25 May, 2023

The New King of Pension Options for Company Directors?

Our Head of Financial Planning, Martin Glennon, is advising company directors to revisit Personal Retirement Savings Accounts (PRSAs) following favourable changes to this option.

We have recently witnessed the lavish coronation of the new King in the UK. With far less fanfare, and initially some confusion, we may have witnessed the crowning of the new king of pension options in Ireland. Let me introduce you to the PRSA (Personal Retirement Savings Account).

Like Charles, the PRSA has been around for a while (over 20 years now), but was considered by many as a poor option, particularly for company directors.

What has changed?

Prior to 1 January 2023, an employer contribution paid to an employee’s PRSA was a Benefit in Kind (BIK) for income tax purposes for that employee. The employer contribution was treated for the employee (director), as if it were a personal PRSA contribution and so the employee’s tax relief was limited by the age related % limits and the €115,000 earnings limit in respect of all personal pension contributions. 

Section 22 of the Finance Act 2022 has added contributions to a Personal Retirement Savings Account’ to a list of employer funded benefits which are exempt from an income tax BIK charge in the hands of an employee. This gives employer PRSA contributions the same BIK exemption as employer contributions to an occupational pension scheme. 

Why is the PRSA better?

The latest change has opened new opportunities for company directors to make much larger tax-free employer contributions to PRSAs than was previously permitted. 

Under an occupational scheme, Company Directors are restricted by Revenue rules regarding salary and service levels, and tax relief for employers on large contributions may need to be spread.

These individuals can now extract cash tax free from their companies into PRSAs by way of employer pension contributions and the only limit is the standard fund threshold of €2m.

Consideration should of course be given to the cashflow situation and to the long-term plans for the company. Once cash has been contributed to the pension it cannot be reversed. 

Other things to consider…

  • An employment contract and salary are required, but there is no minimum to the salary level.

  • Tax relief on employer contributions can be claimed in the year its paid.

  • Option for all PAYE employees. 

  • Salary sacrifice must be considered

Many company directors will already be funding for their retirement using an occupational pension scheme often referred to as an executive pension arrangement and those schemes will allow more than enough scope for the contributions they wish to make for their retirement. 

However, some company directors will see the new PRSA changes as advantageous. This is likely to be the case for those on low salaries with little or no scope to fund under an occupational pension scheme, and those on larger salaries who have large profits which they want to extract now and obtain tax relief immediately. 

Like Charles, the PRSA has stepped from the shadows to take the crown. The restrictions on occupational pension schemes can be by-passed by accessing the PRSA, which makes this, in my view, the new king of pension products for company directors.