Signed into law by President Michael D Higgins in early January this year The Finance Act 2023 brought into effect the single biggest and most significant change to pension legislation in Ireland for 30 years. The act now provides a significant opportunity for business owners to transfer unlimited surplus funds from their business into a pension in their children’s name without impacting the parent/child inheritance tax threshold.
SIA Moore Wealth Management has been advising members of the pharmacy community for over 20 years and preferred providers of advice to IPU members
This may sound like an unbelievable scenario but Finance Act 2023 enacted the following changes with effect from Jan 1st, 2023
• An employer can contribute to an employee PRSA without taking into account the age-related tax relief contribution limits.
• Employer contributions to a PRSA are no longer treated as benefit in kind (BIK).
• There is no limit on employer contributions to an employee’s PRSA. However, the overall maximum tax-efficient standard fund threshold of €2m still applies and needs to be considered.
Before 1st January 2023:
• Employer pension contributions to an employee PRSA were calculated based on the agerelated percentage limit for tax relief on pension contributions. For example, an individual under the age of 30 could only have had a contribution of €17,250 under the old rules.
• If a company made a contribution to an employee’s PRSA that exceeded these age-related limits, the employee would be liable for BIK.
Real Life Example
John and Jane Pharmacist have fully maxed out pensions. They have a child John Jr, working in the pharmacy part-time at the weekend who is aged 19 and still in college. They approached us intending to invest surplus corporate funds at which point we explained the new option to them to compare and contrast.
Option 1 – Corporate Investment
• Invest in an appropriate investment fund and pay tax on any gains at a rate of 25% as non-trading income.
• Eventually, extract these funds as salary from the business and pay tax at over 50%.
• Once extracted and passed to their child on death this would then be taxed at 33% after the relevant inheritance tax threshold was breached.
• Surplus nontrading income if left in the company would be subject to the close company surcharge at 20%.
Option 2 – Set Up a PRSA for their Child
• Receive Tax Relief at 12.5% on the unlimited contribution to the PRSA
• The company funds move into beneficial ownership of the child with no inheritance tax implications
• The PRSA will grow tax-free in the child’s name up to at least age 50 when the funds could be accessed if needed.
By selecting option 2 they have bypassed numerous layers of penal taxation and made a planning move that will likely benefit not only their child but their grandchildren as well. They are now looking at intergenerational wealth transfer courtesy of Finance Act 2023.
Contribution
In this case, John and Jane contributed €350,000 as we had projected with long-term full equity allocation return assumptions that this would be worth circa €2,000,000 after 31 years when their child reached 50 taking longterm inflation at 2.5%. This target fund is the revenue-approved maximum tax-efficient fund threshold under current legislation.
Not just for Children
As you will see there is a significant opportunity here for cash extraction that we have not seen before. This will be particularly attractive to those who are sitting on cash reserves and
1. Have an underfunded pension and do not run a high salary so cannot contribute any additional funds.
2. Have a maxed-out pension but also have a spouse employed on a small salary who previously could only contribute a small amount.
3. Those close to business exit looking to extract cash tax efficiently.
As mentioned above this is a change from revenue practice and is the current situation for this year and anyone availing of it is following the legislation as written. There was no indication in this year’s budget that this is under review but we will not know for certain until Finance Act 2024 is published. Chief among any concerns about the interpretation of the legislation would be revenues view on the spirit of the act and this needs to be factored into any decision made and be a part of the conversation with your financial adviser.
Do bear in mind that any changes in government in the coming years may see a curtailment of this opportunity.
There are of course many more variables to factor into someone putting such a lump sum into their pension and clients need to be advised accordingly to ensure this is the right course of action for their circumstances. This is where holistic advice by a CERTIFIED FINANCIAL PLANNER™ can prove invaluable in conjunction with a lifetime cashflow model.
