There is no "massive loophole" in pensions

An article appeared the The Irish Times about a "massive loophole" in pensions. This took me by surprise. Was there something that I had missed? I've been working in pensions for 25 years and I like to think that I stay up to date on changes in legislation. Have I been giving my clients the wrong advice for the last few years?

It turns out that it was Pearse Doherty spouting on about pensions to attract attention and it turned out to be nothing. We will have a look at what they were giving out about and put a bit of context around the issues.

Removal of BIK on PRSAs

Pre 2023, the maximum tax relievable contribution limits to PRSAs were the same as those of personal pension plans. An employer can also make contributions to a PRSA, if the total combined contribution was over the prescribed limits, the employer contribution was subject to BIK. For example, someone in their 40's can contribute up to 25% of their earnings to a pension and claim tax relief. If their employer contributed 5% to their PRSA, the person can only contribute 20% personally. If they contributed 25% personally, the employer contribution is subject to BIK.

This BIK rule does not apply to occupational pension schemes. The member could always contribute the Revenue maximum limits in addition to the employer contribution. With group PRSAs becoming more popular due to increased compliance and trustee obligations under occupational pension schemes, it was seen as time to right this anomaly and allow people to maximise their pension contributions without being penalised.

This change is just levelling the playing field between occupational pension schemes and group PRSAs.

€2 million tax free

The maximum you can have in your pension is €2 million. Yes, this is a large amount of money and most people will not reach this threshold. Ironically, Pearse Doherty will be one of those lucky few to reach that target!

Under occupational pension schemes, the maximum pension you can have is 2/3 final salary. A company can put as much into a members pension to achieve this pension. There is a formula used based on years service, salary, current age, retirement age and current benefits to come up with the amount that they can contribute to a pension plan each year. They can then claim tax relief on the amount paid in. If they go over this amount and contribute more, the tax relief is carried forward and claim in future years (up to a maximum of five years).

The annual funding limits were removed in January 2023 for PRSAs. The long complicated formula was gone and it is a significant change. If you were on a salary of €50,000, you could now have a pension pot of €2 million. And with there being no annual funding limits, a company can claim tax relief for the contribution in the year that is was paid and would not have to carry it forward.

The €2 million personal threshold has remained in place (which may actually be changed in this years Budget). Anyone that goes over that is subject to taxation of 40% on the excess, the same as always.

Sharp practices

The Revenue were aware of the changes in funding rules before it was announced at the Minister's Budget speech in 2022, so it was not a surprise to them. They are also aware of any sharp practices that may occur. You can forget about hiring your 18 year old child for the summer job and putting €1 million into a PRSA for them before they start college. Or hiring your spouse or child for a day, paying them €1 and putting €2 million into their PRSA.

The article in The Irish Times is a nothing burger. It must have been written on a slow news day.

Steven Barrett

27 May 2024