It is rare to have a year with radical change in the pensions world. 2022 was one of those rare years. First came the death of the Executive Pension in July. Then came the rebirth of the PRSA in November. The result is a complete change in the pensions landscape for business owners.
Prior to July 2022, a business owner who wanted to fund a pension for themselves or key personnel would normally use an Executive Pension administered by a life company. They could also use a Small Self-Administered Pension (SSAP) administered by a pensioneer trustee. Technically speaking, these were both one member company sponsored pension arrangements. The tax relief of each pension was the same, but the SSAP offered the option of direct property and equity investment.
In July 2022 the Pensions Authority announced that new European Pensions legislation called IORPS, introducing extensive governance requirements, would be strictly applied to Executive Pensions and SSAPs with immediate effect. Whether intended or otherwise, the effect of this legislation was to stop the issuing of any new Executive Pensions or SSAPs. By end of 2022, it became clear that this new regime was permanent. New Executive Pensions and SSAPs are no more. Furthermore, all existing Executive Pensions and SSAPs must find a new home within three years at the latest.
The pension companies quickly developed a new solution called the Master Trust – Executive Pension. Technically speaking, this is one very large Group Pension scheme that allows individual members to join from a wide variety of employers. It is governed by independent trustees typically connected to the pension company managing the pension. The tax relief limits are the same as a one-man Executive Pension. The individual can decide how much to contribute to the pension within those limits. There is a somewhat limited range of investment options determined by the trustees and the member can choose their investment strategy from that range. The charges are determined by the trustees within Pensions Authority guidelines. In practice, for the member it operates like a one-member Executive Pension in some respects, but it is actually a Group Pension. This is a useful solution but the loss of control to a large trustee company unconnected to the investor does not suit everyone. Some of the fund restrictions are also not appealing.
Separately, to the surprise of the pensions industry, the 2022 Finance Bill introduced a new tax relief regime for Personal Retirement Savings Accounts (PRSAs). This has now been confirmed in the Finance Act since January 2023. In effect, PRSAs are now replacing the Executive Pension & SSAP as the pension of choice for business owners and senior executives.
The new PRSA has several attractive features compared to an Executive Pension. For example:
- The only annual or lifetime funding limit is now the €2M cap (€2.15M in practice)
- It is not necessary to have a high salary or long service to fund a €2M pension
- Employer contributions are fully allowable against Corporation Tax for a company in that trading year and do not have to be spread forward
- Employer contributions are fully allowable against Income Tax, PRSI & USC in that tax year for a professional or partnership funding a PRSA for an employee
- There is no BIK for the director/employee on the employer PRSA contributions
- The client can have multiple PRSAs and retire them gradually if required. For example, you could fund one PRSA of €800,000 to access the €200,000 tax-free lump-sum @ 60 and another to accumulate the balance of €1,200,000 later
- On death, the full PRSA value is payable as a tax-free lump-sum to a spouse
- A PRSA can be funded and/or continued to age 75
- There is no trustee requirement so there is no trustee cost or loss of control or privacy
- There is no Revenue Approval required
- The management fees are typically lower with no up-front charge and a 1.25% annual fee
- A PRSA offers the widest range of investment options such as:
- Multi-asset funds
- Bond & Equity funds
- Property funds
- Direct Equities
- Direct Property
The PRSA now presents an attractive retirement and tax planning solution for business owners, senior executives and a range of other situations. We will be contacting all affected clients but if you have any queries, please feel free to contact us.