| Meteorologically, spring begins on the 1st of March. Spring is the season during which the natural world revives and reinvigorates after the colder winter months.
In many ways, Pensions have had a long winter, but there are certainly spring shoots, and to a large degree, Pensions have been reborn.
Key changes were made within the Finance Act 2022 in December of last year. Most of these changes relate to Personal Retirement Savings Accounts. Some of the changes may not last forever.
FROM AN EMPLOYER PERSPECTIVE
The most significant change from an Employer perspective is that there is now no upper limit on Employer contributions paid into a Personal Retirement Savings Account. Previously, PRSAs were restricted by age-related limits.
As an example, take a 35-year-old Company Director earning €80,000. In 2022 he would have only been able to pay €16,000 into a PRSA, but now, with these changes, he can pay whatever he wants into a PRSA with no upper limit.
Do remember that Company Master Trusts still provide scope for significant Company Contributions. However, for certain Company Directors, a PRSA offers even further scope.
A PRSA now has the most scope when it comes to funding a Pension.
Some business owners may see this as an opportunity to fund a spouse’s pension with no upper limit. Especially if the spouse’s salary is low and there’s a lot of cash in the business.
FROM AN EMPLOYEE PERSPECTIVE
Previously, when an Employer made a contribution on behalf of an Employee into a Personal Retirement Savings account, benefit in kind was triggered. This no longer applies.
For ordinary Employees saving into a PRSA, Employer contributions will no longer form part of the Employee’s age-related limits. PRSA Employer contributions will be treated the same as a Company Master Trust Pension Plan.
An Employer can now contribute to an Employee’s PRSA with no upper limit. This may be useful if an Employee prefers to build up their Pension instead of taking a bonus.
FROM A FINANCIAL PLANNING PERSPECTIVE
From a Financial Planning perspective, the new PRSA rules will offer Company Directors and key Employees an option to take advantage of funding their Pension, with no limits. This is especially useful if they are behind on their retirement goal.
Another significant advantage is that the new rules offer low-earning Company Directors with significant cash reserves an opportunity to take advantage of the generous Pension tax reliefs of a PRSA.
A PRSA is a very useful vehicle for those business owners who are approaching retirement age and have a cash-rich business.
As an example, let’s say Bob owns a business and never set up a Pension. He earns €80,000. He has already taken advantage of retirement relief (this is not Pension Relief) and he has €300,000 still remaining in his business. He’s 60 years of age. His options are limited if he pays himself €300,000 as income – he will receive €158,755 after tax. However, if he pays €300,000 into a PRSA and retires from his PRSA, he can take out €75,000 tax-free. If he paid the remaining balance of €225,000 as income, he would receive €122,755 after tax. In conclusion, the PRSA gives him €197,755 which is higher than just paying it out as income where he would receive €158,755.
The final advantage of a PRSA is on death, 100% of the value of the PRSA transfers to the spouse tax-free, whereas a Company Master Trust is limited to 4x salary.
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