PRSAs (Pensions)
PENSIONS
From 2003, employers in Ireland will be obliged to provide access to at least
one standard PRSA for all their employees.
EMPLOYERS REQUIREMENTS
As a result of the Pensions Act (Amendment) 2002, you will be required to set
up at least one Standard PRSA (Personal Retirement Savings Account) arrangement
for your employees if:
· You do not currently operate a pension scheme for your employees
· You operate a pension scheme but you restrict who can join the scheme
or you have imposed a waiting period to join the scheme for more than
6 months
· You operate a pension scheme for your employees, but the scheme does
not offer any facility for your employees to make additional voluntary
contributions (AVCs) to top up their retirement benefits.
Employees who fall into either of the above three categories are referred to
as excluded employees.
When you are required to set up at least one Standard PRSA arrangement, you
will also be required by law to:
· Notify your excluded employees of their right to contribute to a PRSA
by payroll deduction
· For employees who wish to contribute, deduct employee contributions
from wages and remit to their PRSA.
· Allow institutions and intermediaries who promote PRSAs worksite access
to your excluded employees for the purpose of taking out a Standard PRSA.
· Allow excluded employees reasonable paid leave to enable them to make
arrangements to take out a Standard PRSA.
· Remit to the institution operating PRSA employees’ contributions deducted
within 21 days of the end of the month in which the deduction is made.
You can’t make any deduction from these contributions; you must pay them
over in full to the PRSAs.
· Notify your employees each month of the PRSAs contributions deducted
from their wages and any contributions you make to their PRSAs during
the previous month. This can be done through the employees’ payroll
slips.
However, you are not legally required to contribute to the Standard PRSA
arrangement for your employees, but you can do so, if you wish.
· You may be required to set up at least one Standard PRSA arrangement
for some of your employees, even if you are already operating a pension.
· You will not be legally required to contribute to your employees PRSAs
but you can do so if you wish.
· Where you do set up a Standard PRSA arrangement, you will be required to
allow certain employees to pay PRSA contributions by deduction from wages
and comply with other requirements including allowing institutions and
intermediaries promoting Standard PRSAs access to your employees at work
for the purpose of taking out a Standard PRSA.
PRSAs and THESAURUS PAYROLL
1. Enter the amount of the PRSA (or other pension) deduction in the Add/Amend
Employees screen using the deduction heading reserved for pensions.
2. Enter any employers contribution in the section reserved for employers
contribution.
3. If the amounts being entered are percentage amounts rather than fixed amounts,
specify this by ticking the percentage check box.
4. If this is a PRSA scheme you should have received a scheme reference number
from the scheme provider. This number is up to 10 characters long. Enter this
number where required on the same screen. (If this number has already been
entered in respect of another employee, it will then be available for you to
click in the drop down menu).
5. The payroll will now look after the deductions and tax issues.
6. After processing each month, go into the reports section and select the pension
report. You need to establish how much to remit to the relevant institution within
the 21 day time limit provided in law. Simply select the relevant scheme reference
number for all employees and choose whatever weeks fell into the particular month.
If there are monthly paid employees, go into monthly payroll and prepare a report
for these also. The report printouts can then serve as remittance advices.
7. As well as calculating the monthly remittances the report facility can also be
used to prepare yearly (or other periodic) summaries for individual employees as
they will be interested to view the progress of their deductions (and your
contributions if applicable). The payslip will also detail the deductions made.
TAXATION ISSUES (For guidance only - Always seek professional advice)
The following is a summary of the main rules:
Tax relief on contributions:
1. Contributions paid into a PRSA will benefit from tax relief at an individual’s
marginal income tax rate. Employee contributions to PRSA are subject to Employee PRSI and USC. Employee contributions are also subject to Employer PRSI contributions.
Details of this tax relief:
2. As with most tax reliefs, there is a limit on the relief. The maximum annual tax
deductible contributions are based on a percentage of the individual’s earnings.
The allowable percentages that rise with age are as follows:
Age % Earnings
Under 30 15%
30 - 39 20%
40 - 49 25%
50 + 30%
The 30% limit will apply, irrespective of age, to certain categories of person who
typically retire earlier than usual, such as athletes, jockeys and so on.
An earnings cap of €115,000 will apply also to PRSAs as is the case with RACs for
the purposes of tax relief. Thus, for example, where a person is aged over 40, the
maximum tax relieved contribution is €115,000 x 30% = €34,500 per year.
Contributions paid in any year in excess of the maximum tax deductible contribution
may be carried forward and claimed in future years subject to the annual limit for
those years. Similarly, contributions paid while out of the workforce may be carried
forward and claimed against future earnings on return to paid employment subject to
the annual limits.
The tax relief is non-transferable between spouses in line with existing rules for
RAC and occupational pension scheme contributions.
3. Contributions paid after the end of the tax year and before the return filing
date for that year may be claimed for that tax year.
4. The limits apply to the total contributions made by the employee and employer
where the employee is not a member of an occupational pension scheme. Thus, where
an employee aged 29 contributes 5% of his or her earnings to a PRSA, the employer
may contribute a further 10% making a total of 15% in aggregate.
5. Employer contributions to a PRSA on behalf of an employee up to the tax relieved
limits will not be subject to benefit-in-kind tax for the employee.
6. Employer PRSA contributions on behalf of employees will be fully deductible for
tax purposes.
7. Relief for contributions paid is allowed against trading, professional income or
employment income only as is the case with other pension products. These pensions
are ‘second pillar’ pensions and therefore are designed to provide a replacement
for earned income that ceases on retirement.
Contributions to both an RAC and a PRSA:
8. Contributions to an RAC and a PRSA will be aggregated when calculating the
maximum tax relief.
PRSAs and AVCs
9. Employees in an occupational pension scheme may use a PRSA as an ‘AVC’ vehicle,
in other words, additional voluntary contributions may be made to a PRSA. The 15%
limit that currently applies to the total of employee contributions to an occupational
pension scheme and an AVC scheme will similarly apply to the aggregate of
contributions to the occupational scheme and the ‘PRSA-AVC’. Such employees also
benefit from the ‘tax-free’ employer contribution to the occupational pension scheme
which is only limited by funding requirements.
Refunds of contribution from occupational pension schemes:
10. Refunds of contributions (with interest where applicable) paid out from
occupational schemes may be transferred to a PRSA without a tax charge to encourage
pension funding.
Tax regime in funding period:
11. The existing tax regime for pension business will apply to PRSA business,
i.e. there will be tax free growth during the funding period.
Position on retirement:
12. Benefits can usually be provided at age 60, subject to the same ‘early’
retirement rules that exist at present for the self-employed and employees
respectively.
13. There is no limit on the pension or annuity that is payable from a PRSA on
retirement.
14. The options available on retirement are similar to the options introduced for
RAC holders and certain other persons in Finance Act 1999. Thus a PRSA holder on
retirement may take ¼ of the fund as a tax free lump sum and may:
- invest the balance in an Approved Retirement Fund (ARF) subject to a minimum
investment in an Approved Minimum Retirement Fund (AMRF)
- withdraw the balance in cash subject to a minimum investment in an AMRF
- invest the balance in an annuity
15. The ability to invest in an ARF is subject to the individual having a guaranteed
pension or annuity from another source of at least €12,700 a year for life. If this
is not the case, €63,500, or the balance in the PRSA fund if less, must be transferred
to an AMRF or used to purchase an annuity payable immediately. The capital in the AMRF
cannot be withdrawn until the individual reaches the age of 75.
16. Similarly, the ability to withdraw the balance in the PRSA fund in cash is subject
to the individual having a guaranteed pension or annuity from another source of at least
€12,700 a year for life. If this is not the case, €63,500, or the balance in the PRSA
fund if less, must be transferred to an AMRF or used to purchase an annuity payable
immediately. The capital in the AMRF cannot be withdrawn until the individual reaches
the age of 75.
17. Where the PRSA is used as an ‘AVC’ vehicle (see paragraph 9 above), the lump sum
would be restricted in line with the occupational pension scheme rules.
18. There is no tax charge where the balance is transferred to an ARF. Instead any
withdrawals from the ARF will be subject to PAYE at the marginal rate of tax for the
year in which the withdrawal is made.
19. PAYE will apply to all annuities and other withdrawals on retirement other than
(a) a tax free lump sum, and,
(b) transfer to an ARF/AMRF.
Death prior to retirement:
20. Where the contributor dies pre-retirement, the PRSA fund may pass in its entirety
to the estate of the deceased person free of income tax. Inheritance tax will apply as
per the usual rules.
Death post retirement:
21. Where the contributor dies after benefits have commenced, the taxation rules for
the PRSA fund will be similar to the taxation rules for ARFs on death.
