I wrote an article earlier this year debunking an article in the The Irish Times that there was a “massive loophole” in pensions. The core issue in The Irish Times article was that employers could put up to €2 million into a pension in one go and claim tax relief on it. This came about in 2023 when it was introduced that employer contributions to PRSAs were not subject to funding checks that occupational pension schemes are subject to.
The Revenue warned providers that sharp practices will not be tolerated. Examples of this would be me hiring my son for the summer, paying him the minimum wage for 3 months and putting €500,000 into a PRSA. Or a company director with a fully funded pension hiring their spouse for a month and putting €2 million in their pension and then retiring.
It is clear to all that this is not what the Revenue intended when this was introduced but unfortunately some people couldn’t help themselves. So just two years after the change was introduced, there is speculation that the “no funding checks” will be removed in the Finance Bill later this year.
This of course has lead to lots of scaremongering in the industry. Lots of brokers using this as an opportunity generate sales, telling people that this is their last chance to make big contributions to their pensions before the Revenue takes away their ability to fund their pension!! Nothing like a deadline and the threat of something being taken away to get someone to move quickly!!
If there is a change, it is likely that PRSAs will be subject to the same annual funding checks that occupational pensions schemes are subject to. And company pension limits are extremely generous.
Pension funding checks are based on a number of factors; namely age, salary, retirement age and accrued benefits. If a 50 year old director earns €150,000 a year, has 10 years service, €500,000 in their pension and wants to retire at 60, how much can they contribute to their pension each year? Based on the Revenue funding limits, their company can contribute €304,444 a year to their pension. For most small business owners, this is more than they are able to contribute anyway, so funding limits will have no impact on their ability to put money into their pension plan.
But what if they do have more money to contribute to their pension? There is an option is making large contributions to pensions for back service. In our example above, the company director can make a once off payment of up to €1,140,506 for back service and the annual contribution they make is reduced to €177,722 a year. Under current PRSA, if the company had €1 million to put into a pension, they could do so easily and claim tax relief in the year that it is paid. Under occupational pension rules it has to be spread out over up to 5 years.
The biggest impact will be on those looking to make really large contributions or those who keep their salary low. Our company director reduced their income to €42,000 so they just pay 20% tax. They are accumulating excess cash in the business with the intention of funding their pension. This ability to fund their pension has been reduced drastically. Instead of them being able to contribute €304,444 a year, their company can now contribute just €45,244.
If there are changes, it will impact some but not most. It will mean more work for us advisors and the life companies to ensure that payments are within the limits ☹️
Steven Barrett
16 September 2024