Personal Retirement Savings Accounts (PRSAs) are low cost, easy-to-access, private pension savings vehicles designed to allow individuals save for retirement flexibly and transfer their pension funds between jobs. They are available to anyone regardless of employment status. The relevant legislation setting out the treatment of PRSAs is contained in Chapter 2A of Part 30 of the Taxes Consolidation Act (TCA) 1997. Except in limited circumstances, benefits cannot be drawn down until the individual is at least 60 years of age.
An “imputed distribution” regime applies to Approved Retirement Funds (ARFs) and “vested” Personal Retirement Savings Accounts (PRSAs). This regime was extended to vested PRSAs by Budget and Finance Act 2012. When it was originally introduced by Finance Act 2006, it only applied to ARFs. The reason for the introduction of this regime was because many ARF and PRSA owners were not using these funds as intended i.e. to provide an income stream in retirement, but instead as a form of tax-efficient estate planning.
Under the current rules, ARFs and vested PRSAs are subject to a taxable minimum drawdown requirement which varies between 4 per cent and 6 per cent of the value of the assets in the ARF or PRSA. The percentage depends on the individual’s age and the overall size of the fund. PRSA funds can usually only be accessed from the age of 60, except in certain circumstances. If the person is under 70 and their fund is below €2 million in value, then the required annual distribution is 4 per cent of the assets in the fund. If the person is aged over 70 with a fund below €2 million, the distribution is 5 per cent of the assets in the fund. If the fund is over €2 million in value, a 6 per cent distribution applies, irrespective of the age of the individual.
A vested PRSA is a PRSA from which assets are available to the PRSA owner or any other person – in general this is in the form of benefits taken from age 60. So long as a PRSA remains unvested, it can continue to build up tax-free and is not subject to the imputed distribution requirement. In addition, by not vesting the PRSA, the rate of imputed distribution on any ARF(s) and/or other vested PRSA(s) which the individual has, can be kept to a minimum.
On actual drawdown a pension is subject to tax at the individual’s marginal tax rate. The policy rationale underpinning this is that the State provides generous tax relief on both pension contributions and fund growth to ensure that people have sufficient savings to fund their regular costs and expenses during their retirement. It is a form of tax deferral and the income tax and USC paid upon drawdown of a pension are generally lower than the income tax and USC the individual would have paid during their working life.
Finance Act 2016 made a number of amendments to the Taxes Consolidation Act 1997 in order to prevent certain tax avoidance opportunities in relation to PRSAs. A situation was arising where the funds in non-vested PRSAs, on the death of the owner, were being transferred to his or her estate tax-free and, under Capital Acquisitions Tax (CAT) rules, would pass to any surviving spouse tax-free. This was not the intention of PRSA provision – the intention is that when individuals drawdown pension benefits they will pay income tax and the Universal Social Charge (USC).
The changes made in Finance Act 2016 only affects people who, by their 75th birthday, have not taken benefits from their PRSA. Until their 75th birthday they are under no obligation to drawdown any benefits. The amendments ensure that, where benefits are not taken by the PRSA owner on or before his or her 75th birthday, they will be treated as being taken on that date and, therefore, the PRSA will be treated as “vesting” on that date. From the owner’s 75th birthday, the PRSA assets are subject to the imputed distribution regime that applies to vested PRSAs (and Approved Retirement Funds (ARFs)). They are also treated as a benefit crystallisation event occurring on that date for the purposes of the Standard Fund Threshold regime (which effectively places a lifetime benefit limit of €2 million on an individual’s tax relieved pension fund). Finally, they are treated on the death of the PRSA owner under the provisions relating to ARFs and not by way of a transfer of the PRSA assets to the deceased owner’s estate.
At this time I have no plans to make changes to this policy.
