The amendment to the taxation of Personal Retirement Savings Accounts (PRSAs) that was included in the Finance Bill 2022 was received positively by the market. The removal of the benefit in kind (BIK) on employer contributions now makes the PRSA a very real competitor to both retail and group master trusts. Indeed, it is significant enough that some of the life companies have decided that a retail master trust is no longer necessary.
Prior to this change employer contributions to a PRSA were effectively limited to the employee’s personal tax relief limit (the age-related percentage limits with a €115,000 earnings limit). S118(5) of the Taxes Consolidation Act 1997 was amended by adding contributions to a PRSA to a list of employer funded benefits which are exempt from a BIK. The Act also removes the treatment of the employer contribution as an employee contribution meaning that employees can now contribute up to their annual age-related limit on top of the employer contribution.
The PRSA now has several benefits over an occupational pension scheme:
- There is no lump sum limit payment limit on death in a PRSA while an occupational scheme is limited to a lump sum of 4 times final remuneration. The balance can be transferred to Approved Retirement Funds (ARFs) or an annuity for the beneficiary’s benefit.
- PRSAs are not subject to caps on contributions while the occupational pension scheme is subject to maximum funding limits based on salary and service. However, the two-million-euro Standard Fund Threshold and the always important affordability should be kept in mind. It is also important to note that the Taxes Consolidation Act now seems to suggest that transferring an AVC into a PRSA will affect the ability of an employer to make BIK free contributions to that PRSA. As the changes are less than a month old, we have not seen this in practice yet, but it would be best to ensure that AVCs are not mixed with employer contributions to a PRSA until we have further clarification.
- The use of multiple PRSAs allows for a phased retirement while all benefits related to an occupational scheme must be retired at the same time.
- In normal circumstances the latest retirement age on an occupational pension is 70, while it is up to age 75 in a PRSA. Although there are major consequences if a PRSA is not retired before 75 that do not apply in an occupational scheme.
- In an early retirement scenario, there is no requirement for a 20% director to relinquish their shares in a company, simply leaving employment will suffice.
The PRSA has clearly improved as a retirement vehicle and has now become a real competitor to the occupational pension scheme, that will need to be at the forefront of any retirement planning decision. It will also need to be an integral part of a trustee’s or advisor’s research during a group scheme wind up exercise, this is something I will delve deeper into in next month’s article.
Author: Eoin Hassett, Trustee Services Director, ITC Group.