The PRSA was introduced to increase private pension coverage - it’s a consumer-friendly product, very transparent, mobile and above all flexible.
Both an employer and employee can contribute to a PRSA and from an employer perspective there is no need to create a group pension fund. Employers, particularly multinationals, had started to favour PRSA’s as a part of an overall remuneration package.
In the context of pension schemes, employer contributions to PRSAs are taxable on the employee as a benefit-in-kind. However, the employee could claim tax-relief up to the normal age-related pension limits, so in general there was no tax liability arising.
With the passing of the 2011 Finance Act, which saw PRSI extended to certain types of pension contributions, and the introduction of the Universal Social Charge (USC), the unfortunate employee, with a PRSA as his company pension vehicle, gets hit with a double whammy - the employer and the employee contributions are subject to both PRSI and USC.
As employer contributions are treated as if they were made by the employee and effectively added to the pay of the employee, employer contributions to a PRSA now attract a USC liability ranging from 2% of the first €10,036 up to 7% on sums over €16,016 plus PRSI of 4% (on amounts over €127 per week).That’s an 11% hit on pension contributions for virtually all employees on monies they will not be receiving until they retire.
Meanwhile employer contributions to a self administered pension scheme are, quite rightly, not subject to either the USC or PRSI.
The impact of a potential 11% hit on PRSA contributions by an employer was probably unintentional. However it will very quickly kill that market.
An example of how not to do it – we live in hope that the new government will realise the damage that is being caused and reverse the Finance Act changes.
Hi Paul,
ReplyDeleteI'd agree that this glaring anomaly is very poor planning by the Government. But I fear that if we as an industry lobby too hard on this topic, the natural response for any incoming Finance Minister would be to rectify the anomaly by simply rendering Employer Contributions to Occupational Pension Schemes a BIK also. In one neat move - remove the anomaly AND generate more revenue for the Exchequer. (Unless such a move caused a steep reduction in Employer Contributions and therefore actually decreased revenue, which is a very real risk.)
Of course we know that this would simply be adding insult to injury and would be a further unwelcome move. My point is just that we need to be careful what we lobby for.
Regards, Liam
I disagree completely Liam - an industry that deliberately ignores unfairness is not an industry that deserves much respect. The PRSA issue should be rectified because not to do so is unfair on ordinary employees. It is then up to us as an industry to put together an effective and coherent lobby (something we have hitherto failed miseraby to do) so as to ensure that the overall pension environment is protected.
ReplyDeleteNote - some typos in the image above - also the "before" situation is technically incorrect as the PRSA holder was subject to income levy on their employer contributions before this budget.
Extract from Fine Gael’s manifesto:
ReplyDelete'Fair Tax Treatment of Personal Retirement Savings Accounts (PRSAs):
We will put the tax treatment of employer contributions to Personal Retirement Savings Accounts (PRSAs) on an equal footing with
employer contributions to occupational pension schemes.'
This would indicate their intentions are sound-the question is whether they will actually getting around to actually placing the PRSA on an equal footing.
Paul