PRSA Tax efficient Payment options for Business Owners

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 Personal Retirement Savings Account (PRSA), has been removed.

This change has come into effect on 1 January 2023 and is considered to be one of the most important changes in the pensions industry, since ARF’s.

Changes for Employees

It now means that ordinary employees, saving into a (PRSA) 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 employee’s own scope within their age-related limits. This is no longer the case, as employer contributions are now un-constrained. Employee contributions however, are still subject to the age-related contribution limits and the Earnings Cap (currently €115,000).

Changes for Business Owners

The real change however has impacted the ability of business owners to fund pensions substantially. Currently the interpretation is that the new legislation does not place any upper limit on an employer contribution to a PRSA as would have traditionally existed in the old executive pension, these changes have removed the salary and service rules which restricted how much could be invested into pension on an annual basis.

This now means someone could draw a salary of €30,000 from their business and make a pension contribution of €2,000,000. This may seem extreme however it is currently allowed under the legislation.

An employer can only make a contribution to a PRSA for a bona fide employee. That is defined as someone who is registered as an employee of that entity in receipt of salary with taxation applied at source. Thereafter the level of salary paid, service to date and level of pension benefits already in place are irrelevant. This also opens up the business to make substantial pension contributions for the spouse/partner and any family member working in the business irrespective of salary, service, or shareholding.

The key issues that now apply relate to the to the Pension Fund Threshold, currently this is at €2,000,000 and the employer’s capacity to fund a sizable contribution from their business accounts.

The impact on current financial advice

Many company directors will be funding their retirement using 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. For directors on low salaries who have large cash balances or profits, they can now extract these and obtain tax relief immediately in year one.

Another aspect of the PRSA that is attractive is the fact that the 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 tax-free 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.

20% Directors of investment firms

The Revenue has been very clear that a 20% director of a company that is treated for tax purposes as an investment company, was precluded from funding a pension from that business, that it was in affect non pensionable employment. That continues to be the case for executive pension however no such restriction currently exists in respect of the PRSA. As a result, where a 20% director of an investment company is registered as an employee of that company and receiving a salary, then the employer could make an employer contribution to a PRSA for the benefit of that director.

Where can PRSA’s invest?

It is possible for non-standard PRSA’s to hold an investment property, direct equities, managed or protected funds.
Another key benefit of PRSA’s is no entry or exit costs plus a fixed and transparent management charge.

Summary

The new legislation for PRSA’s presents a unique and golden opportunity for employers and employees alike. This legislation could change and with it a golden opportunity. Our suggestion is to get advice and see how PRSA pensions can work for you and your family.