First launched in 2002 with much aplomb to help boost pension coverage, PRSAs – or personal retirement savings accounts – were introduced to offer a clearly defined, portable pension product.
Hopes for the product were high but take-up, while still significant, has been lower than expected. The most recent figures show that, at the end of 2013, there were 215,892 PRSA contracts taken out, holding assets of some €4 billion, while a report from the OECD in 2013, said that the product had had only “limited success”.
Backing up this point was the fact that PRSAs only covered 6.6 per cent of the working-age population some nine years after their introduction.
Last month’s Finance Bill, however, may change the attractiveness of the product, and cause employers to look anew at PRSAs, increasing the chances for their wider use.
The change
In October, Minister for Finance
Michael Noonan
published his Finance Bill, and surprised many pension observers when he announced an exemption from an employee universal social charge (USC) in respect of employer contributions to a PRSA. While the pensions industry had been lobbying for the exemption, it was surprising nonetheless when it came.
The move brings PRSAs into line with other pension schemes and, according to Jonathan Sheahan, managing director of Compass Private Wealth, will be "revolutionary" in terms of the pension products that companies can now offer their employees.
“Essentially, if you’re a mid-sized company of between five and 50 employees, the choice of pension structure up to now has always been very difficult,” he says, noting that the options were largely restricted either to executive pensions, PRSAs or going down the road of introducing a defined-contribution (DC) scheme.
But the last is “expensive in terms of time and in terms of commitment”, and is “barely justifiable”, Sheahan says, unless the company strongly believes it will grow its numbers.
But PRSAs have also posed a challenge. An anomaly has existed since the introduction of the USC in December 2010, which meant that when an employer contributed to an employee’s PRSA product, the contribution got hit by the USC. This is because employer contributions to a PRSA are treated as benefit in kind, whereas contributions to a DC scheme are not.
"If your employer wasn't contributing, you weren't losing out," notes Daryl Hanberry, tax partner at Deloitte – although clearly, building a realistic pension pot without employer contributions is very unlikely.
However, if they were, then you were losing as much as 7 per cent of each contribution via USC. So, an employer contribution of €200 a month or €2,400 a year would have meant €168 less going into your pension fund each year. Over a 30-year working life, this would reduce your fund by a large amount, so the latest move is important.
The change means that more employers will now look to PRSAs again, says Sheehan, adding “it’s a no-brainer to move to a PRSA scheme”.
Hanberry agrees that the move “should make themmore attractive”, but cautions that a bigger issue is that “people still aren’t funding enough for retirement”.
How PRSAs work
Now that PRSAs are back on a level playing field when it comes to tax treatment with other forms of pension savings, you might be interested in considering one. But how do they work?
First thing to know is that all PRSAs are wholly owned by you – in the same way as any other defined-contribution pension scheme. That means no one else has a right over the assets of the fund, as may be the case if you’re in a more traditional, though increasingly rare, defined-benefit or final salary scheme.
If you’re an employee, you’re also entitled to ask your employer to set up such a scheme. It’s not quite auto-enrolment – which requires employees to opt out, rather than opt in, to a pension scheme – but employers are obliged to facilitate access to a PRSA for employees who otherwise wouldn’t have access to a corporate pension plan.
Contributions can come from yourself, and your employer, but PRSAs are not tied to a particular employer, regardless of whether or not they make contributions. They are very portable, which may suit the growing cohort of people for whom a “job for life” is a historical artefact.
Another advantage of a PRSA is that even if you leave a company fairly soon after joining, employers are not entitled to a refund of the contributions they made to your PRSA pension. “It’s a big benefit for the person in the street,” notes Sheahan.
Investment options in a standard PRSA – where there is a threshold on costs – are limited, as they can only invest in managed funds but if you have a different risk/investment appetite, you can also consider a non-standard PRSA, which allows a wider investment choice.
Just like other pension products, you’re entitled to tax relief on your contributions, up to certain age limits, at either the standard (20 per cent) or higher (40 per cent) rate of tax, depending on which you pay. Thus, if you pay tax at the higher rate, a €240 contribution to your fund will only cost you €144.
Where PRSAs fall down, however, is when it comes to the age-related limits for tax relief.
The headline figure says, for instance, that you can get tax relief on 25 per cent of your income if put into a pension fund when you’re aged 40-49 for example.
But, with PRSAs, when working out what tax relief you’re entitled to, Revenue considers “combined” contributions to the fund – ie what you get from your employer and what you put in yourself.
With a DC scheme, on the other hand, only employee contributions are subject to Revenue limits. This can put a PRSA holder at a significant disadvantage if they have the funds, and the desire, to allocate to their pension.
The charges
Investing in a PRSA offers a degree of certainty about what charges you’ll face, as maximum limits are set out in legislation, at least for standard PRSAs.
A standard PRSA provider can only impose charges of 5 per cent on contributions, plus a 1 per cent annual management charge. But, while charges are limited to this ceiling, some argue that even then they still impose a hefty charge on savers.
As the aforementioned OECD report noted, charges on the Irish PRSA product are “substantially” above the levels charged in the best-performing countries such as Denmark or Sweden, where total management fees are below 0.5 per cent of assets under management.
And, when compared with the UK’s auto-enrolment workplace Nest product, the differential in the maximum charges with PRSA are such that it translates into a cut in benefits for the PRSA holder of the order of 12 per cent.
Given this, it makes sense to shop around and seek out the best options and avoid the maximum charges.
Many low-cost financial brokers, such as prsa.ie and LA Brokers, have PRSA products that don’t impose a 5 per cent contribution charge, although you may be charged a fee for setting up the fund. Indeed many of these products are the same: they’re just cheaper or more expensive depending on the channel you choose to buy them from.
Consider a PRSA with Irish Life. If you buy it directly from the life assurance company, you will see 5 per cent of every contribution – ie €15 on a €300 monthly contribution – handed over to the company. On the other hand, if you buy the same product from a low-cost broker, you can avoid this 5 per cent charge.
Bear in mind also that these maximum charges are only limited to standard PRSAs. If you opt for a non-standard product, which offers a broader investment range, you should be prepared for higher charges. For example, Irish Life’s non-standard PRSA Performance product charges 5 per cent on contributions as well as 1.35 per cent in annual fees.
