Starting a PRSA with zero earned income

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Savvy Sally

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Hi,

45 F here. Not working currently. Upskilling and exploring the possibility of setting up my own business. I am in the fortunate position that I have some additional cash that I can invest for the longer term (15 to 20 years at least). I considered setting up a PRSA and investing a lump sum. I appreciate that I will not get tax relief on the way in, however it will grow tax-free within a PRSA and will go some way towards plugging the pension contribution gaps given that I am not working presently. When I suggested this approach to my current financial advisor they were quite dismissive of the idea and did not think it would be possible.

Has anyone in this community invested in a PRSA when they did not have earned income? All thoughts and feedback on this topic are welcome.

Thanks a lot!
 
You're allowed to pay into a PRSA when you've no relevant earnings, but you'd need to be cognisant of the tax that may be payable on the way out
 
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Your plan is a good one.
You will get a longer investment period with tax free gains.
Even if you never get tax relief on contributions it is a good deal.
You will get 25% tax free lumpsum at retirement.
Even if you are paying income tax @ 40% + USC after retirement it is a good deal compared to taking out an investment bond now and eventually paying exit tax.

If you eventually pay income tax at 20% in retirement it is a great deal.
 
Is it necessarily always crazy? 20% in retirement is a maximum effective rate of 15% when the 25% tax free lump sum is accounted for and before factoring in tax relief/credits which will reduce the effective tax rate further. And mightn't there be a situation where the gross/tax free roll up on growth makes it worth it? I guess it could be modelled mathematically. And there can be ways to manage the amount taken on a regular basis so as to minimise the taxes payable.

Edit: FWIW...

 
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Thanks you all for your thoughts and pointing to the Reddit post. This has given me lots of food for thought.
 
Brendan Burgess said:
I think you are better off waiting until your business succeeds and you get tax relief at 40%

Brendan
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If you forward fund your pension is it possible to put off the date you start claiming tax on contributions for a few years until Savvy Sally can take a higher income if you build up cash and is using a company for new business,
 
ClubMan said:
Is it necessarily always crazy?
Click to expand...
The reddit post has ignored that AMCs are much higher on a pension than an ETF. That will reduce the pension value a lot.

And it hasn't shown the pension value post-tax. Income tax on withdrawals is charged on the full amount, not just the growth.

ClubMan said:
I guess it could be modelled mathematically
Click to expand...
A call to the Duke?
 
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You need to be in the fortunate position of never needing the money you invest so that you can potentially defer up to age 75 and let the compounding swamp the original capital to such an extent that you don’t pay tax on it. Then you’re only paying tax on the “house” money and,typically , that can be at a lower rate than exit tax, currently 38% or CGT 33%.

So, it can work for some people but I would caution against suggesting that this is a good idea generally.

There are also some additional nuances which I set out in this case study https://open.substack.com/pub/marcw...into-a-pension-if-you?r=6xvrb4&utm_medium=ios

The PRSA legislation specifically supports this kind of planning but with a new tax structure potentially just months away you should probably wait and see what that brings to the table.

If we get a U.K. style ISA you would need to think about which option works best for you.
 
As I know that my personal retirement income will be low and that we will probably decide to retire before 66, I decided to put a lump sum into a PRSA (in my early 50s). If I continue my current self employed activity, I should be able to claim back 20 per cent at least on most of it. My thought was that I would have access to a tax free lump sum and before the state pension, only a limited amount of my drawdown (if any) would be subject to 20 per cent income tax and as in the above article, I would have the additional PRSI contributions if needed. It could also means that we would be able to manage better our tax as a couple. It wasn't a huge life changing lump sum so it made sense to me and we knew that it was very unlikely that we would need access to it.
 
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Marc said:
You need to be in the fortunate position of never needing the money you invest so that you can potentially defer up to age 75 and let the compounding swamp the original capital to such an extent that you don’t pay tax on it. Then you’re only paying tax on the “house” money and,typically , that can be at a lower rate than exit tax, currently 38% or CGT 33%.

So, it can work for some people but I would caution against suggesting that this is a good idea generally.

There are also some additional nuances which I set out in this case study https://open.substack.com/pub/marcw...into-a-pension-if-you?r=6xvrb4&utm_medium=ios

The PRSA legislation specifically supports this kind of planning but with a new tax structure potentially just months away you should probably wait and see what that brings to the table.

If we get a U.K. style ISA you would need to think about which option works best for you.
Click to expand...

Really interesting article Marc, was discussing something similar with a colleague this week around the option of changing early retirement of say 57/58 to 53/54 by taking a voluntary exit. It would provide say 200k, but you would ‘lose’ 100k employer pension contributions over the missing 4 years along with 100k of your own contributions, along with losing the tax relief. On the upside you are retired!
The discussion was around whether you could control the timing well enough to move you occupational pension to a prsa to protect its lump sum, then add some, all or most of the 200k exit package to the new prsa. Then how to split and the prsa and when to vest first one and take the tax free lump sum and what to do with it, would you take enough income to allow you to put relieved funds back into one of the other PRSAs etc.

The conclusion was it is all pretty tricky timing and the wait and see approach on the new investment accounts which would make quite a few things much simpler was best as you say.
 
Thanks @Marc for your excellent case study.

The €650 minimum charge does not apply to ARFs. PRSI is charged at the current percentage on drawdowns. This is the case as PRSI is deducted from ARFs at source under the PAYE system.

This will increase to 4.7% from October 2028.
 
One advantage of setting up a relatively modest PRSA which is not linked to an occupational scheme, is that benefits can be taken at any time from age 50 onwards.
If a person wants to retire early and has not yet reached 2080 PRSI contributions the ability to set up an early ARF is an advantage.
Yearly ARF drawdowns of 5k are sufficient to achieve 52 reckonable class S PRSI contributions.
From 2028 onwards the yearly cost of these is €235.
This is far less than paying voluntary PRSI.
This saving can offset some of the loss of tax relief on the PRSA contributions made without having relevant earned income.
This could be a useful strategy for post 2013 public sector employees.
They could have a small unlinked PRSA in tandem with AVCs or an AVC PRSA.
ARF drawdowns of less than 5k could be sufficient if the person had other unearned income after retirement. This can include bank deposit interest, share dividends and rental income.
 
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Robovac rider said:
This could be a useful strategy for post 2013 public sector employees.
They could have a small unlinked PRSA in tandem with AVCs or an AVC PRSA.
Click to expand...

But am I correct that they would need self-employed or private sector income to set up a separate PRSA? Most probably won't have much scope or desire for this
 
No, they could set up a PRSA from their existing savings.
Basically as in the thread title, they would be setting up a PRSA without using earned income.
But they would not be entitled to tax relief from their public sector earnings for contributions to this separate PRSA.
This could be a niche plan for certain people wishing to take early retirement.
If they had no other retirement earnings it is likely that their ARF drawdowns before their Public sector pension kicks in would be income tax and USC exempt.
So they would get no tax relief on contributions in, but might benefit from no tax on their ARF drawdowns.
They would also get the benefit of tax free gains in their PRSA.
 
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@Robovac rider

Ok, there can be edge cases where it might make sense to contribute after-tax money to a PRSA where you can be confident that your subsequent drawdowns will be exempt from income tax and USC and the payment of PRSI stamps on drawdowns is advantageous.

But you initially said that OP’s plan makes sense even if they are end up paying income tax @40% + USC on drawdowns.

Sorry but that’s crazy talk.
 
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