28th October, 2021

How do PRSA pensions work and do they suit you and your family? This article is written by Ian Feighery QFA, RPA, FLIA - founding Director of Summit Financial Planning.

Please be advised that this article will provide a high-level overview of the advantages of the Personal Retirement Savings Account (PRSA) pension structure versus some of the other pension structures (Directors Pensions, Company Pensions, Personal Pensions etc). It will not go into any great detail on specifics. It is only designed to highlight opportunities and flexibility available to individuals who hold their pension monies in a PRSA structure. If you are looking for further information, Summit Financial Planning are happy to accept enquiries.

All pension structures (Directors Pensions, Company Pensions, Personal Pensions, PRSA’s etc) have rules to follow when it comes to; how much a pension can be funded, how the money can be accessed/matured, how the value is paid on death pre & post retirement etc.

For the purposes of this article, we are going to concentrate on the following areas of the PRSA structure:

A. How pension money is paid to estate on death before maturity

B. Multiple maturity option

C. Excess fund tax liability deferment

How pension money is paid to estate on death before maturity

On death, any time before the PRSA policy has been matured, the PRSA structure will pay the full value of the policy as a lump sum to the estate of the deceased. Assuming that the lump sum is paid to a spouse, then there will be no tax due as currently there is no inheritance tax liability between spouses. If the lump sum is inherited by a child, then the normal inheritance tax rules apply.

Any type of Occupational Pension Scheme (Company Pension etc) may not be as efficient as the PRSA rules and lump sum death pay outs could be significantly less. This is an area which needs to be reviewed on a case-by-case basis, especially if the individual is also included in a Death in Service Scheme.

Multiple maturity option

The PRSA structure is the only pension structure which definitely allows for a policy to be “split” multiple times. Where this is of real benefit to the policyholder is when it comes to maturity options, as outlined in the following example:

  • a. Policyholder has a PRSA policy with a €800K fund value

  • b. She is 65 years old and married with one son

  • c. She would like access to €100K from this PRSA policy to help her son purchase a property

  • d. As the PRSA can be “split”, we believe her best option would be to set up a new 2nd PRSA policy and transfer €400K out of the existing PRSA and invest this €400K in the new 2nd PRSA policy

  • e. So, now there is €400K in the original PRSA policy and €400K in the 2nd PRSA policy

  • f. The policyholder now matures the 2nd PRSA policy and takes 25% of the policy value (€400K x 25% =€100K) as a fp sum. This lump sum is 100% tax free once the total amount taken from all previous pension maturities and this PRSA maturity does not exceed €200K

  • g. The remaining €300K (€400K less €100K) in the 2nd PRSA is then invested in a post-retirement pension product called an *Approved Retirement Fund (ARF) policy

  • h. She now has the €100K tax free lump sum to give to her son but also, which is very important, she still has another €400K in the original PRSA policy which has not been matured. If she were to pass away before this policy was fully matured, then the full value at date of death would be paid out as a lump sum to her estate (tax free to spouse)

The ARF policy (€300k) would then either pass to her spouse as an ARF policy who would have to pay income tax on any withdrawals or it would pass to her estate as a lump sum.

i. She could of course split the original PRSA several more times – there is no limit on how many times – if she so wished. This provides her with control over how much she takes out as lump sums and how much income she will have to take from her ARF policy. Additionally, she can protect some or all of the original PRSA until the full amount has either been fully matured or she reaches age 75

Personal Pension and Company Pension type structures are required to mature 100% of the pension value of the policy(s) when being matured. They are unable to be split like a PRSA. This means that any overfunding liability (explained later) would be due immediately and all money left after the lump sum payment has been taken, will have to purchase an *ARF. An ARF pension structure is not as advantageous as a PRSA structure on death, as explained above.

Excess fund tax liability deferment

The current Standard Fund Threshold (SFT) limit for an individual is €2m. This means that if you have a total pension(s) fund value above €2m and you mature the full amount, then there will be Chargeable Excess Tax (CET) liability due to revenue. The CET rate is currently 40% of the value above the €2m threshold. Therefore, for example, if your pension fund was worth €3m, then the CET bill for the excess fund liability would be €400k (€1m x 40%). This liability is paid from your pension fund (private pensions) to revenue.

The CET liability only becomes payable once the individual has matured a total value of their pension(s) above €2m. As seen in the previous example, it is possible to split a PRSA policy in order to maintain control over the amount that is matured. This process can be repeated a number of times in order to have multiple PRSA maturities up to the €2m threshold before excess fund tax is due and therefore deferring the CET liability to potentially age 75 if desired. Assuming the person lives to age 75, they will still have to pay the CET liability at that point, but with the advantage the money has been growing gross of the CET liability until age 75. Plus, if they were to pass away before age 75, the full amount of the unmatured PRSA would be paid to their estate as a lump sum. As no maturity event had been triggered – death isn’t a maturity – there would be no CET liability to be paid to revenue. If the money was paid to a spouse, then the full amount would be tax free.

In Summary

In many scenarios, PRSA’s provide better choice and flexibility than other pension structures. The ability to control how much you want to mature and when you want to mature is unparalleled. For large pension funds, especially pensions that are over €2m, having the option to defer CET liabilities until age 75 is extremely advantageous. It is a very useful structure which can help when putting together an estate planning strategy.

In the meantime, it is important to understand what type(s) of pension structure(s) you are invested in. Not all pensions are the same and once a maturity decision has been made, it cannot be unwound.

Need more information?

Summit Financial Planning is a full financial planning firm that operates out of Dublin 2. They can be contacted by email at info@summitlife.ie or by phone on 01-4445282.

Summit Life & Pensions Ltd T/A Summit Financial Planning is regulated by the Central Bank of Ireland.

*For this article we have assumed post-retirement monies have been invested in an ARF rather than an annuity.