PRSAs and USCs – How not to do it!

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.  

Paul Gilmer

Three Strikes - Are We Out. Follow up Interview

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Budget 2010 – Good for some?

Much will be written over the next few days on the details of the budget. However it is sometimes useful to stand back and take a wider view of matters. What will the long lasting impact of this budget be?

The first impression that comes to mind for me is – an opportunity lost.

Everyone accepts that we needed to alter our finances to put things on a more stable footing.

However the opportunity to make some long-lasting changes appears to have been missed. The measures on pensions, property and employment smack of short term raids and incentives rather than a longer term realignment of priorities, broadening of the tax base and control of expenditures.

The second thought that strikes me is – can you ever trust the government again? Those that invested in a vast array of tax incentives are seeing those tax breaks ended prematurely with the promised relief curtailed. What impact will that have on future tax breaks e.g. the new improved BES scheme?

A final thought relates to the public sector – particularly the golden generation that joined the service before 1995. These individuals will continue to enjoy pension benefits far beyond those enjoyed in the private sector. The capitalised value of these mushroomed from €75bn in 2007 to €129bn in 2009 – an increase of approximately €145,000 per person. The 4% reduction now proposed is only a drop in the ocean compared to liabilities that grew by €54bn in the last two years alone. If we genuinely are all returning to 2007 living standards surely we should have “gained” another €50bn?

The lasting impression therefore is one of sadness – Animal Farm is alive and well in Ireland.