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Why PRSA's ?
Following the recommendation of the Irish Pension Board, through the National Pension Policy Initiative the government
has signalled its intention to introduce
Personal Retirement Savings Accounts, the benefits include:-
- Easy to set up
- No policy charge
- Portable
- Choice to convert private pensions to PRSA's
- 25% tax free cash lump sum
- Can be used as collateral
- Retirement between age 55 and 75
- Contributions can be made at any time.
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Minister for Finance speaks
"What I found difficult to accept was that the consumers had up to now no other option but to take out an
annuity.
What I found especially difficult to accept was that where the pensioner died after a relatively short time into retirement and,
if there was no guarantee period provision, the entire accumulated fund became the property of the
annuity provider."
"I believe that this was totally unfair to the spouse or minor children of the deceased whose pension savings had now disappeared.
I believe that dependent spouses and dependent children should consequently greatly welcome these new proposals as the
accumulated pension fund of the deceased at date of death will now pass to them tax free, which will help provide for them for the future.
These new proposals can accordingly be regarded as socially progressive from this point of view."
A Segment from the Opening Address by the Minister for Finance at the Business and Finance Conference on Pensions, 12/5/99
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The new Personal Retirement Savings Account
The Department of Social, Community and Family Affairs are due to publish shortly a Pensions Bill which, inter alia, will provide for a
new type of pension product called the 'Personal Retirement Savings Account' (PRSAs). The aim is to create an alternative pension
product that is flexible, portable and user friendly. The PRSA is an investment account that will be owned by the individual. It will hold
units in investment funds that are managed by an approved PRSA provider. The funds can be transferred from one provider to another
during the person's career. PRSAs are expected to appeal to a variety of individuals from part-time or atypical workers to certain high
net worth individuals. In contrast to Retirement annuity Contracts which are only
available to the self-employed or those employees in non-pensionable employment, PRSAs will be available to individuals regardless
of their employment status.
The main advantage with a PRSA is the account is not tied to the employment and that individuals can continue contributing while out
of work or when they change employment.
The tax rules for PRSAs will be contained in the Pensions Bill. The following is a summary of the main rules:
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Tax relief on contributions
- Contributions paid into a PRSA will benefit from tax relief at an individual's marginal income tax rate. For individuals subject to
PAYE, there will also be relief from PRSI and the health levy in circumstances where the employee's PRSA contribution is
deducted from salary under the net pay arrangement. This means that income tax, PRSI and the health levy are calculated on
pay net of the pension contribution.
- As with most tax reliefs, there is a limit on the relief. The maximum annual tax deductible contributions are based on a percentage
of the individual's earnings. The allowable percentages that rise with age are as follows:-
- Under 30 15%
- 30 - 39 25%
- 40 + 30%
Thus, for example, an individual aged 35 can gain tax relief on the lower of 25% of earnings or the contribution paid in that year.
There is a 5% increase in the limits for persons in the age groups 30 - 39 and 40 - 49 compared to those currently available for
contributions paid to Retirement annuity Contracts (RACs).
The 30% limit will apply, irrespective of age, to certain categories of person who typically retire earlier than usual, such as athletes,
jockeys and so on.
Each taxpayer is entitled to tax relief on a contribution of £1,200 paid even if this exceeds the normal limit on tax deductible
contributions. For example, if an individual aged 23 earns £7,500, the normal limit on the tax deductible contribution is 15% of £7,500
being £1,125. If this individual pays a contribution above the £1,125, they will obtain tax relief on the lower of the contribution paid and
£1,200. However, if an individual pays £1,250, they will be given relief on £1,200 rather than the earnings based limit of £1,125.
An earnings cap of £200,000 will apply also to PRSAs as is the case with RACs for the purposes of tax relief. Thus, for example, where
a person is aged over 40, the maximum tax relieved contribution is £200,000 x 30% = £60,000 per year.
Contributions paid in any year in excess of the maximum tax deductible contribution may be carried forward and claimed in future
years subject to the annual limit for those years. Similarly, contributions paid while out of the workforce may be carried forward and
claimed against future earnings on return to paid employment subject to the annual limits.
The tax relief is non-transferable between spouses in line with existing rules for RAC and occupational pension scheme contributions.
- Contributions paid after the end of the tax year and before the return filing date for that year may be claimed for that tax year.
- The limits apply to the total contributions made by the employee and employer where the employee is not a member of an
occupational pension scheme. Thus, where an employee aged 29 contributes 5% of his or her earnings to a PRSA, the employer
may contribute a further 10% making a total of 15% in aggregate.
- Employer contributions to a PRSA on behalf of an employee up to the tax relieved limits will not be subject to benefit-in-kind tax
for the employee.
- Employer PRSA contributions on behalf of employees will be fully deductible for tax purposes.
- Relief for contributions paid is allowed against trading, professional income or employment income only as is the case with other
pension products. These pensions are 'second pillar' pensions and therefore are designed to provide a replacement for earned
income that ceases on retirement.
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Contributions to both an RAC and a PRSA
Contributions to an RAC and a PRSA will be aggregated when calculating the maximum tax relief.
For example, a person aged 45 who gets tax relief on 25% of their earnings on contributions to an RAC may contribute an extra 5% to
SAs making up 30% tax relief in aggregate.
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PRSAs and AVC's
Employees in an occupational pension scheme may use a PRSA as an 'AVC' vehicle, in other words, additional voluntary contributions
may be made to a PRSA. The 15% limit that currently applies to the total of employee contributions to an occupational pension scheme
and an AVC scheme will similarly apply to the aggregate of contributions to the occupational scheme and the 'PRSA-AVC'. Such
employees also benefit from the 'tax-free' employer contribution to the occupational pension scheme which is only limited by funding
requirements.
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Refunds of contribution from occupational pension schemes
Refunds of contributions (with interest where applicable) paid out from occupational schemes may be transferred to a PRSA without a
tax charge to encourage pension funding.
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Tax regime in funding period
The existing tax regime for pension business will apply to PRSA business, i.e. there will be tax free growth during the funding period.
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Position on retirement
- Benefits can usually be provided at age 60, subject to the same 'early' retirement rules that exist at present for the self-employed
and employees respectively.
- There is no limit on the pension or annuity that is payable from a PRSA on
retirement.
- The options available on retirement are similar to the options introduced for RAC holders and certain other persons in Finance Act
1999. Thus a PRSA holder on retirement may take ¼ of the fund as a tax free lump sum and may:-
- Invest the balance in an Approved Retirement Fund (ARF) subject to a minimum investment in an Approved Minimum Retirement
Fund (AMRF)
- Withdraw the balance in cash subject to a minimum investment in an AMRF
- Invest the balance in an annuity
- The ability to invest in an ARF is subject to the individual having a guaranteed pension or
annuity from another source of at least £10,000 a year for life. If this is not the case, £50,000, or the balance in the PRSA fund
if less, must be transferred to an AMRF or used to purchase an annuity payable
immediately. The capital in the AMRF cannot be withdrawn until the individual reaches the age of 75.
- Similarly, the ability to withdraw the balance in the PRSA fund in cash is subject to the individual having a guaranteed pension or
annuity from another source of at least £10,000 a year for life. If this is not the case,
£50,000, or the balance in the PRSA fund if less, must be transferred to an AMRF or used to purchase an
annuity payable immediately. The capital in the AMRF cannot be withdrawn until the
individual reaches the age of 75.
- Where the PRSA is used as an 'AVC' vehicle (see paragraph 9 above), the lump sum would be restricted in line with the occupational
pension scheme rules.
- There is no tax charge where the balance is transferred to an ARF. Instead any withdrawals from the ARF will be subject to PAYE
at the marginal rate of tax for the year in which the withdrawal is made.
- PAYE will apply to all annuities and other withdrawals on retirement other than:-
- A tax free lump sum
- Transfer to an ARF/AMRF
Death prior to retirement
Where the contributor dies pre-retirement, the PRSA fund may pass in its entirety to the estate of the deceased person free of
income tax. Inheritance tax will apply as per the usual rules.
Death post retirement
Where the contributor dies after benefits have commenced, the taxation rules for the PRSA fund will be similar to the taxation rules
for ARFs on death.
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