Companies exploiting pensions loophole introduced in Finance Act 2022

Brendan Burgess

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Revenue raises concerns over rule change allowing people to sink up to €2m tax free into pension pots

‘Massive loophole’ emerged after the removal of a benefit-in-kind charge on employer pension contributions
www.irishtimes.com

The Revenue Commissioners has written to the Department of Finance raising concerns over what the Opposition has dubbed a “massive loophole” allowing people to sink up to €2 million tax free into their pension pots.

The taxation change, which was introduced in the Finance Act 2022 by then minister for finance Paschal Donohoe, removed a benefit-in-kind charge on employer contributions to a pension pot that had previously been in place.

I don't understand this. I thought an employer could contribute a very large amount to a pension fund and that the maximum was determined by funding limits?

Was there a different treatment of occupational pension funds from PRSAs?

Brendan
 
Brendan, there are limits to how much contributions can be invested into an Occupational Pension Scheme- based on salary and service.
However the rules for PRSAs are different, benefits are not related to salary and service. Previously there was a limit on contributions - a percentage of salary. Any Employer contribution was deemed a BIK and added to the Employee contribution. The combined contribution was limited based on age, but with a max of 40% of salary. My understanding is that following the FA 2022 the BIK rule was removed and thus the contribution limit was removed. So now an unlimited amount can be contributed to a PRSA (but the €2m fund cap still applies).
So currently PRSAs have an advantage over Occupational Pension Schemes. Not sure why this change was made , other than to address than complication of the BIK issue. The result may have been an "unintended consequence ".
 
Revenue should go after the people who are making disproportionately large contributions for people with contrived employments.

e.g. company owner on €300k a year getting the company to put €2m in, fine. Company owner’s spouse and children also getting €2m provision each, not fine.
 
PRSAs had worse treatment than occupational pensions, sue to BIK. Fixing that anomaly brought in a new anomaly for to the Frankenstein nature of the half personal half occupational PRSA.
 
In January product providers were urging caution on giving advice about the change in legislation.

In March, the Revenue update to Pensions Manual (Chapter 24.3) stated that “There is no limit on employer contributions to an employee’s PRSA. However, theoverall standard fund threshold for an individual of €2m applies.”

Tax advisor doing what they're paid to do.

DoF/Revenue don't get it right from outset all the time. They may need to tweak it, like they did with forcing the withdrawals from ARFs when there were none when initially introduced.


Gerard

www.prsa.ie
 
The Revenue were well aware of this months before it was introduced in the Budget. It didn't catch them by surprise.

The story is a nothing burger. Company can pay €2m into a PRSA in one go and claim it as a business expense. Or it can pay €2m into a Master Trust and claim it as a business expense over up to 5 years. Either way, the same amount of money is being written off as a business expense.

The BIK issue is because of an anomaly in the treatment of contributions to PRSAs. With one person company pensions now gone, PRSAs are much more popular as the replacement. They aren't going to row back on this.

This really isn't a loophole. There is nothing fancy or hidden that only the top tax advisors discovered through scrutinising the legislation. It was widely announced and everyone knows about it.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
I've always thought it unfair, that there is an annual cap on how much an individual can put into their pension, but no annual cap on how much an employer can put into a pension.

In effect its a tax dodge for the super wealthy.
 
AJAM said:
I've always thought it unfair, that there is an annual cap on how much an individual can put into their pension, but no annual cap on how much an employer can put into a pension.

In effect its a tax dodge for the super wealthy.
Click to expand...
It's a tax dodge for company directors. Those who can't incorporate are limited to a percentage of salary up to €115,000. And to add insult to injury, if the €115,000 cap applies to you as a sole trader, you also pay an additional 3% in USC!
 
Plus, while it’s useful for company directors, it’s also highly useful for employees that the employer contribution no longer eats up the age-related limits and allows higher contributions in total. Definitely not a loophole that’s only useful for directors and entrepeneurs
 
As long as there is defined benefit pensions, where the employer takes on all the risk, they cannot limit the amount that an employer puts into a pension for their employees (subject to the maximum threshold). And as the Revenue and Dept of Finance have DB schemes (unfunded of course), they cannot limit private sector contributions while enjoying the unlimited funding nature of their own pensions.
 
There was a time when an employer could buy a Hancock Annuity for an employee. From memory (it's a long time ago), they were used where employer had made no pension provision for a key employee but, on leaving service, the company could buy a pension with a lum-sum for the employee.

There's still this reference in the pensions manual to it.

A Hancock annuity means an annuity purchased by the employer at the time of the employee’s retirement, the capital cost of which is normally allowed for tax relief in the year of purchase. (The type of transaction is considered in Hancock v General Reversionary TrustLimited 7 T.C.)
 
Wow Ger, that's some memory!! The Hancock Annuity was always only something I read about in text books when studying for exams. I never actually did one!
 
How would you prove that?
 
If my DB pension is unfunded, why is a grand a month being taken out of my pay...

All messing aside though, what kind of value would the pension pot of a Sec Gen / Deputy Sec be at retirement? They get the 200k lump sum and then a pension of half of salary (I'm assuming full service)?
 
Bronte said:
How would you prove that?
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Prove what?

If it fails a smell test, Revenue will raise a tax assessment and on appeal it'll be up to the taxpayer(s) to prove that there was / is a legitimate employment. So the question you need to ask is how will they prove that...
 
torblednam said:
Prove what?

If it fails a smell test, Revenue will raise a tax assessment and on appeal it'll be up to the taxpayer(s) to prove that there was / is a legitimate employment. So the question you need to ask is how will they prove that...
Click to expand...
I assume the wife will say she's the secretary/tax admin/payroll person, in some cases that would be actually the case, though maybe she's a lady who lunches and shops every day in BT. Must be more difficult to prove children are working there though. If they are not. Not everybody is Tony O'Reilly's son.
 
torblednam said:
what kind of value would the pension pot of a Sec Gen / Deputy Sec be at retirement? They get the 200k lump sum and then a pension of half of salary (I'm assuming full service)?
Click to expand...

If you start with an available fund of €2m on this annuity quote facility and adjust for spouses/escalation rate, I'd say you won't be far off.
 
A Secretary General (level 1) is on €258,825. If they have 40 years service, that's a pension of €129,412. Retiring at 65, that's a capitalisation factor of 26, which has their pension valued at €3,364,725. Add in their lump sum and that's €3,3654,725.

In reality, it will be valued at less than that as any service pre 2014 will be valued using a factor of 20 instead of 26. And in the future, career average earnings will be used, so the pension will be lower. But a Sec Gen retiring today will most likely be looking at a considerable tax bill for going over the pension threshold. Of course, public servants that do go over the threshold can avail of the 20 year, interest free loan to pay their tax, a loan that dies with them if they don't get to repay it in full.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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