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Pension funding opportunity
At the beginning of January 2023, a small wording change to pensions legislation resulted in a significant opportunity for company directors and business owners to fund larger pension pots than before.
Since January 2023, an employer contribution to a Personal Retirement Savings Account
(PRSA) for an employee, is no longer taxable as a Benefit-In-Kind (BIK) for that employee.
In essence, this change now allows an employer to contribute to a PRSA with no upper limit on employer contributions. In fact, the only limit is the lifetime Pension Fund limit which is currently €2,000,000.
This rule change will be of significant interest for business owners and directors, as it means that they can now move profits from their business into a PRSA for themselves, for employed family members, and for employees.
Let’s briefly explore some of the new PRSA opportunities
1. Company Directors or Business Owners on modest salaries
Profile: Patrick is a 50-year-old male, married and on a €20,000 annual salary. He has
a €300,000 pension fund and his retirement age is 60.
Current Pension arrangement
Patrick is currently invested in a Master Trust Executive Pension which is subject to
funding limits. His Pension Advisor recently calculated Patrick’s maximum funding
limit, which allows him to fund for a total pension fund of €432,000. As he already has
€300,000 saved, the maximum he can save into his pension from now until retirement.
is €13,200 per annum over 10 years.
The new PRSA opportunity
Under the new PRSA rules, Patrick’s business can invest up to another €1,700,000
into a PRSA for him as the only PRSA limit which now applies is the lifetime limit of
€2,000,000.
2. Family business with excess profits
Profile: John and Mary are Company Directors, and their son David is also employed in
the business.
Current Pension arrangement
John and Mary have funded Executive Pensions to €1,000,000 each and their son David has a pension fund in place of €300,000.
The new PRSA opportunity
Under the new PRSA rules, both John and Mary can fund a PRSA by an additional €1,000,000 to bring their pension funds up to €2,000,000 each. As David is employed in the business there is also an opportunity for the business to fund a PRSA up to the maximum lifetime limit of €2,000,000 – so an additional €1,700,000 above his current €300,000.