Lost in translation P7RS5A

Jim Connolly, Head of Retirement Planning at AIB Private throws some light on the treatment of PRSAs post age 75.

In 2019 a contestant on Who Wants to be a Millionaire was asked if the passage “3 May. Bistritz. Left Munich at 8.35pm” were the opening words to Tinker, Tailor, Soldier, Spy or Dracula. 81% of the audience said Tinker, Tailor. The contestant agreed and proceeded to lose £93,000. The answer was Dracula.

Interestingly, I found myself in an ask the audience situation when, in the middle of presenting a CPD lecture, I was asked what happens to a vested PRSA at age 75. Struggling to recall the treatment – we all know something happens, but what was it – I asked the audience. Surely someone from a sizeable number of CFP® professionals would know for certain. And thankfully they did. One candidate of robust credibility confirmed that nothing happened to a vested PRSA at 75.

And that got me thinking. Why is there a lot of confusion on PRSAs and age 75?

Set out below are the fruits of my labour on this subject. Brace yourselves. The industry practice and the actual technicalities seem to clash on this and some of the outcomes may prove uncomfortable reading for those of you who followed the industry consensus on this one.

Cosmetic surgery on the PRSA

The PRSA was born in 2002 and our legislators have been tinkering with its beauty ever since. Most recently they have given the PRSA the most magnificent funding face lift, however many of the legacy adjustments have been to correct anomalies that the industry exploited from time to time.

For example, up to 2011, a vested PRSA differed from its ARF counterpart from an imputed distribution perspective – the regime applied to ARFs but not to vested PRSAs. A quick legislative nip and tuck sorted that out and the regimes were harmonised.

Similarly, up to 2016, a PRSA could be held until death, and in typical industry fashion this characteristic was put to very strategic use by clients who had breached the €2m threshold. In simple terms they would split their pot into two PRSAs – one holding €2m and a second PRSA holding the excess.

This allowed the individual to crystallise pension benefits up to the threshold without breaching it. The excess over the threshold could be held in the second PRSA indefinitely, eventually to be passed on as a death benefit. And, given that death is not a benefit crystallisation event (BCE), the individual escaped the charge to chargeable excess tax completely. Neat.

A little more surgery followed in FA2016, and it is these legislative provisions that has, in our view, been entirely misinterpreted by the preverbial world and its mother.

FA2016

It is important to identify the purpose of the amendments introduced by FA2016. The intention is very clearly aimed at thwarting the practice identified above by forcing a BCE at age 75. This simple change ensures that the State gets their pound of CET flesh, once of course the individual survives to age 75.

The methodology to achieve this was also reasonably straightforward. FA2016 introduces new provisions into S790D which makes a very explicit difference between a PRSA where benefits have commenced before age 75 and those that have not commenced by age 75.

This distinction meant that the characteristics of a PRSA for anyone who voluntarily accessed benefits before age 75 remains unchanged, i.e. they can take their 25% lump sum, thus vesting the PRSA, and continue to use this structure to fund their retirement through income withdrawals until death. There is no mention anywhere of any requirement to turf this contingent of PRSA investor out into an ARF by age 75. Despite this, several PRSA providers do so.

S790D(1A) creates a new BCE for any PRSA where benefits have not commenced by age 75.

You want to avoid falling foul of these provisions at all costs because if you do not pull the trigger on your PRSA by age 75, you lose the ability to do so. Period. No lump sum. No access to income. Imputed tax forever. And a potential CET charge on the entire pot. Ouch.

Technical position

So, in simple terms, there are two destinies for a PRSA, both of which are entirely in the individuals control.

This treatment is also clearly reflected in the Revenue Pensions Manual. Chapter 24.4 does call for benefits to be taken from a PRSA by age 75, meaning that you must take your lump sum and other benefits by age 75. This seems to have been interpreted by some providers as meaning you must get rid of your PRSA by age 75. This is the equivalent of adding two plus two and getting five.

The guidance goes on to state…

“An individual who retains the balance of a PRSA (after payment of the tax-free retirement lump sum) in the PRSA, rather than using it to purchase an annuity or transfer it into an ARF, may then draw down from that balance as and when they choose.”

….and further encourages us to refer to 24.14 for “the treatment which applies where PRSA benefits do not commence on or before age 75.”

So, it is very obvious that Revenue is distinguishing between a PRSA which is voluntarily vested before age 75 and one that hasn’t been accessed by age 75.

24.14 is aimed at the latter category and, not wishing to reinvent the wheel, here is exactly what it says…

“A PRSA from which retirement benefits have not commenced on or before the date of the owner’s 75th birthday is treated as becoming a vested PRSA (within the meaning of section 790D TCA) on that date… A consequence of a PRSA vesting in these circumstances is that the individual cannot access the PRSA assets in any form from the date of their 75th birthday…. The vesting of a PRSA in these circumstances is a “benefit crystallisation event” for the purposes of Part 30, Chapter 2C, TCA (see Chapter 25). In addition, such vested PRSAs are subject to the imputed distribution regime (see paragraph 24.10) and the death related provisions which apply to vested PRSAs.”

Despite the apparent clarity of the rules on the subject, a practice seems to have evolved from somewhere where providers are seeking to evict vested PRSA investors into ARF alternatives at age 75, and the logic for doing so appears to emanate from a perceived requirement set out in S787K.

S787K is the only section of PRSA legislation where Revenue has any discretion, and this relates to the approval of the PRSA product itself. S787K (1)(c)(ii) does say that Revenue shall not approve a contract that not “provide for the annuity or other sums payable to the individual to commence or for those assets to be made available to the individual before the individual attains the age of 60 or after he or she attains the age of 75.”

Interpreting this to mean you can’t have a PRSA post age 75 is a bit of a stretch. It simply means that benefits must have been triggered by this age.

The jury is no longer out in my mind. A PRSA can be vested and can be held by an individual post 75 without any adverse consequence. Based on the evidence in the market, this seems to be a contrarian view, but I fail to see how it can be interpreted otherwise.

Views expressed in this article are those of the author and do not necessarily reflect the views or positions of FPSB Ireland DAC. This article is for information purposes only and should not be construed as financial advice. Formal advice is advised in advance of taking any action.