The Finance Bill has made some interesting changes to funding for retirement, namely in PRSAs.
At present, employer paid contributions to an employee’s PRSA is a Benefit in Kind (BIK) for tax purposes. But the BIK is not put through the PAYE system so the it does not attract USC & PRSI taxes, just income tax. The contribution also gets tax relief as if it was a personal contribution.
In other words, the tax relief granted on the contribution cancels out the BIK as long as the total contributions into the PRSA does not exceed the personal tax relief limits. These are dependant on your age.
From 1 January 2023, the BIK is removed. And so will pension funding limits. An employer can contribute as much as they want into an employee’s PRSA as long as it remains under the €2 million pension threshold.
The personal funding levels are removed from employer pension contributions. Company pension plans always had generous funding levels. There is a formula to work out the maximum pension contributions allowed based on age, salary, years service and retained benefits. Under the new PRSA rules, there are no calculations.
People this will really work for is those who draw a relatively modest salary from their business but have built up cash reserves in the company. With a low salary, their maximum funding levels were low so they had to increase their salary to increase the amount they could put into a pension. They don’t have to do that anymore. It also suits people with a short work history in the company as that is also removed from any formula.
The maximum tax free lump sum that you are allowed to receive is €200,000. You can receive a further €300,000 taxed at 20%. Pension lump sums received from pensions in other countries were not counted in calculating these amount…until now.
The Finance Bill will now count pension lump sums counted in other jurisdictions. This will reduce the attractiveness of transferring pensions to places such as Malta (not something we did at Bluewater) as you can no longer get an increased pension lump sum abroad in addition to the lump sum you received in Ireland.
Steven Barrett
31 October 2022