Personal Retirement Savings Accounts
Personal Retirement Savings Accounts (PRSAs) were first introduced in Ireland through the Pensions (Amendment) Act 2002. A Personal Retirement Savings Account is a long-term personal retirement account designed to enable you to save for retirement in a flexible manner. (This is especially important for people with no pension provision). Your PRSA is a contract between you and a PRSA provider in the form of an investment account. PRSAs allow you to change employment and continue to use the same PRSA. You can also switch from one PRSA to another at any time, free of charge.
Tax relief based on your age will be given by the Government for the contributions you pay into your PRSA. Since 2003 employers that do not provide an occupational pension scheme for their employees are obliged to provide access to at least one Standard PRSA. Employers are required to have provided access to a PRSA to employees who are not entitled to join a pension scheme within 6 months of existing service. Read more about employers' obligations and PRSAs here (pdf)
There are two types of PRSA:
- Standard PRSA and
- Non-Standard PRSA.
The main difference between the two is that the maximum charges under a Standard PRSA cannot exceed 5% of contributions paid and 1% per annum of the PRSA assets. There are some restrictions on the kind of assets a standard PRSA can invest in. You can read more about the differences between Standard and Non-Standard PRSAs in a Consumer's Guide to PRSAs (pdf) produced by the Pensions Authority.
Standard PRSAs are likely to meet the requirements of most people. The level of charges imposed is very important; the charges imposed reduce the fund you can build up. On your retirement, the size of your fund will depend on your contributions and the investment performance less charges deducted. It is not possible to predict investment performance. Charges on non-Standard PRSAs are not capped and in most cases, are higher than Standard PRSAs. If you are considering a Non-Standard PRSA, ask for a full explanation of the differences between this product and the Standard product. You should beware of promises of better returns on Non-Standard PRSA products - predicting investment performance is extremely difficult.
Do you need a PRSA?
If you are considering whether to invest in a PRSA or are weighing up your options, you should ask yourself the following questions:
- Is there an existing pension scheme available to me in my job? If not, you should consider making provision for your retirement and a PRSA may be the option for you. If you already have a good pension arrangement, you may not need to make any additional provision, or you may be able to "top up" your benefits through making Additional Voluntary Contributions (AVCs). If there is no AVC facility, your employer must provide access to a PRSA.
- Should I start a PRSA if I already have a personal pension plan? You should seek professional advice based on your circumstances. Contact a broker or your pension provider for more information.
- Do I need a PRSA if I already have a defined benefit scheme? Defined benefit pension schemes promise a pension related to your salary (e.g. two-thirds of final salary on retirement). You may not need to make any further pension provisions. Transferring from a defined benefit scheme into a PRSA involves a risk. Assess your financial position and weight up the advantages/disadvantages.
- Do I need a PRSA if I have a defined contribution scheme? You are already carrying the investment risk - your pension will depend on the contributions you make, together with the investment performance of your fund, less charges involved. If your employer is making a contribution to your existing scheme, you should find out whether this will continue if you transfer to a PRSA.
Investment of your money
Standard PRSAs invest only in pooled funds where the risk is spread across a large number and variety of investments. Non-Standard PRSAs can offer wider investment choices. However, you need to be sure that you understand the investment choices and the reasons why you should opt for them. If you do not understand how your pension will be invested, then you should consider if this product is best for you.
You should also be sure that you can afford the monthly payment suggested and that this is the most effective payment for tax relief purposes - read more about tax relief and PRSAs below.
Approval of PRSA products
The Pensions Authority and the Revenue Commissioners are jointly responsible in Ireland for approving PRSA products. The Pensions Authority supervises the activities of providers in relation to their approved products and monitors compliance with the legislation regarding PRSAs. As part of the Pension Authority's role, a register of PRSA providers and their products is available.
Ombudsman for Pensions
The Ombudsman for Pensions has the power to investigate and determine your complaints concerning disputes of fact or law and errors in relation to occupational pension schemes and Personal Retirement Savings Accounts. The Ombudsman has the power to give any directions necessary to resolve the complaint or dispute and can give financial compensation (redress) but this cannot exceed the actual loss of benefit under the occupational pension scheme or Personal Retirement Savings Account. The Ombudsman does not have the power to award legal costs. All decisions made by the Ombudsman are binding between the parties subject to a right of appeal by either party to the High Court.
Tax relief and PRSAs
If you pay a contribution into a PRSA, you will benefit from tax relief at your marginal income tax rate. Since 1 January 2011 you have to pay social insurance (PRSI) contributions and the Universal Social Charge on your PRSA contribution. Where your contribution to your PRSA is deducted from your salary by your employer, net pay arrangements will apply, that is, your tax relief is given at the time you pay the contribution.
Maximum annual tax deductible is based on a percentage of your earnings. The allowable percentage rises with age. (So for example, someone over 40 years of age will obtain a higher rate of tax relief than someone aged under 30 years).
Tax relief is allowed against your relevant earnings (that is, earnings from employment, from a profession, from a trade or from an office). If you have earnings as a proprietary directory or employee of an investment company, these are discounted. "Net relevant earnings" are relevant earnings less losses, capital allowances and certain payments that reduce a person's income for tax purposes such as tax effective covenants.
If you are a member of an occupational pension scheme or of a statutory pension scheme, you may pay to an Additional Voluntary Contributions PRSA. (Separate rules apply here - see AVC below).
PRSA providers cannot impose a minimum contribution greater than the following:
- €300 per annum
- €10 per electric transaction or
- €50 per transaction for other methods of payment.
Contributions received by PRSA providers must be held in a custodian account.
Maximum allowable contributions for tax relief purposes are as follows:
|Age||Percentage (%) of earnings*|
|Under 30 years||15%|
|60 and over||40%|
*In the case of employees, "earnings" means gross pay for tax purposes. In the case of self-employed people, "earnings" is defined as "net relevant earnings" (see above). From 2011 the annual earnings limit that may be taken into account is €115,000 (€150,000 in 2010).
This means for example, that someone aged 35 years can gain tax relief on the lower of 20% of their earnings or on the contributions paid in that year.
Contributions made by an employer to a PRSA on behalf of an employee, are treated as a "benefit in kind" of the employee. These contributions are treated for relief purposes for the employer as they are for the employee. For example, an employee aged 29 contributes 5% of their earnings to a PRSA and the employer contributes a further 10%, the employee as treated as making a total contribution of 15%. The employee is charged on the employer's contribution as a benefit in kind and must include this on their return of income to the Revenue Commissioners. This tax treatment makes no practical difference unless the total contribution limits shown are exceeded.
From April 2006 contributions to PRSAs have been disregarded from assessment in means-tested social welfare schemes except Supplementary Welfare Schemes.
How to apply
If your employer does not operate an occupational pension scheme or where there are certain restrictions applying to the occupational pension scheme, your employer is required by law to ensure they provide access to at least one Standard PRSA. This rule applies to all employers, irrespective of the number of employees and the status of those employees (i.e., whether they are full-time, fixed-term, part-time, contract, etc.).
Contact the HR manager or Payroll Section at your employment to find out about more about the Standard PRSA(s) they have provided.
You can also read more about pensions and retirement here.