Personal Pensions & Personal Retirement Savings Accounts (PRSAs)

A Personal Retirement Savings Account (PRSA) is a long-term pension plan which acts as contract between an individual and authorised PRSA provider in the form of an investment account. You are free to make once-off or monthly contributions, availing of tax relief each time you do put money into your account (provided, of course, that you are generating taxable income). You can also stop our contributions at any time without incurring a charge or penalty. PRSAs are also very portable – you are free to transfer PRSA providers or carry over your PRSA if you change jobs without incurring charges or penalties, or having to make significant changes to your plan.

Anyone can take out a PRSA but it especially suited to those who cannot avail of an occupational pension scheme or any other pension arrangement. Note that your employer is legally obliged to allow you access to at least one Standard PRSA if you are categorised as an ‘excluded employee’:

You are an ‘excluded employee’ if:

• Your employer does not offer an occupational pension scheme
• You are included in an occupational pension scheme for death-in-service benefits only
• You are not eligible to join your company’s occupational pension scheme or will not become eligible following your first 6 months in employment there
• You are included in an occupational pension scheme that does not allow for additional voluntary contributions (AVCs)

Whilst they must offer you access to a PRSA through an approved provider, your employer is not legally obliged to make any contributions to your pension plan.

There are 2 types of PRSAs:

• Standard PRSA
• Non-Standard PRSA

The differences between the two being the maximum applicable charges and types of investment allowable.

• Maximum applicable charges:
  • Standard PRSA: 5% on contributions paid & 1% per annum on PRSA fund value
  • Non-Standard PRSA: No maximum limit on charges applied
• Types of investment allowed:
  • Standard PRSA: Only pooled or managed funds are allowed (apart from temporary cash holdings)
  • Non-Standard PRSA: Investment in products other than pooled funds is allowed

PRSA providers cannot impose a minimum contribution greater than:

• €300 per annum
• €10 per electronic transaction
• €50 for any other transaction types

Questions you should ask yourself when deciding on investment options:

• How much time do I have before I retire?
• How much money will I require when I retire?
• What level of risk am I comfortable with?

Factors influencing the value of your retirement fund:

• Size of your monthly contributions
• Performance of the fund your PRSA is invested in
• Level of charges applied
• Length of time before your retirement date

Like personal pension plans, there are limits to the size of the contributions you can make and expect to receive tax relief for. These limits are based on your age. They are the same as those imposed on a personal pension:

• Charges: As outlined above, a PRSA can impose charges on your pension contributions up to a capped or uncapped amount, depending on the type of PRSA you have taken out. A personal pension offers much cheaper contracts that allow for attractive rates. The typical policy fee is around €3-€4.
• Investment Opportunities: A Standard PRSA offers only pooled funds, whereas a Non-Standard PRSA enables you to access other funds. Even so, the complete range of funds may not be available through a PRSA. A personal pension, on the other hand, gives you the full suite of funds to choose from
• Employer Contributions: An employer can contribute towards your PRSA but bear in mind that if they do, these will be counted against the total allowable pension contributions for which you can receive tax relief i.e if your maximum allowable proportion of earnings that can be contributed is 20% and your employer chooses to contribute 5%, you are now only allowed to contribute an additional 15% of your income. Under a personal pension plan, your employer does not make any contributions
• Transfer Charges: PRSAs impose no transfer charges. Some personal pension plans may enforce a 5% charge if you transfer your funds to another provider within the first 5 years, in the interests of indemnity.

Tax implications in the case of;

• Employers:
  • Contributions are fully deductible for corporation tax purposes up to certain limits
  • Contributions paid to PRSAs are treated as benefits-in-kind but are eligible for income tax relief up to the statutory limits. Any contributions made will thus reduce the proportional amount by which the employee itself can contribute. Employer contributions are not liable to PRSI or USC
  • Contributions paid to company pension plans/occupational pension schemes are not treated as benefits-in-kind and therefore do not count against the total amount of contributions allowable for tax relief that an employee can make
• Pensions and Annuities:
  • Annuity payments are subject to PAYE, USC but not PRSI
  • Occupational pensions received in addition to the State pension will be subject to higher tax due to the tax-free payment of the State pension
• Lump Sums taken out at Retirement:
  • The first €200,000 of your retirement fund that is drawn down represents a lifetime limit and is tax-free. A lifetime limit signifies that all the lump sums taken out from different plans or at different times are aggregated such that you do not exceed the above amount.
  • A tax rate of 20% is imposed on any drawn down balances up to €500,000
  • Any balances which exceed €500,000 are subject to the 40% tax rate as well as USC
  • A cash limit of 25% of the fund value is applicable when amount is drawn down from a PRSA/Personal Pension and those transferring to an ARF/AMRF
  • A cash limit of c.1.5x your final remuneration is applicable when amount is drawn down from an occupational pension scheme, provided you have 20 years’ worth of service and not receiving benefits from any previous pension scheme
• ARFs/AMRFs:
  • Any amounts drawn down from either constitute taxable income and are also subject to USC
  • Upon reaching 61 years of age, an imputed distribution rate of 4% of the market value of the owner’s funds is applied as at the 31^st December of that fiscal year
  • Upon reaching 71 years of age, an imputed distribution rate of 5% of the market value of the owner’s funds is applied
  • For all ages above 60 and where the market value of the funds exceeds €2,000,000, an imputed distribution of 6% is applied
• Benefits on Death:
  • Capital Acquisitions Tax (CAT) and/or income tax is imposed on the receiver/beneficiary:
    • Spouses including divorced spouses pay no CAT for lump sums received
    • Children or other beneficiaries are subject to the CAT rate applicable to them
    • Pension payments passed on to spouses and dependents are subject to income tax and USC, but not PRSI
    • ARF/AMRF payments incur no income tax or CAT when beneficiary is spouse or civil partner, but are subject to the marginal rate of tax if inherited by any other entity. If beneficiary is a stranger, CAT is also applicable
    • Children under the age of 21 in receipt of benefits must pay CAT but no income tax