Do you understand pensions today? Featured
At the turn of this century, yes 25 years ago, it was a stated aim of government to simplify the pensions landscape in Ireland. There was clear recognition then that the range of pensions schemes had mushroomed, and it was time to help consumers by making the whole area of pensions easier to understand.
So how has pensions simplification in Ireland progressed in the meantime? The bottom line is, that it has not really progressed at all. What was an area hard to make sense of 25 years ago, is a veritable minefield today. You step into the world of pensions with caution, and without expert advice you risk making some very expensive mistakes.
Some progress - PRSAs were introduced
In fairness, the intentions were good. Personal Retirement Savings Accounts (PRSAs) were first introduced in Ireland through the Pensions Act 2002. These were the retirement savings vehicle that were to change the pensions landscape, as they were financial products designed to be easier to understand than those available in the market up to that point. The problem was that after everyone had their say and pitched in their opinions, PRSAs were just added to the existing range of retirement products available, rather than replacing swathes of them as was the original intention.
So, from the outset, the pensions world simply became more complex! Now consumers had the additional question to ask, “Should I have an old-style pension – a Personal Pension Plan or an Executive Pension Plan – or should I have one of these new PRSAs?” This was on top of all the questions they had about pensions anyway.
We treaded water… before the pensions world went into crisis
While there were many tweaks and relatively small changes to pensions over the following years, in reality not much changed. Until it changed, with a bang…
Pretty much out of the blue, in July 2022 there was a major upheaval in the pension market in Ireland. Due to sudden regulatory developments, all the main providers ceased to offer one-man schemes, commonly known as Executive Pension Plans. While schemes set up prior to April 2021 were unaffected, any schemes set up since then or in the future would have to comply with significant new regulatory requirements that were introduced under an EU Directive known as IORP II. It was simply not viable for providers to offer a product to meet these new requirements.
The market was thrown into a state of flux, with business owners wishing to establish new pension schemes being unable to make tax-efficient large company contributions.
PRSAs came into their own
The solution emerged in the Finance Act 2022. While there were a number of impacts to PRSAs, the most significant one was that the only factor that limited employer contributions to a PRSA was the lifetime Standard Fund Threshold (SFT) of €2million. Also, tax relief on all employer PRSA contributions could be claimed in the accounting period in which they are paid.
This created an enormous wealth management opportunity for owners of highly profitable businesses, who could now extract significant sums out of their business in one swoop. In reality, this opportunity was way beyond the intended outcome of the legislation change and made PRSAs significantly more attractive than other retirement savings vehicles.
Rolling forward to today…
This loophole was eventually changed with effect from 1st January 2025. The Finance Act 2024 introduced an important change by capping the level of annual employer PRSA contributions, subject to tax relief, to 100% of the employee's salary. Any contributions into a PRSA in excess of the cap will now be treated as a BIK and taxed as income.
While a somewhat understandable change, it has simply increased the complexity in pension planning, as the rules of PRSAs bear no resemblance to those applied to the other main retirement savings vehicle today – the Mastertrust. Sometimes a PRSA is the optimal route, sometimes the Mastertrust is the way to go. Here are a few examples of the type of issues that need to be considered,
- Under a Mastertrust, the maximum contributions are based on salary, age and company service. Under a PRSA, the employer contribution limit is 100% of salary.
- Depending on age and company service, sometimes greater contributions can be paid to a PRSA, sometimes a Mastertrust enables greater contributions.
- Employee contributions are separate to limits under a PRSA, but form part of the limits in a Mastertrust.
- Funding for future and prior service opens up greater opportunities in a Mastertrust, but not in a PRSA.
- There are very different rules on accessing benefits, either at retirement or on early retirement.
- There are different rules in relation to tax free lump sums
- There are different rules on death under each scheme
These are a snapshot of some of the issues to be considered. Pensions today are a very complex area, the need for expert advice is greater than ever.