Last week we discussed the recent changes in pension legalisation and how this has created opportunities for business owners and key employees to invest tax efficiently for their futures.
This is a significant win all round. In addition to the new opportunities the changes have brought about, there are a number of other key benefits that make Personal Retirement Savings Accounts (PRSAs) the most effective way to save for retirement in most cases.
Let’s unpack them for you.
1. Investment Flexibility
In April 2021, the IIORPS II legislation was signed into law. Do you need to know the detail behind this? Not at all. But in practice, this imposed three new limitations on traditional company pension schemes:
1. No more than 50% of the pension fund can be invested in unregulated assets. The best example here is direct property. If your pension fund was worth €1,000,000 the maximum you could invest in a property was €500,000.
2. Independent Trustees are basically an essential requirement right now. You can no longer act as your own trustee in practice as it has become too onerous to do so. Be aware that Trustee Fees will start to eat into your pension growth at some point in the future.
3. Each pension scheme needs its own set of audited accounts. Again, this is another cost the customer is going to have to face at some point.
The good news here is that PRSAs are not subject to this legislation. You don’t need a trustee or audited accounts – these costs are removed immediately. And you are not limited to 50% of the funds in regulated assets. You can invest as you much as you like in Property, direct shares, funds and other investment options if you wish.
2. Early Retirement
PRSAs allow you to draw down your pension from age 50, provided you meet a few important requirements:
1. You need at least one employer pension contribution to the PRSA
2. You must have left service with that employer when drawing down your PRSA between the ages of 50 and 60
For traditional company pension schemes, there’s often an additional requirement for company directors to sever all ties with their company – for example, sell all their shareholding and leave service.
PRSAs don’t force you to relinquish your shareholding to draw down your pension prior to age 60. You can leave service as an employee but keep your shares and potentially draw dividend income as a shareholder.
3. Phased Drawdown of Benefits
One of the often-overlooked benefits of PRSAs is the freedom to draw them down in stages or segments over time.
For example, a PRSA with €1million in it could be drawn down over 10 years by splitting it into 10 smaller PRSAs of €100k each. The ability to phase the drawdown of your pension allows for several benefits:
• You only take out what you need from the pension, therefore leaving much of your investments in a tax-free environment.
• Your lump sum is 25% of your pension when you draw it down. Deferring and phasing the drawdown of your pension allows it to keep growing and you can get a bigger lump sum over time.
• Phasing the drawdown of your pension mitigates against the risk that markets may fall rapidly just as you are about to draw down your pension lump sum. Essentially, you are getting more than one bite at the apple.
4. Does my PRSA die with me?
One of the most commonly asked questions we deal with and a very important one. Simply put, in the event of your death in a PRSA all of the funds are payable tax free without limit to your estate.
For old company pension schemes the maximum lump sum you could get on death was 4 times your salary. Take a business owner with €1.5millon in their company pension and a salary of €100,000. On death the maximum lump sum they can get tax free is €400,000. The balance of the pension can pass to their estate but would have some tax implications.
If they moved the same €1.5millon pension to a PRSA they secure their pension pot so that all of it can transfer tax free to their estate as a lump sum.
5. Funding Limits
Last but certainly not least is pension funding limits for PRSAs. This was covered in last weeks blog, but it’s so important we had to mention it again. A PRSA gives you the freedom to fund a pension regardless of salary and service. If you have a company and draw a salary of €10,000 per annum there is no limit on how much you can contribute to a PRSA each year from your company. Your overall personal limit is a pension pot of €2millon and you are free to get to this amount any way you want.
I want to benefit from a PRSA!
We thought you might say that!
Before making any decisions, we always strongly recommend that you seek advice from a qualified, experienced financial planner. If you’d like to discuss your situation and your plans for your pension fund, please do get in touch with us over email at firstname.lastname@example.org, or by phone on 01 908 1500.
Private Client Manager
Disclaimer: Metis Ireland is not a tax advisor. All content in these blog posts is intended for information purposes only. We recommend that you should always seek independent tax advice.
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.