If you’re a company owner/director and want your company to pay pension contributions on your behalf, then an Executive Pension Plan, (EPP) which must now be set up as a Master Trust, should be carefully considered against a PRSA alternative.
The reason that a PRSA is now viable option for company director pension funding, is due to the significant changes made in the Finance Act 2022, which became law in January 2023.
The key impacts of this 2022 Finance Act and subsequent Acts, mean:
- Employers can contribute to a PRSA, without an employee BIK implication.
- An annual funding limit of 1 times salary now applies, with no reference to the length of employment.
- Lump sum contributions, which stay within salary related limits (allowing for any regular contributions in the same year) can claim full corporation tax-relief in that year.
Other considerable PRSA features include:
- Phased Retirement – Company pension funding, can be split over a number of PRSA contracts, to allow for phased retirement benefits, which can’t be done with a Master Trust, as all retirement benefits related to the same employment must be taken at the same time.
- Late Retirement -A PRSA can be funded and/or continued to age 75, a Master Trust normally to age 70, although you can delay benefit drawdown.
- Death-in-Service – On death prior to benefit drawdown, the full PRSA value is payable as a tax-free lump sum to a spouse, whereas, under a Master Trust – EPP this is restricted to 4 times salary (plus a refund of personal contributions), with the balance used to provide a taxable pension, via an annuity, or an ARF for dependents.
- Additional Cash – Additional employer post-NRA funding can be made to a new PRSA, which carries a right to take 25% as a lump sum, but, in cases where Master Trust – EPP benefits have already been taken at NRA, any fresh EPP funding post-NRA, would all have to be taken as a transfer to an ARF.
- Early Retirement – Where a proprietary director decides to bona fide retire, before age 60 under a PRSA, they can still retain their shareholding, not so under a Master Trust – EPP. Although a Master Trust does allow you to continue to work elsewhere.
Master Trust – Executive Pension V PRSA Alternative
So, for new director pension plans, is an PRSA now a better option?
No, it depends on individual circumstance, the a Master Trust – EPP may still remain the better choice:
- Higher Funding – If there are sufficient funds within the company, to fund beyond 1 times salary annually, then a Mater Trust – Executive pension plan will prove more suitable.
- Late Starter – Where a business owner is playing catch up, in terms of creating a decent sized pension pot, and has the past service and the company funds available, to inject a substantial lump sum, the again a Master Trust – EPP is more than likely the best solution.
- Retirement Lump Sum – Where a plan holder has a very large salary and long company service, in some cases a 1.5 times final salary multiple, may lead to a higher tax-free lump sum come retirement, than taking 25% of the retirement fund value.
- Ceasing Contributions – Where the holder of an Executive – Master Trust, needs to make their plan paid up, perhaps due to taking up a different employment, the option to transfer to a Personal Retirement Bond only exists under this plan type, which may offer a lower AMC on transfer.
- Early Benefits Access – There is a big consideration, for those who may need to access their pension benefits early i.e. from age 50, and before age 60. Under a Master Trust, whilst you must retire from the employment that last funded your pension, you can continue working elsewhere, not so with a PRSA, although you could retain your shareholding.
If I already have an Executive Pension Plan, should I switch to a PRSA or new Master Trust provider?
Firstly, beyond the nuances of taking early, or even extended late retirement, having multiple plans, and pre-retirement death benefit considerations, if your existing EPP has lower charges e.g., 100% net allocation and an AMC of 1.00% or less, our general advice would be to stick with it.
If on the other hand, if your charges appear high, you could perhaps consider transferring your EPP to a PRB, or to a single premium PRSA (provided their are no early encashment charges), to lower the AMC, and continue to fund via a newly arranged PRSA, or Master Trust.
For example, if your existing Executive Pension is carrying 1.25% AMC or higher, you may be able to achieve a 0.75% AMC or less, under a lump sum PRSA/PRB fund transfer. Meaning, a 1.25% AMC would then only apply to your new regular contributions, with long-term support, including all important investment advice.
In Conclusion
If you’re a company owner/director/executive, seeking to set up a new pension plan, to fund for retirement through the payment of employer contributions, then in many cases a PRSA could indeed prove your best option (based on current legislation).
However, your companies ability to fund beyond the PRSA 1 times salary limit, and to provide sufficient length of service, with the possibility of a high salary on the lead up to retirement, to justify a higher tax-free lump sum, should lean you to a Master Trust.
If you still have an existing Executive Pension Plan, a transfer to Master Trust or a PRSA will have to happen *soon, so it makes sense to assess the opportunity to reduce charges now, not to mention reviewing your investment strategy and broker service.
Important Note:
* If you’re a company owner and you already have an Executive Pension Plan, taken out before 22nd April 2021, you have up until April 2026, before you will have to transfer it under European pension governance legislation (IORP II) to a Master Trust – or to a PRSA, but there is nothing stopping you from taking action on this earlier, if so required.
Phone Consultation
If you would like to explore and discuss the new rules and how they may apply to you, your company, or to your executive employees, please get in touch.
Contact: Ken O’Gorman – Director – CB, RPA, QFA, SIA – Pension Specialist
One Quote Financial Brokers on 01 845 0049 or email: ken@onequote.ie
