The Finance Act 2022 was enacted on 15 December 2022. Amongst other changes to pensions, the Act confirmed that the Benefit in Kind for an employee, which was previously triggered by an employer contribution to a PRSA, has been removed. This has come into effect on the 1 January 2023.
Impact for Employees
For ordinary employees saving for retirement in a Personal Retirement Savings Account (PRSA) this is a positive change. They will now be given the same tax treatment as occupational pension scheme members in relation to any employer contributions to their pension scheme. Previously where an employer paid into the PRSA, that employer contribution used up part of the employees own scope within their age related limits to pension their income. This is no longer the case.
Employee contributions are still subject to the age-related contribution limits and the Earnings Cap (currently €115,000).
Impact for Business Owners
The changes have led to much discussion as to what it means for employer contributions to a PRSA, particularly in terms of how they are controlled. Currently our interpretation is that the legislation does not place any upper limit on an employer
contribution to a PRSA as would exist in occupational pension schemes under the Revenue guidance for Ordinary Annual and Special Contributions.
An employer can only make a contribution to a PRSA for an Employee. To be specific, that is someone who is registered as an employee of that entity and receiving a salary under Schedule E with PAYE Taxation applied 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, currently €2M) – and the Employers capacity to fund a significant contribution and the profits/corresponding tax that the Employer is paying.
There is no specific guidance in the Pensions Manual as to how an employer would seek tax relief on such a contribution (as we do for occupational pension scheme in Chapters 4 & 5 of the Revenue Pensions Manual), however the current interpretation by the industry of the legislation is that it appears these contributions will be allowed as an expense in the year in which they are paid (with no upper limit).
Impact on Advice for Business Owners
Many company directors will already be funding for their retirement using an occupational pension scheme often referred to as an executive pension arrangement. For many the funding rules within those schemes will allow more than enough scope for the contributions they wish to make for their retirement.
However some company directors will see the new PRSA changes as advantageous. This is likely to be the case for those on low salaries with little or no scope to fund under an occupational pension scheme and also those on larger salaries
who have large profits which they want to extract now and obtain tax relief immediately. Another aspect of the PRSA which some directors may find attractive is the more simplistic approach to a death benefit claim for an active member as PRSA funds can be paid in full to the estate of the deceased member in the event of death whereas occupational pension schemes place restrictions on the maximum allowable lump sum payable with residual funds being used to provide a pension via an Annuity or purchase an Approved Retirement Fund (ARF) for a spouse or dependents. As with occupational pension schemes, employers funding for an employees retirement using a PRSA should always ensure they are compliant with Revenue’s Salary Sacrifice rules.
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 executive pension arrangements however no such restriction currently exists in respect of PRSA’s. 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.
Contributions from Employer
Subject to Funding Calculation – Allowable as either Ordinary Annual Contributions (immediate tax relief) or Special Contribution (potential requirement to spread forward tax relief).
Finance Act Changes interpreted to put no upper limit on Employer Contributions. No requirement to spread forward relief.
Trustee
Yes – New Master Trust Arrangements.
Not a trust based arrangement.
Access
From 50 onwards where employment has terminated and all links severed, otherwise scheme NRA
(lowest possible 60).
Between 50 – 60 where employment has ended, all links severed and member is no longer economically active. Age 60 otherwise.
Death Benefit
Active Member: Lump Sum limited to “4 X Final Remuneration” plus a refund of member contributions. Residual fund used to buy ARF or Annuity.
Deferred Member: Where a member has left service or terminated pensionable service the fund is seen as preserved and payable in full to the estate.
Full value paid to the estate.
Pension Lump Sum
Salary and Service Route or 25% of Fund.
25% of Fund
Transfers
Overseas Transfer not subject to Tax.
Overseas Transfer currently a Taxable Event.
Flexibility
All benefits must come into payment at the same time.
Possible to split benefits into Multiple PRSA’s which is popular with clients looking to phase drawdown.
Further Revenue guidance and Legislative Changes
These new legislative changes mean that the current guidance in the Pensions Manual on the administration of PRSAs is now out
of date. Therefore, caution needs to be exercised around advising on this issue as we expect the manual to 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.
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Wallstone Financial Planning
Steamboat Quay, Dock Road, Limerick V94AE26
Telephone: 061 440044 Website: www.wallstone.ie
Mantra Consultants Ltd. T/A Wallstone Financial Planning is regulated by the Central Bank of Ireland.
Further Revenue guidance and Legislative Changes
These new legislative changes mean that the current guidance in the Pensions Manual on the administration of PRSAs is now out
of date. Therefore, caution needs to be exercised around advising on this issue as we expect the manual to 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 information contained herein is based on Wallstone’s understanding of current Revenue practice as at January 2023 and may change in the future.