Pensions for Business Owners Series

Unlocking the Power of PRSAs

Following our exploration of Executive Pension Plans in the first article of this series, we now turn our attention to another highly effective retirement planning tool for business owners in Ireland: the Personal Retirement Savings Account (PRSA).

Recent legislative changes have transformed the PRSA landscape, making it a compelling option for company directors, partners, and sole traders looking to maximize their retirement funds while extracting company profits in a tax-efficient manner.

 

Here, we explore the rules, benefits, and strategic advantages of using a PRSA, along with a real-world case study demonstrating its funding power.

 

Who is Eligible for a PRSA?

One of the key advantages of a PRSA is its accessibility. It is available to a wide range of business structures, including:

 

• Limited Companies (for company directors and employees)
• Partnerships
• Sole Traders

 

Unlike some pension structures that are tied to a specific employment, a PRSA is a personal contract owned by the individual, offering excellent portability if you change career paths or business structures.

 

Contributions and Tax Relief: The 100% Rule

The funding rules for PRSAs offer significant flexibility for both the employer and the employee.

 

Employer Contributions

Under current Revenue rules, an employer can make ordinary contributions to an employee’s or director’s PRSA up to 100% of their annual remuneration.

• Tax Relief: The employer can claim immediate Corporation Tax relief in the year the contribution is made.
• No Benefit-in-Kind (BIK): These employer contributions do not trigger a BIK charge for the individual, making it a highly efficient way to transfer company wealth into personal hands.

 

Employee (Personal) Contributions

In addition to employer funding, the individual can also make annual personal contributions. These are subject to Revenue’s age-related percentage limits and an overall earnings cap of €115,000. For example, an individual aged 40-49 can personally contribute up to 25% of their earnings (capped at €115,000) and receive income tax relief.

 

Note: Unlike Executive Pensions, Special Contributions (for past service) are not permitted within a PRSA structure.

 

Accessing Your Pension: Standard and Early Retirement

When it comes to drawing down your pension, the rules differ notably between PRSAs and Executive Pensions, particularly regarding your ongoing relationship with your business.

 

PRSA Retirement Rules

• Standard Access (Age 60+): You can normally access your PRSA benefits from age 60. Crucially, there is no requirement to sever links with the company. You can continue to work, hold shares, and draw a salary while accessing your pension.
• Early Access (Before Age 60): Earlier access may be allowed, but the individual must be fully retired from all employments.

 

Executive Pension (OMA) Comparison

• It is possible for a Director to get early retirement access from an Executive Pension from age 50. However, they must sever all ties with the company. This means selling their shares and terminating their employment contract—a step many business owners are not ready to take at that age.

 

Split Retirement

Another strategic benefit of the PRSA is that it facilitates split or phased retirement. If you hold multiple PRSAs, you can choose to draw down benefits from one policy while leaving others invested, providing immense flexibility in managing your retirement income and tax liabilities.

 

 

Case Study: How a PRSA Allows for Greater Funding

To illustrate the power of a PRSA, let’s look at a scenario where a client has significant retained pension benefits and a high salary. In this situation, the PRSA structure allows for much greater annual funding compared to a Master Trust/Executive Pension.

 

Client Profile:

• Gender / Age: Female, 43 years old
• Marital Status: Married
• Salary: €140,000
• Existing Service to Date: 10 years & 6 months
• Normal Retirement Age (NRA): 65 years
• Total Service at NRA: 32 years
• Retained Employment Current DC Pension: €800,000

 

Because this client already has material retained pension benefits (€800,000), the scope for ordinary annual contributions under a Master Trust is restricted by Revenue maximum funding calculations. However, the PRSA rules allow the employer to simply contribute 100% of the current salary, bypassing those complex past-service calculations.