Since the Finance Act 2022, the pensions landscape has changed positively with respect to retirement planning for employees and company directors.
To start let us look specifically at what was the case prior to the 2022 Finance Act with respect to funding – this refers to the maximum amount that can be contributed to a pension scheme or PRSA Company pension schemes were limited to funding based on salary and service. PRSAs were not limited on the amount that could be contributed – Instead tax relief on contributions for both employer and employee, was restricted to the age-related limits.
In the last 18 months the Master Trust has replaced the company pension scheme as the vehicle of choice for employee pension benefits. However, funding is still limited and linked to salary and service. Also, the Master Trust is governed by the IORP II directive, so amongst other things, it must invest predominantly in regulated markets and be properly diversified. This realistically rules out investing in direct property for example.
On the other hand, the 2022 Finance Act has put the PRSA in a very advantageous position as a planning tool for employees and directors for the following reasons:
Death Benefit
There is no lump sum limit on death in service in a PRSA while a Master Trust is still limited to a lump sum of 4 times remuneration.
Contributions
PRSAs are now no longer subject to caps on employer contributions. A Master Trust is still subject to maximum funding limits based on salary and service. Employers can now make a contribution to a PRSA up to the Standard Fund Threshold limit of €2 million. Tax relief on employer contributions to a PRSA can be claimed in the accounting period in which it was paid.
Regular employer contributions in a Master Trust will receive corporation tax relief in the year of payment but are of course limited by way of salary and service.
Where an employer pays single premium contributions in a Master Trust, corporation tax relief will be spread forward to a maximum of five years. Full relief will only be given in the year of payment, where the total single premium amount is equal to or less than the total employer regular contribution paid in respect of all employees.
Retirement
The use of multiple PRSAs allows for phased retirement, while all benefits related to a Master Trust must be retired at the same time.
Investments
As the Master Trust is governed by the IORP II directive, as mentioned earlier, it must predominantly invest in regulated markets and be fully diversified. As an attractive investment option, property can be purchased by a PRSA, and if required, one can even borrow within a PRSA to purchase property.
Early Retirement Requirements
In an early retirement scenario for a PRSA, age 50-60, there is no requirement for a 20% director to relinquish their shareholding. Simply leaving employment from the linked employer will suffice. A 20% director in a Master Trust, must relinquish their shareholding, as well as the shareholding of their family members.
Retirement Age
In normal circumstances, the latest retirement age in the Master Trust is age 70, while it is up to 75 in a PRSA.
As you can see, there are many differences between a Master Trust and a PRSA. For directors and senior executives, a PRSA will often be a more attractive option and for this reason it is imperative you seek independent financial advice from a regulated financial advisor.