Since the turn of the year, a huge amount of conversation has revolved around the Personal Retirement Savings Account (PRSA) and the new opportunities that have arisen for employees, business owners and potentially even investment holding companies, on the back of the Finance Bill 2022.
From its introduction in 2002, the PRSA has always been a decent pension product – but never the great pension product that it could be.
When all is stripped away, the PRSA can be viewed as a long-term personal retirement savings plan comparable to an investment savings account and designed to fund your retirement by accepting contributions tax efficiently.
The main draw for the PRSA to date has been its flexibility. You can apply for a PRSA regardless of your work status or position. You can change jobs and keep using the same PRSA and at little or no cost you can switch from one PRSA provider to another in the pursuit of better investment returns. You are also not charged or penalised if you decide to increase, decrease, or cease your contributions.
You must also be given access to a Standard PRSA if your company does not offer you access to an occupational pension plan or if the plan has restrictions such as the ability to make AVCs (additional voluntary contributions).
So, despite the great flexibility and retirement options of the PRSA, it always carried daft limitations and especially when compared to rival pension products such as the standard occupational pension for employees and the Executive Pension product most used by business owners.
In tandem with the Government’s desire to simplify the pensions landscape, notable downsides to the PRSA are being corrected year after year and by successive Finance Bills.
The Finance Bill 2022, applicable since Jan. 1st 2023, was no exception and in particular relating to the disapplication of Benefit in Kind (BIK) on employer contributions to a PRSA above the age related percentage earnings limits.
Now there is an equalisation of tax treatment and employer contributions to a PRSA do not form part of the age-related earnings thresholds and do not attract BIK.
This type of funding flexibility is particularly important for business owners and SMEs who quite often delay saving for their own retirement in lieu of investing in their business and creating jobs.
So, to date, the PRSA pension product has not provided business owners with sufficient scope to make meaningful contributions through their company and usually in the years approaching their expected retirement.
The Finance Bill 2022 has changed all that, where alongside the disentanglement of employee and employer contributions, there are also no funding limits on the contributions that an employer can make to an employee’s PRSA. This is hugely significant for business owners.
The only considerations for business owner contributions are the Standard Fund Threshold of €2m (€2.15m with clever tax planning) and what the business can afford to contribute.
Now that these long-standing thorny issues for PRSAs have been resolved, the net result will be a rising popularity of the PRSA product for both employees, small group pension schemes and business owners alike.
Afterall, and to supplement these changes, there are more than a handful of other advantages the PRSA holds relative to occupational pensions schemes like the Executive Pension typically used by business owners.
The PRSA now provides superior funding capability and particularly for business owners drawing small salaries, better death in service benefits, more flexible accounting treatment and clearer opportunities for a phased retirement drawdown strategy.
Even business owners currently drawing retirement benefits from an Executive Pension can get a second bite of the cherry where significant funds within the business can be transferred tax efficiently to a PRSA. They also now have the opportunity to run an Executive Pension and PRSA side by side.
Executive Pension holders also face a looming deadline relating to the future of their arrangements. Most critical are Executive Pensions established after April 2021. Here, there is an end of June deadline to either transition the arrangement to a Master Trust structure or to a PRSA. Where no action is taken, no further contributions can be made into those existing Executive Pensions.
Executive Pensions established before April 2021 have until 2026 to transition but MOJO Finance would encourage holders to explore the potential benefits of transferring their arrangement to a PRSA as early as possible.
Employers that provide group pension schemes to their staff have until year end to make such changes.
Either way, it makes sense for all to engage with their financial advisor well in advance of their relevant deadline.
MOJO Finance are happy to advice further and to facilitate changes for those seeking to comply with obligations and to maximise retirement funding opportunities.