Tax on ETFs in a PRSA

[TheJackal]

Hi, I'm wondering does the (Irish domiciled) ETF Exit tax of 41% on gains and income count if they are bought in a PRSA?

i.e. I set up a self-directed PRSA and buy ETFs. I no longer pay 41% exit tax as these ETFs are now part of my PRSA, which has different rules.

Or is that too good to be true?

For a PRSA, your assets grow free of both capital gains tax and income tax. You then pay Income tax, PAYE and PRSI on withdrawls less 25% tax free lump sum.

If your retirement income will not pass the threshold to pay 40% income tax, then buying ETFs via PRSA would seem more efficient.

You would also avoid the 8 year deeemed disposal.

 

[Gordon Gekko]

Correct. You don’t pay the 41% tax.

 

[daswerr]

@TheJackal I'm in a similar situation, planning retirement in 20 years time. If you don't mind me asking, did you go for that PRSA strategy? I'm wondering if this is really a good option considering that investing post-tax money into pension means the principal will be taxed twice.

 

[Dave Vanian]

@TheJackal I'm in a similar situation, planning retirement in 20 years time. If you don't mind me asking, did you go for that PRSA strategy? I'm wondering if this is really a good option considering that investing post-tax money into pension means the principal will be taxed twice.

You can get tax relief in full on contributions to a pension at your highest rate. When you draw it down at retirement, you'll get part of it back as a tax-free lump sum. The rest will only be taxed at your rate at the time. You might not be paying higher-rate tax in retirement.

 

[daswerr]

You can get tax relief in full on contributions to a pension at your highest rate. When you draw it down at retirement, you'll get part of it back as a tax-free lump sum. The rest will only be taxed at your rate at the time. You might not be paying higher-rate tax in retirement.

Like the OP, I'm already maxing out my pension contributions. The question now is where to invest beyond Revenue limits for my age. I think the OP's idea of putting money into pension without getting any tax relief is one worth exploring, assuming the goal is long term diversified passive investing. Considering these options for example:
1. ETFs (41% tax + deemed disposal)
Pros: diversification, passive, low cost
Cons: heavily taxed, compound growth partially interrupted every 8 years

2. Investment trusts (33% CGT tax)
Pros: tax regime, moderately diversified, moderately passive
Cons: at mercy of the fund's manager

3. Self directed PRSA (without tax relief)
Pros: compound growth, simplicity, relatively easy to track average market returns over long term by investing in ETFs
Cons: any money put in will be income taxed again on withdrawal

I'm not sure how to do the math and translate these pros and cons into actual numbers for comparison. I believe the main factor here will be how much income we withdraw in retirement, i.e. If on 20% bracket chances of PRSA double taxation still be worth it are higher than if on 40% bracket.

 

[Dave Vanian]

I believe the main factor here will be how much income we withdraw in retirement, i.e. If on 20% bracket chances of PRSA double taxation still be worth it are higher than if on 40% bracket.

Also bear in mind that the first €200,000 lump sum from all pensions will be tax-free. From €200,000 to €500,000 would be 20% with no PRSI, USC etc.

If memory serves, @Marc did an analysis of investing in a PRSA without tax relief on contributions before. That would probably be worth rooting out.

 

[Marc]

You have to be very careful but yes in principle this could work for some people.

We have a client with no pensionable income and no personal or occupational pension benefits. Substantial capital and high rates of income taxes and capital gains tax annually.

We put €700k into a PRSA aged 50 and it is now worth €1.3m no tax so far on either income or gains.

At 75 goal is to hit €2m and take out 25% with some tax at 20%

Balance to an ARF taking min inc

The reality is that the income from the ARF will be taxed at the same rate as any dividend income today except that the PRSI will drop away.

So it works well for some people for tax deferral even if you don’t get up front tax relief.

Personal Savings Accounts

This guide sets out how a Personal Retirement Savings account (PRSA) combined with an Approved Retirement Fund (ARF) can be used by any Irish Investor between the ages of 18 and 75 to invest personal savings in a tax efficient way

joom.ag

 

[TheJackal]

So in my case I’m 37 now so the plan currently is Retire at 55 and use

55-65
-Self-Directed PRSA
I believe you can drawdown from a PRSA from 50 if you have retired from employment.
25% of total will be tax free.
Balance potentially at 0% Income tax bracket if I keep it below c.20K p.a.
Looking at Davy for this, based on their fees.

-Investment Savings
Already set up. Draw these down at 55, subject to Exit tax (41% currently, may have fallen at that stage in line with CGT, but who knows).

-Inheritance
Also likely to have some inheritance by then.

-Spouse
The missus loves her job and likely will work to 60+.

65+
-Public Service pension
I could draw this down at 55 but the actuarial reduction is very expensive so not worth it.
I'd have c. 32 years service (if I go at 55) so entitled to a decent pension if I wait to take it when 65.

Reckon 35-40K pension depending on pay rises over time, putting me in the higher Income tax bracket.
Another thing, the State Pension Contributory at 66 now and due to be 68 when I retire, I won't actually get that part of my pension until 68.

-AVC
Already set up. This is topping up the tax free lump sum side of my pension, so I'll max the 1.5 times final salary tax free allowed.
Have the option of changing this AVC to a PRSA AVC if I want to do it myself. I'd mostly be looking at ETFs.

Other considerations
-BTL
Considered a BTL mortgage but the tax just isn't worth it. By the time I'd pay the monthly mortgage and 51% tax I'd be lucky to break even until the mortgage is repaid.

-PPR mortgage
I'll have that repaid this year so savings will go into the Self-Directed PRSA