In the wake of the Budget, the government has introduced PRSA contribution limits. That will restrict the amount that employers can pay into PRSAs for members of staff. If you intend to pay substantial lump sums into your pension in the near future, you could be affected.
Read on to understand what’s changing, how it could affect your financial plans, and whether you should take action.
What’s changing?
Two years ago, the government lifted restrictions on the amount that an employer could pay into a PRSA for a member of staff or a director. In practice there was no effective limit on the amount that could be paid in.
There is already a lifetime cap on pensions in Ireland (where other countries such as the UK have none). Government reviews have even suggested that a single cap is enough. But there’s a sense in government circles that some people were gaining excessive advantage by funding pensions with large one-off sums.
So the government is moving to restrict the amount an employer can pay in to 100% of the person’s salary. On top of that, the individual could still make their age-related personal contribution.
Who is affected by changes to PRSA contribution limits?
This change will impact anyone who is looking to put large lump sums into a pension structure.
There are several key groups of people:
Those who are drawing low salaries and prioritising pension savings with the earnings from their business.
Self-employed people who plan to make a large top-up to their pension during a year of particularly strong trading.
Those who have multiple employments and draw their main income from one source, and use another mainly for pension funding.
When will the change occur?
The legislation to govern this change is in the Finance Act. It is likely to take effect from 1 January 2025.
What will happen from next year?
From 2025 onwards, if an employer pays more than an employee’s salary (technically, emoluments, so including bonuses and other benefits) into a PRSA, then the excess will be taxed as if it were a benefit-in-kind. This effectively eliminates the tax benefit of paying into a PRSA over this amount. (An occupational pension could offer more beneficial route for many people in this position however).
What should you do?
There are several options to minimise the effect of this change on your pension plans.
Firstly, there is still time to make a lump sum top-up. But the window is short and uncertain, as we have been explaining in the Irish Times. So if you are planning a material contribution to a PRSA in 2024, the sooner you do it, the better.
Secondly, you may wish to accelerate future pension contributions. That could involve raising cash within your company, or injecting funds into the business, in order to fund a lump sum contribution now. If that pushed the company into a pre-tax loss in the current year, those losses could be set against future profits to reduce corporation tax.
Thirdly, once the changes are made, you could increase your salary, which in turn will increase the scope for funding a PRSA – both through an employer contribution and via a personal contribution.
Lastly, if these measures don’t work for your situation, there are alternatives. Employer-backed pensions will continue to have generous allowances for adding lump sums to your pension, for example to catch up for years of service where you didn’t pay in.
Get in touch if you would like to discuss how these changes affect your financial plans. We can help you make sense of the changes, quantify the impact on you, and devise an action plan to address it.