PRSAs were introduced by legislation in 2003 in an attempt to encourage more widespread retirement savings. They have to some degree replaced personal pensions as the standard pension option for those who are not members of occupational pension schemes. PRSAs can be set up by individuals on a stand-alone basis, but an employer can also contribute. In fact, some employers contribute to PRSAs for all of their employees.
Many of the rules that apply to PRSAs are similar to those for personal pensions. The key differences are:
- Greater transparency in charging
- It is much easier for employers to contribute to PRSAs than to personal pensions
- There are tighter restrictions on the funds that can be offered in PRSAs
Eligibility for PRSAs
Any individual can contribute to a PRSA. However in practice you will only get tax relief on contributions if you are have non-pensionable earnings or self-employed earnings from a trade or a profession. If you do not earn enough to pay income tax, it may not be in your interests to take out a PRSA.
Contributing to a PRSA
Contributions to a PRSA are limited by your age and income level. In respect of income from non-pensionable earnings or from self-employed earnings from a trade or a profession, PRSA contributions are eligible for relief from income tax. This relief is normally claimed back from the Revenue in your annual tax return.
Alternatively, if you are a member of an employer-sponsored PRSA, you can receive tax relief automatically at source through payroll deduction. You may be liable to the Universal Social Charge introduced in Budget 2011 on both your own and your employer’s contributions to a PRSA.
Charges for PRSAs
There is typically a 5% charge on contributions to PRSAs and an annual management charge of 1% of the accumulated fund. Charges can be lower if the amounts invested are large, or if an employer carries the burden of charges.
Benefits at retirement
At retirement, you will be eligible to take 25% of your accumulated PRSA fund as a lump sum. The balance may be used to purchase a guaranteed income for life (annuity) or subject to restrictions it can be transferred to an Approved Retirement Fund (ARF). In certain circumstances the balance after taking a lump sum can be taken as taxable cash.
Determinants of level of benefits at retirement
The following factors will influence the level of benefits you may receive from your PRSA at retirement:
- Your level of contributions
- The investment performance of your chosen fund or funds
- The age at which you take your benefits
- The level of annuity rates when you take your benefits
Investing your PRSA
There are a variety of funds available within PRSAs, including high risk, medium risk and low risk options.
Broadly speaking, the higher risk a fund, the more growth can be expected from it over the very long term. However high risk funds are also volatile, and will experience many ups and downs over the years. Low risk funds will be much less volatile, but may deliver much lower long term growth on average, over the very long term.
It is usually considered appropriate to invest on a medium or perhaps even a high risk basis when you are a long way from retirement. After all, if markets fall in value, it means that your new contributions will buy in at a cheaper price. Thus a fall in value can actually be good news when retirement is a long way off.
However when you are closer to retirement it is usually be sensible to reduce risk. You may wish to consider investing in a “lifestyle fund” which will automatically reduce risk as your planned retirement age approaches. .
Investment return expectations
If you invest in a low risk cash fund, returns are likely to be no higher (and may be lower than) short term deposit interest rates. If you invest in a high risk equity fund, it may be reasonable to expect average returns over the very long term of 4 - 6% ahead of inflation. In other words, if inflation averages 2% per annum, then the average expected return on a high risk equity fund would be in the range 5-7%.
However higher risk funds will experience years of much worse and much better returns than this broad average would suggest.
You may want to find out more about the principles behind saving and investing. These principles are, in general, similar within a pension fund as outside of one.
Annuity rates and their relevance
An annuity is an income for life, provided by a life assurance company. Annuity rates are the prices at which life assurance companies will sell you an annuity.
At retirement, if you use your pension to buy an annuity, the level of income that you receive will be determined by the following factors:
- The size of the pension fund that you have accumulated
- The annuity rates at the time
- Your age when you buy the annuity
Age at which benefits can be taken
Normally, you can take your retirement benefits from a PRSA any time after the age of 60. There is no requirement to abide by your originally selected retirement date. It is possible to take early retirement in the event of serious illness. As a general rule, if you intend to buy an annuity, the older you are when you take your benefits, the higher the annuity you will be able to buy, as annuity rates are less expensive for older people.
You may take your benefits from your PRSA at any time after the age of 50 if you retire from employment. If you become very ill you should be able to take your benefits from your PRSA immediately.
Death before retirement
If you were to die before retiring the value of your PRSA would be payable to your estate.
Tax on PRSAs
In the past, not only have contributions to PRSAs benefited from tax relief, but the fund itself has been allowed to grow free of tax. However a pension levy has applied at differing levels since 2011 and it is projected to continue until at least 2015. The levy as announced by government has been 0.6% in 2011, 2012 and 2013, 0.75% in 2014 and 0.15% in 2015. It is unclear whether a levy will continue to apply after 2015 or not.
Mercer can help with PRSAs
Mercer is Ireland’s largest administrator of occupational schemes. We are well positioned to help you to choose a PRSA that is right for you, or if appropriate, to advise you on alternative options such as a personal pension or an executive pension.
Call us for advice on whether a PRSA is the right option for you, which PRSA to choose, or to set up a meeting with one of our consultants. We can also give you a second opinion on your existing PRSA arrangements. Call Mercer today to arrange a meeting.