Pension - PRSA for a Child

[Steven Barrett]

You don’t need to be working to contribute to a prsa. You can always draw down the relief in the future once you are in non pensionable employment.

The tax relief is a small point. 30 years of tax free growth is what this is about. We are clearly talking about estate planning here. Of course you wouldn’t do it if they couldn’t afford it

The tax relief was the point of my reply to you. It is not pensionable income.

I understand the point that is being (and it would be 60 year tax free growth) made but it is fanciful because you can't enter a contract for a pension if you are under 18.

 

[Oisin19]

The tax relief was the point of my reply to you. It is not pensionable income.

I understand the point that is being (and it would be 60 year tax free growth) made but it is fanciful because you can't enter a contract for a pension if you are under 18.

I don’t understand. Surely if the child went to work in the future that would create the pensionable income

How is it fanciful? It’s extremely simple. 6k a year in a bare trust. At 18 set up the prsa and make the contribution. Invest the whole thing in 100% equities. Job done

 

[Steven Barrett]

I don’t understand. Surely if the child went to work in the future that would create the pensionable income

The money put into a pension has to be from earned income. If the proceeds are from an investment, it is not pensionable income and therefore income tax relief cannot be claim on it.

How is it fanciful? It’s extremely simple. 6k a year in a bare trust. At 18 set up the prsa and make the contribution. Invest the whole thing in 100% equities. Job done

Again, the point I was referring to is a different one you are answering. Setting up a PRSA for a minor is fanciful.

Under the bare trust solution you are suggesting, there will still be deemed disposal (twice if set up early enough) which is what the OP was trying to avoid when he came up with the PRSA solution. So the problem isn't solved.

 

[Oisin19]

The money put into a pension has to be from earned income. If the proceeds are from an investment, it is not pensionable income and therefore income tax relief cannot be claim on it.

have you ever had a client come to you at this time of the year, after been advised by their accountant to make a pension contribution to reduce the tax that was created by their rental income?

Unless I have misunderstood you are saying that I can’t lodge this money to the pension as it was recieved from my tenant and not my job?

I think we have crossed wires here. Anyway as I said earlier it’s a small point.

 

[Oisin19]

Again, the point I was referring to is a different one you are answering. Setting up a PRSA for a minor is fanciful.

Under the bare trust solution you are suggesting, there will still be deemed disposal (twice if set up early enough) which is what the OP was trying to avoid when he came up with the PRSA solution. So the problem isn't solved.

But on a net basis the funds have grown substantially in the kids name. Actually It’s best to forget about it as there is a small tax leakage. No thinking outside the box allowed here.

 

[ClubMan]

But on a net basis the funds have grown substantially in the kids name. Actually It’s best to forget about it as there is a small tax leakage. No thinking outside the box allowed here.

If the funds are not from income earned by the policy holder might Revenue also challenge/refuse access to that tax benefit too?

Edit: sorry, I misread and thought that you were referring to gross roll-up growth in a pension.

 

[Robzig]

The money put into a pension has to be from earned income.

This is just not true. When my wife came to Ireland we knew that she would have substantial future income on a self-employed basis (i.e. there were no potential complications of her being employed in a pensionable job and thus running the risk that this seed contribution would ultimately not get tax relief.)

We lobbed in a healthy whack into her pension in the knowledge that the tax relief could be claimed prospectively which is exactly what happened until the carried forward contribution was all used up. We received tax advice regarding this and a number of other points.

Where are your comments coming from?

 

[Steven Barrett]

have you ever had a client come to you at this time of the year, after been advised by their accountant to make a pension contribution to reduce the tax that was created by their rental income?

Unless I have misunderstood you are saying that I can’t lodge this money to the pension as it was recieved from my tenant and not my job?

I think we have crossed wires here. Anyway as I said earlier it’s a small point.

If the client also has earned income, the two of them are indistinguishable. 45 year old with €100,000 earned income, €50,000 rental income. The amount they can contribute to a pension is €25,000 i.e. based on the earned income. In the original question, there is zero earned income and the money being invest wholly comes from the proceeds of an investment plan. The Revenue may reject the claim for tax relief.

But on a net basis the funds have grown substantially in the kids name. Actually It’s best to forget about it as there is a small tax leakage. No thinking outside the box allowed here.

Of course they have, the money has been invested for 18 years. But the OP wants to avoid deemed disposal. There will be two deemed disposals under the bare trust structure. If that is fine with the OP, that's up to him.

This is just not true. When my wife came to Ireland we knew that she would have substantial future income on a self-employed basis (i.e. there were no potential complications of her being employed in a pensionable job and thus running the risk that this seed contribution would ultimately not get tax relief.)

We lobbed in a healthy whack into her pension in the knowledge that the tax relief could be claimed prospectively which is exactly what happened until the carried forward contribution was all used up. We received tax advice regarding this and a number of other points.

Where are your comments coming from?

It's in the TCA and the Revenue manual...

 

[Oisin19]

It's in the TCA and the Revenue manual...

Thanks Stephen. News to me. Can you point me to the legislation on this?

 

[Robzig]

Well I haven't read the TCA this morning but I have looked at Chapter 24 of the Revenue Manual (the section dealing with PRSAs) and, as expected, there is nothing there to support Steven's assertion. Oisin19 - my guess is that you'll be waiting a long time to be "pointed" to something that supports Steven's claims!!

 

[huskerdu]

Have tyou read the relevant page on citizensinformation.ie which explains simply the max tax relief you can get on pension contributions.

Tax relief on pensions

You can get income tax relief on your pension contributions. You can also get tax relief on a lump sum pension payment when you retire.

www.citizensinformation.ie

At this point, I genuinely dont know what you are disputing in what Stephen has said. Can you clarify this ?

 

[ClubMan]

Have tyou read the relevant page on citizensinformation.ie which explains simply the max tax relief you can get on pension contributions.

Tax relief on pensions

You can get income tax relief on your pension contributions. You can also get tax relief on a lump sum pension payment when you retire.

www.citizensinformation.ie

At this point, I genuinely dont know what you are disputing in what Stephen has said. Can you clarify this ?

I think that there are two issues.

1. Tax relief on contributions - that is explained by the link that you posted and other info already posted.
2. Funding a pension from money that was not earned by the pension holder - e.g. savings accumulated by one person contributed to the pension of another. E.g. in the original query, a parent funding a child's pension from savings/gifts.

 

[Robzig]

@huskerdu

You need to understand that there is a difference between
(a) what can be contributed; and
(b) what can receive tax relief

They are not the same! Does that clarify?!

At this point, I genuinely dont know what you are disputing in what Stephen has said. Can you clarify this ?

And I genuinely don't understand why Steven is disputing what I am saying. I understand that people can make errors but to double down on an error, that's not great!

 

[huskerdu]

I know that.
The link I sent is very clear on the tax relief.

Can you explain what your point is ?

 

[huskerdu]

You have pointed out that it is possibloe to add to a pension for future tax relief is possible ( we all know that, its not disputed). but it is the case that tax relief is only available on earned income, and there is a max tax releif available in each year.

 

[S class]

The earned income is the future employment income from the PRSA holder when they eventually become employed. The funds in the PRSA are their money. The source of this money is not relevant. If this plan runs into problems with revenue then the funds could be transferred into the PRSA yearly, after the child eventually takes up employment.

 

[Robzig]

You have pointed out that it is possibloe to add to a pension for future tax relief is possible ( we all know that, its not disputed)......

This is where you are getting confused. This is precisely what's being disputed! As in - Steven has said, now repeatedly, that

The money put into a pension has to be from earned income.

This is just wrong. The pension being discussed is a PRSA. In the opening section of the relevant section of the Pensions Manual, it states:
A Personal Retirement Savings Account (PRSA) is a long-term savings account to help people save for their retirement. PRSA products are approved jointly by Revenue and the Pensions Authority. Anyone may contribute to a PRSA but there is not an automatic entitlement to tax relief.

In other words, from the get go in this Chapter, the Revenue rightly is distinguishing between ability to contribute and ability to obtain tax relief.

As mentioned, it's completely understandable that people, even advisers, get confused. What I don't like is where Steven "corrects" another adviser (Oisin19) when that other adviser has been right all the time and then says that stuff (to support his point) is in the Pensions Manual when it's just not!

 

[jasdpace@gmail.]

My understanding is that what Oisin, S Class and others have been saying is correct. It would be interesting to see the TCA/Pensions Manual references that Steven is referring to alright.