While there are differences in the treatment of occupational pension schemes and Personal Retirement Savings Accounts (PRSAs), these differences stem from the nature of the products.
I am advised by Revenue that “master trusts” are not currently defined in either pensions or tax legislation. For tax purposes, a master trust is treated as an occupational pension scheme which caters for more than one employer, and which is subject to the provisions of Chapter 1 of Part 30, Taxes Consolidation Act 1997 (TCA). An occupational pension scheme is linked to an employment, and one of the conditions for Revenue approval of an occupational pension scheme is that an employer must contribute to the scheme (section 772(2)(d) TCA).
Tax relief is granted for employer contributions to a pension under section 774(6) TCA. There is no specific limit on allowable employer contributions to an occupational scheme. Instead, the maximum permitted funding is related to the amount required to provide pension benefits for members of the scheme, related to their salary and service and subject to the limits on pension benefits in section 772(3) TCA.
A PRSA, by contrast, is a personal pension product, based on a contract between an individual and the PRSA provider. An employer has no obligation to contribute to an employee’s PRSA, and there is no link between the PRSA and a specific employment. A PRSA may in fact be taken out by a self-employed person rather than an employee. However, tax relief is available for employer contributions to an employee’s PRSA, subject to certain limits. Any amount of an employer contribution in excess of the “employer limit” is not deductible for tax purposes, and is treated as a taxable benefit in kind for the employee. The employer limit is defined in section 787E(1) TCA as 100% of the relevant employee’s emoluments in a tax year or, where an employee’s salary is lower in the current year by reason of unpaid leave, in the previous year. The employer limit imposes a cap on the amount of PRSA contributions that qualify for tax relief for employees and employers, just as the maximum funding rules impose similar restrictions for occupational pension schemes.
Employers may make “non-ordinary” or special contributions to an occupational pension to cover scheme liabilities. However, the maximum contribution an employer can make in a tax year to a PRSA for any individual employee is capped at 100% of that employee’s salary.
All employee or individual contributions to all pension products, including occupational pension schemes and PRSAs, are subject to the age-related percentage limits, ranging from 15% to 40% of emoluments, and to the overall income limit, currently €115,000.
As to retirement benefits, the earliest age at which an individual can take retirement benefits is usually age 60 years. However, the terms of an occupational pension scheme or a PRSA may provide that, in certain circumstances, an individual can retire and take benefits from age 50 years.
An occupational scheme may pay a pension to members or may arrange for a member’s entitlements to be paid as a pension by other means, such as via an annuity, or in some circumstances transferred to an ARF. PRSA holders may take their benefits directly from the PRSA, transfer them to an ARF, or take out an annuity.
There is an overall lifetime allowance of €200,000 on a tax-free lump sum, which applies to lump sums from all pension products. In the event the €200,000 lifetime allowance is exceeded, section 790AA(3) TCA applies excess lump sum tax at 20% on amounts between €200,000 and €500,000, and at 40% on amounts over €500,000. Subject to those tax provisions, occupational pension schemes can provide a lump sum of up to 1.5 times final salary (section 772(3)(f) TCA); where the member can avail of the ARF option, they can take a lump sum up to 25% of their entitlements; while a PRSA holder can get a lump sum of up to 25% of their savings, subject to the €200,000 limit.
Individual occupational pension schemes and PRSA contracts may provide for different terms and conditions about what happens on the death of a scheme member or PRSA holder. Many occupational pension schemes and PRSA contracts provide for payments to spouses, civil partners or dependants in the event of the death either before or after retirement of a scheme member or PRSA holder respectively.
I have no current plans to align the rules governing PRSAs and occupational pension schemes. As outlined above, both products serve distinct purposes within the pension landscape. However, these provisions, along with other pension taxation measures, are kept under review.
