase a property through an occupational pension scheme whereas this limitation does not apply to a PRSA thus making the PRSA a very tax efficient way to acquire investment property in one’s pension.

Trustee Fees:

There are no trustees involved in a PRSAs as it is in the individuals own name, so these do not arise in a PRSA.

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 company pension arrangements however no such restriction currently exists in respect of PRSAs.

As a result, my current interpretation 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.

For some directors a transfer to a PRSA of their existing Occupational Pension Scheme/SSAP may also be a favourable option. Good solid advice from a qualified financial advisor is recommended in this instance.

Niall Rooney is Financial Planning Manager with CityLife Galway

Mobile: 087 2482639 email niall@citylifegalway.ie