Pensions: the high road and the low road
You wait years for a change in the pensions game and then two big ones come along at once! The choices for pensions in Ireland are splitting in two distinct directions.
One is a much-delayed, circuitous journey to an unexciting destination. The other route, open to business owners since January, offers huge scope for funding, better tax benefits, and greater choice and control.
The first road is auto-enrolment. This is the practice of automatically signing up workers to pay into a pension. The idea is that by making opting out of a pension the default choice, rather than opting in, people will “do the right thing” and pay into pensions. Ireland is the last OECD country to introduce it, and by this time next year, we’re told it will be up and running. For workers who have never got moving in terms of pension planning, it offers a route to a basic income in retirement. So it’s likely a good idea, although it places a significant burden on employers, particularly in inflationary times.
The second road is much more exciting to management and owners of SMEs in Ireland. It’s the pension freedoms introduced in January of this year. Since that time, PRSAs offer a new route for entrepreneurs and senior management to extract cash off the balance sheet in a tax-efficient way.
The ability to extract money from your business was always generous through so-called ‘executive pensions’. But a pension-freedom PRSA is even better. Since January, there is effectively no limit on how much an employer can add to a PRSA for a member of staff. Some business owners have been able take hundreds of thousands out of their company and instantly sort retirement provision – not just for themselves, but for family members and trusted management as well.
Since January, getting money in to PRSAs is faster and less restrictive than under the old regime. There’s no need for past service to make large employer contributions, and the money you pay in is fully tax-deductible in the year of payment. And compared to an executive pension, there are fewer restrictions, for example on property, borrowings, and the assets you can hold.
On retirement, taking money out is simpler and more tax-efficient for business owners. If you’re going early, there’s no requirement to dispose of your shareholding to take the benefits. Planning a phased retirement is simple – you can draw benefits from multiple PRSAs as-and-when required, while the remainder stays in its tax-free wrapper. And in the event of death before retirement the full value is paid to your estate tax-free, unlike in the case of typical occupational pensions.
A high road and a low road are coming into sight for pensions. Which will you take?
The SFA, Moneycube.ie and Zurich Life will be discussing Pension for Business Owners & Company Directors at 13.00 on 26 September as part of Pensions Awareness Week 2023. Register and join online.