Every one person executive pension plans has to be wound up by 2026. This is going to be a massive undertaking by life companies. We had a taste of it in 2023, when all pensions written post April 2021 had to be wound up. It was hectic. And that was only for a small period of time. You can imagine what it will be like when every single one person executive pension has to be wound up!!
But out of the chaos comes opportunity for those who have accumulated big pension funds…transfer your executive pension to multiple PRSAs. That is, instead of having one big pension, you have multiple smaller ones.
You do not have to mature all your pensions at the same time. If you have 4 different pensions, you can mature them at different times, take your lump sum to live off for a while and then take the income you need, eventually exhausting the value of the policy.
In the meantime, your other 3 PRSAs should be accumulating in value without an need for imputed distribution. Assuming it is accumulating in value, when you come to mature the second PRSA, you get a higher tax free lump sum. You repeat the exercise you did with the first one, taking the amount you need to live on until the money runs out.
When you mature your PRSA, you can just take the tax free lump sum from it and leave the other 75% in the PRSA. This is called a vested PRSA. You can access the remaining 75% as income just like with an ARF, without setting up an ARF.
Under current rules, you do however have to mature the PRSA by age 75 and transfer it to an ARF or else it is locked and cannot be accessed. There was mention of allowing vested PRSAs being allowed past 75 but things seem to have gone quiet on that front (my guess is furious lobbying going on in the background by “the industry” as high commission ARFs are very lucrative).
It was announced that the pension standard fund threshold will be increased to €2.8 million by 2029. The lump sum payment will remain at €500,000. Those who reach this cap will therefore have a post retirement pension pot of €2.3 million. ARFs valued at over €2 million have an imputed distribution of 6%.
Those with pensions of €2.8m tend to have other assets besides their pensions and don’t want to have to withdraw 6% per annum. If they had split their pension into 4, they will only mature €700,000. After taking a lump sum from it, they will have a vested PRSA/ ARF of €525,000, which is subject to imputed distribution of 4% (or 5% if 71 or older).
If you are unlucky enough not to live into old age, the value of the PRSAs that haven’t been matured will pass to your spouse/ estate tax free. If you had transferred all your pensions to an ARF, the full value of the ARF transfers to an ARF in your spouse’s name and any income drawn down is subject to tax under PAYE.
In our example of the policyholder who had 4 PRSAs valued at a total of €2.8 million and had just matured one and dies soon after. €2.1m transfers to their spouse tax free and the €525,000 that they had put in an ARF will transfer as an ARF in the spouse’s name.
This only applies to those who die before the age of 75. In the same piece of legislation that restricted access to PRSAs not matured after 75, it also changed that the proceeds of the PRSA for those that die after 75 will change to an ARF and draw downs will be taxable as income.
Steven Barrett
30 September 2024