A game changer for pension holders

Despite working in pensions

for many years, I rarely mention it in any of my writings. There are two main reasons for this.

1. My curiosity leans towards more indepth investment research so detailing the idiosyncrasies of the Irish pension scene was never high on my priority list.

I’m sure what I write about bores people at the best of times, but immediate narcolepsy would be unavoidable if all I did was rattle on about pension changes.

2. The way I view pensions is simple, so there is little to be said. For most people, maxing out your pension and AVC’s should be an investment priority. The first port of call. Yes, the administration fees are questionable. Yes, the product offerings are less than inspiring but the reality is, the shortcomings (of which there are many) are outweighed by the tax benefits. Like so many financial decisions in Ireland, the tax implications determine the answer.

With that said, there are rare occasions where something happens in the pensions scene that

is worth noting.

A pensions change that actually makes a difference

Last year, as a result of IORPS II, people looking to set up an Executive Scheme or Self-Administered Scheme (SSAS) couldn’t actually open one.

Essentially, business owners were being pushed into Personal Retirement Savings Accounts (PRSA’s) if they wanted to contribute to a pension. This was an issue, given that the ceiling on contributions within a PRSA made them less advantageous than certain Exec and Self-Administered SSAS.

At the time, PRSA’s operated on a sliding scale system, whereby you could attribute a certain amount of your salary taxfree. The older you were, the more you were allowed to contribute. Similar to standard pension schemes.

Any employer contributions in excess of these levels faced very stiff taxation in the form of Benefit In Kind (BIK). But the ceiling has now been removed thanks to the 2022 Finance Act. As of 1 January 2023, BIK charged to employers making contributions to their PRSA in excess of the ceiling has been entirely removed. What does this mean for business owners with PRSA’s?

It’s a game-changer. A trading company can now make unlimited contributions of company cash to a PRSA up to a max of two million Euros.

In theory, a company director can now legitimately take up to two million Euro in cash out of the company and move it into their PRSA or into an employees PRSA while remaining within a completely regulated tax-structure. Upon retirement, 25% of this PRSA can be drawn down in a tax efficient manner (much more efficient than having taken the money as salary).

In practice, there must be a bona fide