Was one pen tick the master stroke for pension coverage?
One pen stroke in last year’s Finance Bill has changed the pensions landscape significantly for the better, notably for PRSAs.
Whether by luck or design, the recent changes to the rules governing Personal Retirement Savings Accounts (PRSAs) might be a turning point in efforts to improve pension coverage in Ireland.
Last year’s Finance Bill, the subsequent Finance Act, and, critically, the updating of Revenue’s pension manual in early 2023, announced a subtle but significant change to the pension landscape.
The once boring family member of pensions, the PRSA has suddenly become the devilishly handsome and yet intriguing relative at that family reunion! PRSAs have been simplified and made more accessible, giving Ireland a great chance of increasing pension coverage on the back of it.
Pension sceptics, and those who may have been constrained by outdated pension rules, are now able to save more expansively for their retirement.
For example, small business owners and their staff, who might be on modest salaries can now use PRSAs for significantly enhanced employer contributions into their pension funds. Similarly, small businesses that were slow to put pension arrangements in place for their teams - due to complex and outdated trustee issues - can now do so without having a trust in place at all.
So, it would seem that the broadening of the appeal of the highly regulated PRSA product is starting to do exactly what the policymakers intended. Making pensions more straightforward and accessible is going to go a long way to address gaps in pension coverage.
According to the CSO, 34% of workers in Ireland have no pension in place at all. Even for professionals, who typically have higher coverage, 18% have no pension arrangement. For those who have nothing in place, the most common reason given is that they just ‘haven’t had a chance to organise it yet’ or plan to do so ‘at a future date’. The reasons given are surely a wake-up call to slim down the barriers to entry.
As a Private Client Adviser with Unio Wealth Management, the most common criticism of pensions I hear is that there are too many pension products and that the web of overly complex rules associated with different pension structures is off-putting.
Back as far as the early 00s, it seemed that the PRSA would become the pension product of choice across different sectors. But roll forward 20 years to this time last year, and the PRSA was still only of niche interest at best. The main issue holding it back was the fact that an employer contribution to such a pension plan would trigger benefit in kind (BIK) tax for the worker if the contribution was above a moderate level.
Traditionally, a PRSA was used by two cohorts, for whom PRSAs will remain a core pension option. The first group consists of self-employed professionals or those in a company where there is no company pension scheme in place. Then, there are those in an occupational scheme, who would like to invest additional voluntary contributions (AVCs) into a privately owned pension product, over which they have personal control, known as a PRSA AVC.
With the new PRSA rules and the removal of the BIK charge on company contributions, there are multiple uses for the PRSA for various market sectors and segments of the market. We are seeing a marked increase in pension take-up for savers in the following key segments — and there will undoubtedly be more to follow as this develops:
- Now, the business can contribute significantly to the individual’s pension fund without tax implications for the business or the need for the individual to draw a higher taxable salary. This opens up significant estate planning opportunities so that the businesses might be passed, intact, to the next generation. Family businesses are often sold so that the founder might enjoy a comfortable retirement. The PRSA will be a very beneficial tool in these scenarios as people plan for that transition in the 5-10 years before retirement.
- PRSAs can now be put in place for these key staff members, where the business can contribute to their pensions with no BIK implications or trustee issues. A second option here, of course, is to utilise the recent developments in the Master Trust area — a separate but equally interesting topic. The ability to put attractive pension benefits in place for key staff will increase staff loyalty and coverage at the same time.
- We know that the traditional retirement age of 65 isn’t for everyone. Some will retire earlier, but even more are considering a phased retirement, where they will move to part-time, or take consultancy work right into their 70s. By transferring pension arrangements to a number of PRSAs, one can stagger the accessing of those over time as there is no obligation to retire, or mature those pension pots, at one single date. Once upon a time, this strategy was the vestige of the self-employed. Now, business owners and their staff can utilise this staggered approach too.
The challenge of increasing pension coverage in Ireland is complex and a multi-faceted approach is needed. One thing is clear, when a pension plan is clearly explained and made easier to access, workers in Ireland are good adopters. The solution is a clearly communicated offering made accessible across many use cases. One pen stroke in last year’s Finance Bill may have changed this significantly for the better and, this adviser is certainly in favour.
The pensions landscape in Ireland is undergoing a significant and positive transformation. To assist individuals in understanding the implications for their financial future, expert and impartial advice should always be sought.
At Unio Wealth Management, our advisers look forward to helping you to understand and optimise your retirement planning options. Find out more at www.unio.ie Unio Financial Services Ltd trading as Unio Wealth Management is regulated by the Central Bank of Ireland.
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