Apart from the volatility in investment markets and everything else going on in the economy and the world in general, 2022 was also a tumultuous year in the world of pensions for business owners.
This is where it gets a little technical, but if you are a business owner of a profitable business, it is well worth sticking with us here as there is an opportunity you need to be aware of. Otherwise, give us a call and we will discuss it further with you.
In July 2022 there was a major upheaval in the pensions world, when due to regulatory developments, all the main providers ceased to offer one-man schemes, commonly known as Executive Pension Plans. While schemes set up prior to April 2021 were unaffected, any schemes set up since then or in the future would have to comply with significant new regulatory requirements that were introduced under an EU Directive known as IORP II. It was simply not viable for providers to offer a product to meet these new requirements.
The market was thrown into a state of flux, with business owners wishing to establish new pension schemes being unable to make tax-efficient large company contributions.
However the Finance Act 2022 came into law at the end of last year, which opened up a significant and very attractive opportunity for business owners, particularly of profitable businesses. The change relates to Personal Retirement Savings Accounts (PRSAs), which up until the beginning of 2023 treated employer contributions as a Benefit-in-Kind for an employee from an income tax perspective. This is now no longer the case, with employer contributions to a PRSA not treated as a Benefit-in-Kind in the hands of the employee. This gives the employee full personal benefit of their tax relief limits, without having to allow for any employer contributions made.
But furthermore, and unlike company pension plans, the big opportunity in the new regulations is they do not define the level of employer contribution allowable with reference to age, service, salary or other pension benefits. The only factor that limits employer contributions to a PRSA is the lifetime Standard Fund Threshold (SFT) of €2million. This makes PRSAs extremely attractive now for business owners when compared to occupational pension schemes or master trusts, where employer contributions continue to be limited by salary, service and age factors.
Also, tax relief on all employer PRSA contributions can be claimed in the accounting period in which they are paid. This is unlike a special contribution to an occupational pension, where the tax relief must be spread forward over 5 years.
The new opportunity is for owners of profitable businesses, who can now extract large sums of money from their business by making large-scale contributions to a PRSA, with the only restriction being to avoid funding past the SFT. Also, if your spouse and/or your children are working in the business, the company can also fund pensions for them up to the SFT. That is a significant wealth extraction opportunity.
In addition, it’s worth noting that PRSAs differ to company pension plans when taking your benefits. First of all, you can get access to your benefits from age 50. Also with a PRSA, you can phase in your retirement by dividing your pension funds across multiple PRSAs. This option is unavailable when retiring from an occupational pension scheme.
So the previously unattractive PRSA has now become a fantastic wealth extraction vehicle for business owners of profitable companies. However as with all matters pension related, specialist advice and careful planning are needed. We would be delighted to help you.