Navigating The New PRSA Landscape
New rules have thrust Personal Retirement Savings Accounts into the limelight. Leading pensions experts talk to Emily Styles about what employers need to know
The Personal Retirement Savings Account (PRSA) was designed for employees of small firms where there is no company pension fund and the self-employed. Now the PRSA has been promoted to the major league, after Finance Act 2022 introduced significant changes about employer contributions to employee PRSAs.
The legislation removed the benefitin-kind charge, which had been applicable where employers contributed to PRSAs. In addition, the employer contribution can be made without considering the age-related tax relief contribution limits.
Revenue’s Pension Manual, updated in March 2023, confirms that there is no limit on employer contributions to an employee’s PRSA. However, the overall €2m standard personal fund threshold still applies.
“Traditionally, occupational pension schemes would have been the most tax-efficient way in which employers could reward employees and directors by making pension contributions on their behalf,” says Mazars tax expert
Paul Mee.
“PRSAs have more flexibility than occupational schemes regarding funding, where investments within the scheme can be made, whether trustees are required, what vesting requirements exist, and what options exist on retirement and death. These changes mean that PRSAs are considered more attractive for business owners, directors and directors of investment companies.”
Mee cautions that pension advisors have different opinions on how far employers can go in terms of making pension contributions to employees’ and directors’ PRSAs since the changes were introduced. No legislative
provision places a specific cap on what the contributions can be, so it is open to interpretation as to how much is considered an excessive contribution.
“How quickly an employer can fund an employee’s pension to reach the €2m SFT is open to interpretation and debate,” Mee adds. “Regard must be had to the employer’s funding ability and the deductibility of pension contributions from a tax perspective.”
While larger occupational pension schemes will remain a feature of the pensions landscape, Finance Bill 2023 following the Budget 2024 announcement make clear that PRSAs are the sole alternative choice.
Munro O’Dwyer at PwC commented that the leading role of PRSA structures into the future is also evidenced through the implementation of changes that permit the use of PRSA contracts for pension drawdown purposes beyond the age of 75.
The key pensions measures in the Finance (No. 2) 2023 Bill include: Amending the legislation such that no new Retirement Annuity Contracts (RACs) can be approved after 1 January 2024. Amending the PRSA legislation to allow distributions after the age of 75 years. This is part of the process of implementing the ‘whole of life’ PRSA product which allows individuals to both accumulate and then draw down their benefits until death. Anti-avoidance rules extended to all pension products to prevent the assets being used to provide loans and/or used as security for loans to private type companies. Provides that in order for pension funds to avail of gross roll-up on
rental income, the tenancy must be registered with the Residential Tenancies Board.
“It is not clear if the change impacts top-up payments to existing RACs approved before 1 January 2024 or for continuing contributions to regular premium contracts approved before 1 January 2024,” O’Dwyer added.
“For individuals who have invested in RACs, they can retain the existing contract or transfer to a PRSA. There are different investment rules and charging structures that apply to PRSAs, so it may be appropriate for existing RAC investments to be retained until drawdown, subject to the facts and circumstances applying in each individual case.”
O’Dwyer said that though drawdown will be possible from a PRSA after 75, the requirement remains for a deemed crystallisation of a PRSA at age 75 where funds have not been accessed before reaching that age. The latest pensions shake-up left Approved Retirement Funds alone.
‘Pension inertia restricts us from making decisions that will help us properly fund our future’
the employer through our platform MyPension365. Combining our Master Trust and MyPension365 we have found that the vast majority of our clients have chosen this option.”
Walsh explains that defined contribution scheme members can use MyPension365 to view their Pension Savings Account via multiple platforms including mobile app, access up to date fund value, carry out contribution and investment changes online, and access all correspondence regarding their pension scheme.
Walsh adds: “It’s human nature to shy away from areas believed to be complex, but in doing so we are delaying taking important decisions that are in our best interests and help identify how much people can afford to set aside to enjoy a comfortable retirement.
“Pension inertia restricts us from making decisions that will help us properly fund our future. Our sixepisode Pension Pot webinar series, including an episode specifically created to help women bridge the pensions gap, is designed to take people through the basics of saving for the future.
“The series provides advice and guidance, but also some important considerations for both employers and employees around the impending auto enrolment scheme.”