AM Financial is a financial consultant. We are based in Malahide but we offer pension advice to clients based in Portmarnock, Swords and throughout North Dublin. Many of our clients are choosing PRSAs as the tax-efficient retirement savings vehicle of choice. It is now the natural choice for business owners and it makes sense for employees too.
The Finance Act 2022 introduced many changes for the PRSAs which have made them appealing.
AM Financial had a flurry of clients setting up PRSAs at the end of 2023 and this is continuing into 2024. This blog discusses the PRSA changes in more detail.
Why are PRSAs attractive ?
AM Financial has been busy setting up PRSAs for business owners and for employees. The changes in the Finance Act has added considerable momentum to this.
PRSAs for business owners ?
PRSAs are fast becoming the best tax efficient way for business owners to save for retirement. They are replacing the executive pension plan in this regard.
Why ?
It is worth refreshing the status quo on current occupational pension schemes. An employer can contribute to this scheme. However, for an employee, the standard age and earnings-related limits apply as per the table below.
AGE-RELATED PERCENTAGE LIMIT FOR TAX RELIEF ON PENSION CONTRIBUTIONS
(maximum amount of earnings for tax relief is €115,000)
AGE | PERCENTAGE LIMIT |
Under 30 | 15% |
30-39 | 20% |
40-49 | 25% |
50-54 | 30% |
55-59 | 35% |
60 or over | 40% |
And how are PRSA's different ?
For business owners, there is no maximum payment stipulated in the legislation. It is true that the contribution can only be made for employees with some (Schedule E) income. But there are no stipulations on the level of salary or of service.
So contributions to a PRSA are potentially unlimited ?
The only limit that applies currently as the legislation is interpreted for PRSAs is the Standard Fund Threshold (€2million). This is the limit on the size of a pension fund at time of retirement. If the fund exceeds this size, it begins to lose its tax advantages.
(The Department of Finance announced an examination of the SFT in December 2023. This is being led by Donal de Buitleir and some changes are likely following a public consultation and review.)
Can you summarise in a nutshell ?
For a business owner, these new rules bring in a lot of positive changes.
It means they have the flexibility to make large contributions in good years. They can choose to contribute nothing in other years. There are no age-related limits as apply for occupational pension schemes. There are no hard rules linking the pension contribution to earnings.
PRSAs will be a tax efficient way for business owners to accumulate funds for retirement. Arguably now, they will be a preferred option to executive pension plans.
Who else can use PRSAs ?
PRSAs will now become easier to use for regular employees. For employees, the changes in the Finance Act have equalised the treatment of occupational pension schemes and PRSAs. There are two reasons for this.
Before the Finance Act, employers contributions to PRSAs would eat into the employees limits to contribute as per the table above. Employee contributions will be subject to the limits in the table.
The second reason is that employers contributions to a PRSA are no longer treated as a benefit in kind. Effectively now, an employer is free to contribute any amount to an employee's PRSA - subject to the SFT rule size.
What next ?
If you want further information on any of this or to set up your own PRSA, contact us at AM Financial.