BY JOHN ELLIS, FINANCIAL ADVISOR
The increasing popularity of a Personal Retirement Savings Account (PRSA) for pension provision in over the last decade is reflected in the recent Pensions Authority data. Currently there are 355,706 PRSA contracts in place with an asset value of €9.986 billion whereas in 2010 there were 181,711 such contracts with an asset value of €2.4 billion.
Why so? The PRSA is a long-term investment option that offers a flexible, tax-efficient way to retirement. It was introduced in 2002 as a ‘modern option’ for retirement savers giving a “portable, transparent, and wholly client-owned pension product” with the principal purpose of being a solution for the modern workforce where a ‘job for life’ is no longer.
Initially, the PRSA was seen as the poor man’s pension and had limitations due to the way they were treated over and against existing pension plans. The treatment of employer contributions especially to a PRSA vs. an occupational scheme was the main drawback for employers and the reason for the establishment of so many single members’ pension schemes.
The pension roadmap, published in 2018, outlined the Government’s intention to transform the pension landscape from 2018 to 2023. A key part of this plan was to reduce the number of one-man schemes. The plan was that future pension provision by smaller employers would be by means of the PRSA, or a Master Trust solution which was launched earlier this year. The PRSA was made more attractive especially for the single member pension.
Up until the Finance Act 2022, that came into effect in January 2023, employer contributions to a PRSA attracted Benefit In Kind and, with the introduction of IORP II, onerous requirements for occupational schemes the PRSA was a good alternative. This now means that moving schemes of 10 members of less into a master trust is not the only viable solution – the PRSA is a comparable product.
By assessing, with your financial advisor, your occupational pension scheme vs a PRSA options you may see the PRSA solution to be a more suitable. For instance, the occupational pension is owned by the scheme trustees and not you, whereas the PRSA is in your name and in your control from outset
Your employer is restricted under an occupational scheme as to how much they can contribute to your pension, based on a calculation using your salary and years’ service as outlined in the Revenue’ manual, whereas the PRSA allows unlimited employer contributions for employees and all contributions receive tax relief in the year they are paid. The standard fund threshold still applies, €2M.
Occupational schemes require prior Revenue approval but the PRSA is pre-approved by Revenue and the Pensions Authority and requires no further approvals. Most importantly, in the case where an employee dies in service, the full PRSA fund is paid to their estate, currently tax-free whereas occupational schemes can only pay at 4 x final salary tax free and the balance must be transferred to an ARF or annuity for spouse/dependants.
In retirement and in conjunction with good tax planning PRSA holders can drawdown their retirement benefits in stages using multiple PRSAs up to age 75, whereas with an occupational scheme all benefits must be taken together.
Of course, there are many other considerations to make when looking at the various options, but this is where your financial advisor comes in.
Advice is paramount.
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