Lump Sum into a PRSA or Trading Account?

[AaronK]

Hi folks,
I'm trying to start a pension, age 45, but better late than never...
Self employed so looking at a self executed PRSA.

I have about 100k in savings and was considering putting that into the PRSA to give it a kick start.
The alternative is to put the 100k into a regular trading account and just add funds yearly to the separate PRSA.

If I put the 100k into the PRSA it can grow tax free, however I don't gain any tax free benefit form the 100k up front as its earnings I've already been taxed on, unlike yearly PRSA allowances. This then ties that 100k into that PRSA account so i cant remove it without being taked (again) on it.

So does it make more sense to put the 100k into a separate trading account and pay the taxes yearly on it, while just funding the PRSA separately from new earnings?

Hope that makes sense! Any suggestions are appreciated.

 

[Marc]

I have written a detailed guide on this subject which is available for free on my website

Personal Savings Accounts - Everlake

This guide sets out how a Personal Retirement Savings account (PRSA) combined with an Approved Retirement Fund (ARF) can be used by any Irish Investor between the ages of 18 and 75 to invest personal savings in a tax efficient way

globalwealth.ie

 

[LDFerguson]

In your 40s, maximum contribution to a PRSA is 25% of income with an income ceiling of €115,000. So if your income is >€115,000 per year, the maximum you can contribute is €28,750 per year to attract tax relief on the contributions. You can exceed this limit and spread the tax relief over future years. But if you're also going to be making ongoing contributions, up to your limit, then you'll never get tax relief on the €100,000. Given that you'll probably be taxed on the pension at retirement (after withdrawing the tax-free lump sum), then if you're not going to be getting tax relief on contributions on the way in, I'd be reluctant to advise that you put your €100,000 into a PRSA. On the other hand, maybe you won't be contributing up to your limit in future years so you may eventually get the tax relief on your €100,000.

When you say you're self-employed, are you a sole trader or a company director? If it's the latter, there are more generous limits for amounts that a company can invest into an Occupational Pension Scheme than a PRSA, so you might be able to go that direction instead.

Other financial advice considerations apply regarding your €100,000 savings - have you other accessible savings before you commit your entire savings fund to a PRSA? Any expensive debt or upcoming expenses that you might need it for before you retire?

Regards,

Liam

 

[AaronK]

I have written a detailed guide on this subject which is available for free on my website

Personal Savings Accounts - Everlake

This guide sets out how a Personal Retirement Savings account (PRSA) combined with an Approved Retirement Fund (ARF) can be used by any Irish Investor between the ages of 18 and 75 to invest personal savings in a tax efficient way

globalwealth.ie

Thanks Marc, I'm reading through that now, the comment on P.7 is relevant 'Unused tax relief can be carried forward indefinitely'. I assume that means that putting the lump sum into a PRSA may benefit from some form of tax relief.
I'll keep reading!

 

[AaronK]

Thanks for that breakdown Liam.
I'm a sole trader, my income rarely exceeds 50K and will likely be less for the next year due to current climate...

I do plan on making regular contributions in future years to the PRSA. If for example I made max contribution on 50k earnings of €12,500 (25% age 45) yearly how does the 100k lump sum factor into giving me tax relief? Is it based on relief on any payments I make above the 25% yearly limit?

 

[LDFerguson]

Thanks for that breakdown Liam.
I'm a sole trader, my income rarely exceeds 50K and will likely be less for the next year due to current climate...

I do plan on making regular contributions in future years to the PRSA. If for example I made max contribution on 50k earnings of €12,500 (25% age 45) yearly how does the 100k lump sum factor into giving me tax relief? Is it based on relief on any payments I make above the 25% yearly limit?

Let's say you put your €100,000 into a PRSA. Based on last year's earnings you had the scope to put a lump sum of €12,500 in against the 2019 tax year. So that's €12,500 of your €100,000 used up for tax relief purposes and €87,500 to go. To keep things simple I'll assume that your 2020 earnings are also €50,000 after business takes off in the second half of the year. Let's say you claim another €12,500 from your €100,000 lump sum against 2020 tax year. €75,000 to go. From January 2021 you start making a monthly contribution of €1,000 out of earned income. The problem then arises that by the end of 2021 you have paid in €12,000 in monthly contributions. Your limit is still €12,500 so you can only use €500 from your lump sum for tax relief in 2021. And so on. You'd be a long time before you'd get the tax relief on your €75,000.

 

[AaronK]

That's very helpful Liam.
So my 100k lump sum is only useful really for 2019 & 2020 tax relief, unless business is bad and I don't have new earnings to invest in PRSA up to allowance.
Setting the tax relief or lack thereof of investing 100k in either a PRSA or a regular trading account, and to keep it simple assume I only ever invest the 100k (with no further money added)....
If both account types were used to buy something simple like an ETF market tracker and held for 20 years, would the compounding effect within the PRSA (no tax till the end) not still out pace the Trading Account due to the loss of capital with regular tax withdrawls?
The more I read on the subject the less I know!

 

[LDFerguson]

Setting the tax relief or lack thereof of investing 100k in either a PRSA or a regular trading account, and to keep it simple assume I only ever invest the 100k (with no further money added)....
If both account types were used to buy something simple like an ETF market tracker and held for 20 years, would the compounding effect within the PRSA (no tax till the end) not still out pace the Trading Account due to the loss of capital with regular tax withdrawls?

Yes the PRSA should outpace the trading account, all other things being equal, because the PRSA doesn't have to pay taxes along the way. The issue arises in 20 years' time when you want to withdraw your money, or commence withdrawing your money. A quarter of the PRSA fund can be withdrawn as a lump sum, tax-free up to a ceiling of €200,000. The other 75% is what's used to provide your retirement income or pension, using either an annuity or an Approved Retirement Fund (ARF). Whichever method you use, withdrawals will be taxed as income. Maybe it will be tax exempt. Maybe you only pay 20% tax on some of it (after tax credits). Maybe you will pay tax at 40% on it, if you have other taxable income in retirement - spouse's income, rental income, dividend income etc. If you are going to be taxed on your pension, remember that the tax is on withdrawals from the overall fund, which is made up of the original capital invested plus growth. Tax on the Trading Account is only on the growth. To compare the two, you'd need to have a crack at figuring out what your tax position is likely to be when you retire. Of course that's difficult to work out given that taxation rules and rates can and will change many times in the next 20 years, but the best you can do is to look at "if I was retiring today".

 

[AaronK]

Thanks Liam, all very good info!
I was leaning towards putting my 100k cash into a trading account and leaving it there, while opening a separate PRSA and using that for yearly tax free investments.
I did indeed take a crack at doing the sums ,long night that was, it comes out at close to a wash compared to just putting everything into the one PRSA account, mainly due to the fact that it'll be a small pension anyhow so should be possible to keep the drawings at the low rate of tax.
I do prefer the idea of the trading account as it allows me to withdraw the lump sum anytime if needed, the obvious downside is the 8 year tax minefield!
Thanks again,
Aaron