Company Director pension funding potential update

Running a business can be a very busy undertaking and sometimes setting up a pension for your future retirement can be pushed down on the long list of things to do. Without having your own pension provisions, you will be fully dependent on the State pension at retirement, should you qualify for it. Depending on your company status (e.g. Sole Trader, Limited Company), there are a number of pension options that may be available to you which include an Executive (Company) Pension, a Personal Pension, a Self-Administered Pension Scheme or a PRSA.

As a company director, Revenue will allow you to build up a pension fund that will provide you with a pension pot of 2/3rds of your final pensionable salary. The only limit relates to the Lifetime Pension Fund Limit (Standard Fund Threshold) which is currently €2,000,000.

As of 1st January 2023, the Finance Act has now introduced a new update to Personal Retirement Savings Accounts (PRSA) which may make this type of policy a more beneficial and attractive option for company directors.

Employers can now pay substantial contributions to a PRSA for an employee or company director that is no longer subject to Benefit in Kind (BIK). Unlike contributions to an Occupational Pension, the contributions will not be limited to salary and service, existing scheme funding or retained benefits.

As a company director or small employer, you now have the option to extract a larger portion of profits directly into a PRSA, in which all contributions paid will receive immediate corporation tax-relief in the year that it is paid.

For example, theoretically with the current legislation status, if a director is an employee, taking an annual salary from their company, they can make a potential employer contribution of up to €2,000,000 into their PRSA. This is a sizeable figure, but it does show the possibility available, which may perhaps only be for a limited time (Revenue could always close this option at a future date).

This will mean that PRSA’s can offer you a more flexible and suitable means to retirement saving and planning according to your particular financial needs. Some business owners may also see this as an opportunity to fund the pension of a spouse/partner who has been employed in the business but, for whatever reason, never previously set up a pension fund. Another important factor is that in the event of death, the complete PRSA pension fund can be paid in full to the estate of the deceased PRSA member, whereas some other pension plans have restrictions on the maximum allowable lump sum payable.