The recent changes in the Pension industry have led to the establishment of Master Trusts and the movement of many Pension Schemes over to these new structures. However, the changes brought in with the Finance Act in January 2023 have opened up a very useful opportunity for Company Directors, Executives, and those wishing to ‘catch up’ with their Pension funding.
Personal Retirement Savings Accounts (PRSAs) as a Route for Company Directors
As many Business Owners know, in the early stages of owning a business, funding for retirement may not be a priority. Likewise, taking an ongoing large salary may not be attractive, therefore restricting Pension funding into Occupational Pension Schemes (sometimes referred to as Executive Pensions). There may be sufficient funds within a Company in later years to fund significant Pension contributions, but frustratingly, the other ‘numbers’ (namely salary) don’t allow for this to happen.
The new legislative changes have opened Personal Retirement Savings Accounts (PRSAs) as a route for Company Directors to extract monies from the Company structure with no limits other than the (Standard Fund Threshold, currently €2M) – and the Company’s capacity to fund a significant contribution and/or the potential to offset Corporation Tax. Additionally, another attractive change is that this expense seems to be allowed as an expense in the year in which the contributions are paid (with no upper limit) rather than being spread forward.
Benefits for Investment Companies and Employers
Further changes also mean that an Investment Company can pay a BIK free contribution for a Company Director if they are in receipt of Schedule E remuneration as the Act makes specific provision for a deduction of an employer PRSA contribution as an expense of management of an Investment Company.
Of course, this is attractive to Company Directors/Business Owners (those receiving salary under Schedule E with PAYE). It is also attractive to employers too as an option to reward employees through a Pension contribution as per their contract. Previously, employer contributions to a PRSA were a Benefit in Kind for Income Tax purposes for that employee. This has now been removed, giving employers more freedom to make larger contributions to a PRSA for their employees. Of course, it is important to note that Revenue will still look harshly on ‘Salary Sacrifice’ (a contribution to a PRSA with a corresponding reduction in remuneration).
Who Might Benefit?
Here are some examples of individuals who may benefit from these changes:
- Company Directors with low salaries but wish to increase Pension funding.
- Company Directors with Company profits and wish to offset against Pension contribution.
- Company Directors of Investment Companies.
- Company Directors who retired benefits from Company Plans/Executive Pensions and didn’t reach the €2m threshold or maximum Lump Sum – opportunity to continue to fund through a PRSA.
- Spouse or family member working in Company with little or no Pension fund.
- Employers wishing to fund employees (Executive level and lower) Pensions with little restriction.
What Action Should you Take?
In light of these changes, qualifying Company Directors and Executives should consider reviewing their current pension arrangements and evaluating whether a PRSA could provide a more efficient retirement funding option. They may also wish to consult with a financial advisor or tax specialist to determine the most advantageous approach for their specific circumstances.
For those with low salaries who wish to increase their pension funding, PRSAs now offer a viable route to do so. Company Directors with significant company profits may wish to offset these against pension contributions, while Investment Company Directors may benefit from the specific provisions in the Act allowing Investment Companies to make BIK free contributions. Additionally, those who have retired benefits from Company Plans or Executive Pensions and did not reach the €2 million threshold or maximum Lump Sum, now have the opportunity to continue to fund their pensions through a PRSA.
Employers looking to reward employees through pension contributions may also find PRSAs to be an attractive option, especially since employer contributions to a PRSA are no longer considered a Benefit in Kind for income tax purposes.
It is important to note, however, that the legislation may change in the future, and any decisions made should be based on current laws and guidance. Seeking advice from a qualified financial professional can help ensure that Company Directors and Executives make informed decisions that are in their best interests.
Overall, the changes to PRSA legislation provide a new opportunity for efficient retirement funding for Company Directors, Executives, and qualifying employees. By taking advantage of these changes, individuals and companies can potentially increase their pension contributions while benefiting from tax efficiencies, all while securing their financial futures.
In conclusion, the recent changes to PRSA legislation provide an excellent opportunity for Company Directors, Executives, and qualifying employees to increase their pension contributions in a tax-efficient manner. As with any significant financial decision, it is essential to seek independent financial advice before making any changes to your current pension arrangements.
At FJ Hanly & Associates, we have over 20 years of experience in providing expert financial advice to individuals and companies. We can help you determine the most efficient approach to your retirement funding and ensure that you are taking full advantage of the opportunities provided by the changes to PRSA legislation.
If you are a Company Director or Executive who may benefit from these changes, or if you are an employer looking to reward your employees with pension contributions, please do not hesitate to contact us. Our team of financial experts is here to guide you through every step of the process, ensuring that you make informed decisions that are in your best interests.