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Pension funding opportunity [Continued]
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
3. An Investment Company
Profile: Alice holds a number of rental properties within a holding company.
She draws a salary from the business.
Current Pension arrangement
As a 20% Director of an Investment Company, Alice is excluded from taking
out an Executive Pension.
The new PRSA opportunity
No such restriction has been made in respect of PRSAs, so an investment
company could contribute to a PRSA for the benefit of a 20% director that is
employed by that company. It’s important to note that Alice must be
drawing a salary which is taxable under PAYE in order to access the PRSA
route.
4. Company Directors who have already accessed an Executive Pension
Profile: Justin funded an Executive Pension and accessed it last year under
the Normal Retirement rules. He still works in and owns his own business.
Current Pension arrangement
Justin funded an Executive Pension for €1,000,000 and took his benefits at
maximum retirement age (70) last year.
The new PRSA opportunity
As Justin still works in the business, he can now invest up to another
€1,000,000 in a PRSA policy.
5. Self Employed business owner with Spouse employed in the
business
Profile: Gerry is a self-employed Accountant and can only save into a
pension based on his personal income which will be limited by the age-
related personal limits and the Earnings Cap. However, Gerry’s spouse
Emma is an employee in the Accountancy practice. As Gerry is her
employer, he wants to provide a pension arrangement for her benefit.
Current Pension arrangement
Gerry as the employer set up an Executive pension for Emma. Both Gerry
(as Emma’s employer) and Emma (as employee) contribute. The employer’s
ability to fund is limited by Revenue’s funding limits for Executive Pensions.
The new PRSA opportunity
As Emma is Gerry’s employee, Gerry as the employer could fund a PRSA on
her behalf with potentially no upper limit on the employer contribution
possible for Emma (other than the Employers capacity to make such a
contribution and the overall lifetime limit for the maximum pension pot
(Standard Fund Threshold).