No PRSI on Employer PRSA

I know - snappy title. The Department of Social Protection have confirmed that contributions by an employer to a PRSA do not generate a PRSI liability for the employee. Such contributions do, however, generate a USC liability.


In clarifying this, the powers that be have gone less than half-way to rectifying a known anomaly between PRSAs and Occupational Pension Schemes. Employer contributions to Occupational Pension Schemes are not a Benefit in Kind and therefore do not generate a liability for the employee in respect of tax, PRSI or the USC. Employer contributions to a PRSA are a Benefit in Kind and, while tax relief offsets the tax and now the PRSI liability has been removed, the liability to the USC remains.

When PRSAs were launched, less than eight years ago, they were designed to be low-cost, transparent, portable pension savings vehicles that would encourage more people to save for their retirement. Why the Government is now discriminating against them in favour of the older type Occupational Pension Schemes is beyond me.

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Personal Fund Thresholds - Revenue deadline looming...

In accordance with Section 787P(2), Taxes Consolidation Act 1997, anyone with pension benefits with a capital value of over €2.3 million at 7/12/2010 has until 7/6/2011 to apply for a Personal Fund Threshold (PFT) Certificate. Anyone who misses this deadline faces substantial additional taxation when they retire. Bearing in mind that an application for a PFT Certificate involves gathering details of all pension arrangements, often from a variety of sources, anyone who needs a PFT Certificate should be taking action now.

Worryingly, in this Irish Times piece, Dominic Coyle tells us that by April 8th, only 144 enquiries had been received by Revenue on this topic, out of an estimated 6,000 affected people.

Who does this affect?

While the figure of €2.3 million might seem enormous, don't forget that this is the capital value of a pension fund. So you don't have to be a multi-millionaire to fall into this category. Here's a few examples: -

• Anyone in a Defined Benefit pension scheme with an expectation of a pension of €115,000 per year or more, before lump sum entitlements.

• Any Public Servants with an expectation of a pension of €100,000 per year or more.

• Anyone in either of the above categories with a lower pension entitlement but with additional pension funds from other sources, e.g. AVCs, RACs, pensions from previous employments etc.

• Anyone with Defined Contribution pension funds totalling more than €2.3 million at 7/12/2010.

What happens if the June deadline is missed?

After 7/6/2011, anyone who retires with pension benefits with a capital value of greater than €2.3 million, who does not have a PFT Certificate, will be taxed on the excess over €2.3 million at 41%. This is an additional tax, over and above the normal taxes that will apply to drawdown of pension funds. So an individual who retires with a pension fund of €3 million and no PFT Certificate will pay €287,000 in tax before drawing their pension benefits in the normal way.

How can we help?

We can gather the required information from the various pension schemes, calculate the capital value of pension benefits in Defined Benefit and Public Sector schemes, calculate the Personal Fund Threshold and prepare the application for submission.

Public Servants should consider retiring now

I recently looked at a pension projection for a 61 year old hospital consultant, working for a HSE hospital. The projection gave him details of his pension and lump sum from the superannuation scheme should he retire now, as well as the projected figures if he stays to age 65.

The twist, however, is the fact that the projections take no account of the 15% salary reduction to which he will be subjected, as a result of Budget 2010. Because public service pensions are based on a percantage of final salary, if your salary is reduced by 15%, your pension will be also.

But in the Budget, a window of opportunity was provided. "To ensure that any increase in the number of retirements can be managed, the legislation on pay reductions in the public service will provide that any retirements in 2010 would be on existing, pre-cut pay terms." So any Public Servant retiring in 2010 will have their pension based on 2009 salary level.

Given that Public Service pensions accrue at a rate of 1/80 or 1.25% of final salary for each year of service, a higher earner facing a pay cut of 15% would take 12 years to build up the lost pension entitlement, unless pay increases come back into fashion during that period. Someone facing a pay cut of 8% would take over 6 years to build up the lost pension entitlement.

So if you're a Public Servant and within sight of pension age, you might do well to consider retiring now. Which is presumably a deliberate move by the Minister.