Michael Noonan closes tax loophole in PRSA pension plans

Minister for Finance Michael Noonan has moved to close off a loophole that allowed holders of certain pensions avoid tax.

The Finance Bill introduces a provision that all Personal Retirement Savings Accounts (PRSAs) are deemed to have started paying out benefits to their owners by the age of 75.

At the moment, holders of PRSAs can choose not to touch the money within their pension plan. Unvested plans – ie PRSAs that have not started paying out benefits to their owners – are not subject to the “imputed distribution regime” where the Revenue assumes holders have drawn down 4 per cent of the fund per year and levies income taxes on that basis.

Other similarly flexible pension savings vehicles like Approved Retirement Funds (ARFs) are subject to this imputed distribution regime.

There is concern in Government circles that some people are availing of generous tax relief on contributions made into their PRSAs and then leaving them untouched to pass on to relatives under the terms of their will.

“The Finance Bill will close off certain tax planning opportunities ,” the Department for Finance said on Thursday.

Under the new rules, once a PRSA holder passes their 75th birthday, the pension plan will be deemed to be vested, regardless of whether any benefits are actually being drawn down. A minimum of 4 per cent of the fund will be treated as subject to income tax and universal social charge.

For people already over the age of 75 with unvested PRSAs, their plans will be considered to be paying out from the date the Finance Bill is passed.

PRSAs were introduced 15 years ago to provide a cheap, portable personal pension option to people who were not members of occupational schemes.

There was no mention of any plan to address the tax treatment of PRSAs in Mr Noonan’s budget day speech.