Is a PRSA worthwhile in my case?

[Slim]

Hi. Please forgive if this has been addressed before but I cannot find it on here and I have looked at the threads. This is our situation.

I am retired with an occupational pension. My wife is almost retired and, as we are jointly taxed, our combined pensions will be taxed up to the 41% rate. Even if one of us dies, the survivor will be taxed at the 41% rate. I have been working as a sole trader since I retired and I am preparing tax returns now. I have decent earnings after expenses for 2019. I know I could set up a PRSA in respect of my new work but I wonder if I will end up paying PRSI/USC on the double? Any drawing from the ARF in a couple of years will be taxed at 41% except for the 25% tax free lump sum. My questions are;
1. Will I pay PRSI & USC on the earnings now and later when I draw down from the ARF?
2. Is it worth my while to bother sheltering the earnings in a PRSA if I will pay more tax etc on drawdown?

The sums are not huge. Max. after exp income of the sole trading may be 40-60k. This will probably last for 1-3 years. I am not dependent on the extra income.

Thanks for any comments. Slim.

 

[Conan]

If you are likely to be a top rate taxpayer in retirement then it is questionable as to whether it makes economic sense to finance additional pension income. You may get 40% tax relief on the contributions but pay 40% + 4% USC on the resulting income.
The only tax advantage is that you may take 25% of the PRSA fund as a tax-free lump sum.

 

[Sarenco]

The only tax advantage is that you may take 25% of the PRSA fund as a tax-free lump sum.

Not necessarily.

The 25% tax-free lump sum is capped @€200k. If Slim is hitting a higher rate of tax on drawdowns from his existing pension(s), then I suspect he has already exhausted the tax-free lump sum. Beyond €200k, the 25% lump sum drawdown is taxed @20%.

It might make sense for Slim to invest in a PRSA but it looks very marginal to me. Without seeing all relevant figures it's impossible to know for sure.

 

[Steven Barrett]

Let's assume you can still take 25% tax free and your net income is €60k. Your allowances are already used up, so you pay 40% income tax, 4% PRSI (if <66) and 8% USC.

If you take €60,000 as income you get €28,800.
If you invest €24,000 into a pension, the remainder is taxed at 52% and you get €17,280.

With the pension, you get €6,000 tax free and if you cash in the rest, you get an additional €8,640, a total of €31,920.

You will be €3,120 better off by doing a pension.

But as Sarenco says, you need to see the figures

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Slim]

Thank you all for the responses. It seems that Steven's post is closest to reality. It seems that the benefit of a PRSA are marginal but 6k plus 3k additional tax free would not to be sniffed at. Appreciate the input. Slim

 

[Slim]

Supplementary question please: Am I right in thinking that I will pay 4% prsi and 4.5-8% USC on the funds both before they go into the PRSA and when they are drawn down?
Also, how is the PRSA taxed on my death?
Cheers. Slim

 

[Steven Barrett]

You pay PRSI up until age 66. USC is forever. If you are under 66 now, you would pay it on the contribution but you can delay the drawdown until age 66 and pay no PRSI.

PRSA is paid to your estate upon death and subject to normal CAT rules.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Sarenco]

USC is forever.

True but reduced rates of USC apply from age 70 onwards provided your aggregate income is less than €60k (0.5% on income up to €12,012 and 2% on all income over €12,012).

Importantly, all payments from DEASP (including the State Pension (Contributory)) are exempt from USC and are excluded in calculating aggregate income for USC purposes.

 

[Slim]

PRSA is paid to your estate upon death and subject to normal CAT rules.

Steven. Would that be paid into my estate free of tax? Would my spouse be subject to income tax or prsi/USC on the value of the ARF? Thanks.

 

[Steven Barrett]

Steven. Would that be paid into my estate free of tax? Would my spouse be subject to income tax or prsi/USC on the value of the ARF? Thanks.

Yes, it is paid to your estate free of tax.

An ARF is different. It will become an ARF in your wife's name free of tax but will be subject to tax when she draws down the money.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Slim]

Yes, it is paid to your estate free of tax.

An ARF is different. It will become an ARF in your wife's name free of tax but will be subject to tax when she draws down the money.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Thanks Steven. If the PRSA transfers to her on my death, I presume she is taxed on drawings from it at her marginal rate? Thanks

 

[Steven Barrett]

Thanks Steven. If the PRSA transfers to her on my death, I presume she is taxed on drawings from it at her marginal rate? Thanks

Not on the PRSA which is liquidated and cash paid to the estate. The ARF passes over to her as an ARF. They are treated very differently.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Slim]

Not on the PRSA which is liquidated and cash paid to the estate. The ARF passes over to her as an ARF. They are treated very differently.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Thanks for the information Steven. Very useful. Slim.