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Move Your Company Pension to PRSAs To Aid Your Retirement? Blog199

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Move Your Company Pension to PRSAs To Aid Your Retirement? Blog199

28th March 2022

Paddy Delaney

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If you are approaching, or indeed planning for retirement (exit from full-time employment) you may benefit from knowing about a strategy which can be both financially and emotionally beneficial; move from Company Pension to PRSAs. While certainly not a strategy that will be beneficial to everyone, in the right scenario, it can be very much so. This is very different to the more common strategy of moving your Company Pension to a Personal Retirement Bond (PRB/BOB) when you leave a company – which doesn’t change anything materially from a strategy/planning perspective.

Introduction To Drawing Your Company Pension

The decision about ‘When’ to start drawing your Company Pension is a rather big one. There are many variable and considerations, such as:

  • Your other resources and liquid assets
  • Longevity risks (living too long and running out)
  • Dying with too much!
  • State Pensions and other income
  • Emotional aspects of moving from ‘saving’ to ‘spending’
  • The rate of tax you will pay on pension incomes/sources
  • Your need/desire for income

We cover these topics in recent Blog 195 which will hopefully help if you haven’t read it already. If and when you are ready to draw your pension, or indeed once you have a decision made about leaving employment permanently, you need to move onto the next stage….

Is It Possible To Move Your Company Pension to PRSAs?

In a moment I will lay out whether it may be very beneficial to have moved Company Pension to PRSAs, however, we first ought to determine if you are actually able to do so. As we all know, pension rules in Ireland are less than straight-forward. There are experts working in the field of pensions in Ireland for 20+years, and they still learn things on a regular basis!

Whether you have the ability to move from your Company Pension to a PRSA, is determined by pension legislation as it currently stands. This legislation is changing on an on-going basis, and the most recent Finance Act 2021 made further changes to what is and is not permitted in the eyes of Revenue. One aspect, which is most relevant to this topic, was the permission granted to someone who has over 15 years’ service within a Company Pension scheme, to move their pension pot to a PRSA, or multiple PRSAs if they so wished.

As a result, individuals with the following pension types are now permitted to move to a PRSA:

  • Company Pension scheme of any duration
  • Personal Pension
  • Overseas (non-UK)

The Pros & Cons Of Moving from Company Pension to PRSAs

As with anything, there are positives and negatives of moving from company pension to PRSAs. Here are some critical ones to be aware of, in no set order;

Pro: You may get access to a broader/more efficient investment solutions within the PRSA than you had available within the Company Pension.

Con: You may pay more fees within the PRSA than you were paying within the Company Pension

Pro: You can split the company pension value across multiple PRSAs – allowing you draw down the different pots at different points in the future (more on this in a moment)

Con: You may face additional administration and costs in setting-up multiple new schemes than simply leaving your company pension where it was

Pro: Provided you have received no other pension lump sums, when the time comes you should be entitled to take 25% of the pension pot totally tax free (up to €200k tax free and any balance of 25% up to another €300k @20% tax). You then can choose either an Approved Retirement Fund (ARF) or an Annuity to generate your retirement income.

Con: If you do not move from Company Pension to PRSA, and you want to take benefits, you have the choice of either A) 25% tax-free or B) A years-service-based tax free lump sum, which can be higher if you have large service and salary (though you are then obliged to buy an annuity with the balance, which is poor value at present- see Blog114).

Pro: If you die while holding a PRSA, the full value of the pot goes to your estate – though the same is true if you die with a Company Pension which you were not an active employee/member of at the time of death.

A key differentiator on that final point; If you die while still being a member of the Company Pension, the trustees can pay a lump sum of 4-times your salary plus any contributions you personally made – however the balance must be used to either buy an Annuity, or to invest in an ARF, to generate income for your survivor. Bearing in mind either of these generate taxable income, it would be far more preferable to have the money paid as a tax-free sum to your estate right? So you either need to have the money in a PRSA, or you to have left service/scheme membership.

Practical Examples of Moving From Company Pension To PRSAs

In each scenario we assume the following, to allow for clear and meaningful comparison:

  • Your pot is €1m at time of draw-down
  • You have already taken tax free lump sum
  • You have €20k rental income and €20k Other Pension Income (Gross) separate from the pot
  • You pay tax at 25% on all incomes once you start taking pension income
  • You manage your pot via an ARF once you start drawing the income
  • You & your partner need €45k income per year (€3,750p/m) from all sources to live comfortably, subsiding this with liquid cash/assets of c€20k per year on discretionary spending/living/gifting

Let’s look at the scenario where you DO NOT move from Company Pension to PRSAs first, so we have a baseline.

Scenario A; You retire and at age 61 you start to draw the minimum obligated 4% from the €1m pot per year. This generates €40k Gross income. You now have €80k Gross Income. After tax you have an income of €60k, which is €15k more than you need. However, because the ARF requires you to take at least 4% per year, you have no option but to take this level of income. You now have an issue where you have more income than you want!

Might sound like a great problem to have – however, it does cause challenges for people. They will likely have the following challenges:

  • Too much cash sitting on deposit, causing concern
  • Paying more income tax than they need/ought to be paying
  • Have no clarity on what they should or should not be spending/investing/gifting
  • If the pension-holder dies, the partner will step into their shoes, and receive the taxable ARF income themselves
  • When they hit 70/71, they will be obligated to take 5% of the ARF pot as income, again, whether they need it or not!

Scenario B; You retire and in the process you move your company pension to PRSAs, two to be exact, of €500k each! At age 61 you start to draw the minimum obligated 4% from one of these PRSA’s, leaving the other alone. Your 4% income from a €500k PRSA equates to €20k per year. When combined with your rental and other pension incomes, you have €60k Gross Income per year. After the illustrative 25% effective tax rate, you have exactly what you need, €45k income from all sources. Benefits of this scenario:

  • Exactly the regular income you need/want
  • Paying as little tax as you need to be paying for your needs
  • If you wish, you can leave the second PRSA un-touched until 75 before drawing any taxable income from it!
  • If you die, your partner steps into your shoes to receive the regular income from the PRSA that was commenced
  • Importantly, the partner/estate will receive the entirety of the other €500k PRSA as a tax free lump sum

Conclusion

There are critical aspects that we have left-out here in the interests of clarity, that you will want to get right as part of this strategy; investment approaches, fees on schemes, draw-down strategy and thresholds, actual effective rate of tax on income, liquid asset strategy, etc.

However, as you will see – this is something that may be beneficial to those with established incomes and pension values only. There are of course things that can go awry, and that we must remain watchful for. By no means should everyone consider moving their Company Pension to PRSAs, however you will also see the tangible benefits that can be achieved in the right circumstances. If you need help in mapping your own retirement strategy, see how we can help here.

I hope it helps.

Paddy.

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