Choosing between a Master Trust and a PRSA (Personal Retirement Savings Account) depends on your priorities and financial situation as a company director. We will break down the key distinctions between these two retirement savings vehicles, helping you decide which one best suits your needs, including who manages them, contribution limits, and flexibility.
A Master Trust is a type of occupational pension scheme designed for multiple, unrelated employers to participate under one trust deed. Each employer has its own section within the master trust, but there’s a single trustee board managing the overall scheme.
A PRSA is a personal retirement savings account for business owners or individuals. You set up and manage your own PRSA, choosing your investment options and contribution amounts. PRSAs are not subject to IORP II regulations.
Here are the most important factors for choosing between a master trust or PRSA pension for company directors in Ireland:
Understanding pension contributions
Master Trust
Employer contributions are capped and still subject to maximum funding limits based on salary and service; however, this can translate to a bigger tax-free lump sum at retirement.
PRSA
The 2022 Finance Act removed the tax burden (benefit-in-kind) on employer contributions. This means employers can now contribute larger amounts to employee PRSAs (no restrictions on contributions based on salary or service history). Employer contributions can fund up to the Standard Fund Threshold limit of €2 million, allowing for potentially larger contributions and offering more flexibility.
This can be a significant advantage for directors looking to maximize their retirement savings. This applies to everyone, including company owners and their families who are genuine employees receiving a salary.
Which pension option offers higher tax relief?
Master Trust
Regular (employer) contributions receive corporation tax relief in the year of payment, but one-off contributions may have relief spread forward over five years. Full relief will only be given in the year of payment where the total single premium amount is less than or equal to the total employer regular contribution paid in respect of all employees.
PRSA
All contributions paid will receive immediate tax relief in the year it is paid. The 2022 Finance Act abolished the Benefit in Kind (BIK) tax for employer contributions to PRSAs. This means company contributions to a director’s PRSA are even more tax-efficient than before.
At what age can I access my pension benefits?
Master Trust
Normal Retirement Age (NRA) can fall anywhere between 60 and 70 years old. In some cases, you may be eligible for early retirement from a Master Trust if you are either over 50 years old and have left your employer (with employer/trustee consent) or due to a disability or long-term illness.
PRSA
You can generally access your benefits from a PRSA starting at age 60 in Ireland. This is the earliest age at which you can begin drawing funds from your account. It’s important to note that while 60 is the minimum access age, there are some flexibilities:
You can wait until age 75 to take your benefits.
There is no requirement to retire at 60 to access your PRSA funds.
In certain cases, you can access your benefits at age 50 when leaving employment or due to disability or long-term illness.
In an early retirement scenario, at age 50, as a 20% director, there is no requirement to relinquish your shareholding. Simply leaving employment with the linked employer will suffice. If you are a 20% director in a Master Trust, you must relinquish your shareholding, as well as the shareholding of your family members.
How much of my pension can I withdraw as a lump sum?
Master Trust
You can take a lump sum up to 1.5 times final salary (if you have at least 20 years of service with your employer and are retiring at your normal retirement age). This can allow Master Trusts to offer more flexibility when calculating retirement lump sums (potentially exceeding the 25% PRSA limit). Master Trust arrangements linked to the same employment must be taken at the same time.
On Death: In the event of death before retirement, if you are an active member of the Master Trust, the lump sum is limited to 4 x final remuneration plus a refund of member contributions.
PRSA
You can take up to 25% of the total value of your PRSA as a tax-free lump sum. You can have multiple PRSAs, so it’s possible to split benefits into multiple PRSA’s, which is popular with members looking to phase drawdown (access at different times).
On Death: In the event of death before retirement, there is no lump sum limit on death in service in a PRSA. The full value of your PRSA will be paid to your estate if you die before retirement. It will also be paid to your spouse tax-free.
Key Considerations Summary
Consider these factors when making your decision:
- Investment Expertise: Are you comfortable managing your investments, or do you prefer professional oversight?
- Desired Flexibility: Do you prioritize flexibility at retirement (potentially with a Master Trust), or is portability across jobs more important (offered by PRSAs)?
- Cost Sensitivity: Are fees a major concern, or are you willing to pay more for professional management?
- Company Profitability: Do you anticipate significant company profits that could be used for tax-efficient contributions to a PRSA?
What do we recommend?
As a company director, the most suitable option really depends on your, financial situation, your individual needs, and your retirement objectives.
PRSA’s might be preferable for the following reasons:
It is simpler to set up and offers more flexibility in terms of contributions (can be stopped and restarted).
PRSAs are portable and can be easily moved from one employer to another without the need for a Trustee.
Potential for higher contribution limits.
Contribute a significant portion of company profits to reduce corporation tax and boost retirement savings via profit (cash) extraction from the company.
Later retirement age (up to 75).
Typically lower fees compared to Master Trusts.
IORP II requirements do not apply.
It is ideal if you prioritize control, cost-efficiency, portability, and maximizing contributions. Well-suited for directors who are comfortable managing investments and may change jobs in the future, or who want to make tax-efficient profit extraction from their company.
Master Trusts might be preferable for the following reasons:
Seeking a wider range of investment options.
Prioritizing a larger tax-free lump sum at retirement (based on salary and service).
Master trusts are typically managed by professional trustees with strong knowledge of pensions, ensuring best practices are followed.
Master trusts handle regulatory compliance and administrative tasks, freeing up the employer’s time and resources. This is especially helpful with increasingly complex pension regulations.
A good option if you value professional management, employer contributions, and potential retirement flexibility. It is suitable for directors who are less comfortable with investment decisions and have a stable employment situation.
If you’re aiming for a larger tax-free lump sum at retirement based on your salary and service, a Master Trust might be a better fit than a PRSA, as PRSAs only allow 25% of the fund as a tax free lump sum. This is the main reason why a company director may choose a Master Trust over a PRSA.
Financial Advice:
Remember: Consulting with a qualified financial advisor is highly recommended. We can assess your specific situation, risk tolerance, and retirement goals to advise you on the most suitable option for your situation.
E.&O.E.
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