12.1 Introduction
12.2 What is a PRSA?
12.3 Disclosure
12.4 Investment
12.5 Tax Treatment
12.6 Benefits
12.7 Transfers
12.8 PRSA Providers
12.9 Regulation and Supervision
12.10 Interaction with Occupational Pension Schemes
A new type of pension vehicle known as the Personal Retirement Savings Account (PRSA) was introduced by the Pensions (Amendment )Act, 2002. This was a principal recommendation of the National Pensions Policy Initiative and its aim is to improve the extent of pension coverage. The first PRSAs were approved in early 2003.
A PRSA is a vehicle which can be used for long-term retirement provision by everyone - employees, self employed, homemakers, carers and the unemployed. It is a contract between an individual and a PRSA provider in the form of an account that holds units in investment funds managed by 'PRSA providers'. The PRSA contributor is the owner of the PRSA assets - unlike an occupational pension scheme, where trustees hold the assets on behalf of the workers.
There are two types of PRSA - a Standard and a Non-Standard PRSA. The difference between the two is that a Standard PRSA's charges are capped at 5% of PRSA contributions paid and 1% per annum of PRSA assets. Non-standard PRSAs have no such cap on charges. The other main difference is that standard PRSAs can invest only in unit funds, whereas non-standard products have a wider choice of assets.
No charges can be made for transfers of assets or the suspension and resumption of contributions. Proposal to alter charges must be notified to contributors. A standard PRSA may not be marketed or sold if its purchase depends on the contributor buying any other product .
An employer who does not operate a pension scheme, or whose scheme limits eligibility or imposes a waiting period of more than a six months will be obliged to allow access by his 'excluded' employees to at least one Standard PRSA; provide a contribution deduction facility if required and allow reasonable access to financial advisers. The employer is not, however, obliged to contribute to a PRSA, but may do so. Contributions- including any made by the employer - must be transferred to a custodian account of a PRSA provider within 21 days following the end of the month in which the deduction is made.
PRSAs are mainly designed to act as a vehicle for retirement savings for those who are not members of occupational pension schemes, but will also perhaps replace Retirement Annuity Contracts (RACs) and may be used as a vehicle for additional voluntary contributions (AVCs). In fact, if a pension scheme doesn't have an AVC facility, employers must make a standard PRSA available to employees for this purpose.
PRSAs providers have to make specific disclosures to contributors. These will include:
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A preliminary disclosure to prospective contributors stating, in general terms, the level of benefits that they could reasonably expect to get.
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Regular Statements of Reasonable Projection showing the level of benefit that can reasonably be expected
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Regular statements of individual and employer contributions, including transfer value and
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disclosure of commissions/charges (requirements for Standard and non-Standard PRSAs differ)
PRSA providers have to provide a Default Investment Strategy for each product. This is an automatic investment strategy to be applied unless the contributor indicates otherwise. The Default Investment Strategy is linked to general good practice for investment for retirement and certified by the PRSA actuary.
Tax treatment of PRSAs is similar to that given to occupational pension schemes - tax relief on contributions , tax-free buildup of the fund. Limits on employee contributions are the same as those that apply to occupational schemes and Retirement Annuity Contracts. However, if an employer contributes to an employee's PRSA, this has the effect of reducing the maximum contribution that the employee is allowed for tax purposes. If the total of employer and employee contributions exceeds the personal contribution limits, the excess becomes a benefit-in-kind on the employee.
PRSA benefits may be taken from age 60 onwards, or earlier in the event of death or permanent incapacity and in a few other limited circumstances. 25% of the fund value is payable tax free. The balance is used to provide a pension, or invested in the ARF/AMRF options set out in the 1999 and 2000 Finance Acts.
Transfers out of PRSAs may also be made and a provider must permit the transfer of assets to another provider without any transfer charge being levied. Transfers from other forms of pension arrangement into PRSAs are a bit more difficult. An RAC can be converted into a PRSA if the provider agrees. However, no transfer can be made from an occupational pension scheme to a PRSA, even if the scheme is winding up, if the member concerned has been in the scheme for more than 15 years. In addition, strict requirements bind the prospective PRSA provider, including a need for very heavy professional indemnity insurance.
A PRSA provider is an authorised investment firm, insurance company or credit institution which has submitted one or more PRSA products to the Pensions Board and the Revenue Commissioners for approval. A PRSA provider may, in turn, contract out the management of the PRSA investments wholly or partly to an investment manager, which must also be an investment firm, insurance company or credit institution.
The Pensions Board is responsible for the regulation and supervision of the PRSA regime and will monitor and supervise the activities of the PRSA providers and the provision of PRSA products. Financial supervision of providers based in Ireland is the responsibility of the Irish Financial Services Regulatory Authority. Overseas providers, if any, will be supervised by the authorities in their home countries.
Key features of the regulatory role include
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Approval of PRSA products jointly with the Revenue Commissioners
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The monitoring and supervision of the actual operation of the PRSA providers
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Review of charges and compliance generally
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Collection of fees from providers to pay for the cost of supervision
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Ordering the withdrawal or suspension of PRSA contracts under certain conditions
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Preparing and updating a code of conduct for the sale and marketing of PRSAs
The introduction of PRSAs has no direct effect on defined benefit pension schemes. As far as defined contribution schemes are concerned, employers may decide to opt for the simpler regime offered by the PRSA rather than for the more heavily regulated occupational pension scheme regime. However, it should be noted that the contributions paid become the property of the employee as soon as they are paid. There will be no minimum period before benefits become preserved (2 years membership in occupational pension schemes).
Tax relief on employee contributions (including those made to PRSAs) has been improved for members of occupational schemes. However, an earnings "cap" has also been introduced, limiting reliefs to aggregate pay from all sources of €254,000. Normal Revenue limits continue to apply to the aggregate of occupational and PRSA benefits, and these will have to be policed by pension scheme trustees. Some members of defined contribution schemes, in particular, may feel that they would be better off to opt out and contribute to a PRSA, so that they can invest their entire pension account in an ARF rather than just the portion represented by their AVCs (see Section 13).
Existing contributors to AVC arrangements may terminate those arrangements and transfer the assets into PRSAs. If a pension scheme does not include an option to allow members to pay AVCs at all, the employer will be obliged to permit employees to participate in one or more standard PRSAs.
Finally, the legislation imposes a time limit for transmission of employee contributions, whether to PRSAs or occupational pension schemes, to the provider, trustees or manager. This must happen within 21 days of the end of the month in which the contribution has been deducted from pay by the employer. A similar time limit applies to employer contributions due to PRSAs and to defined contribution pension schemes. Once the contributions are received, trustees must have them invested, and a further 10 days are allowed for this to happen. PRSA contributions must be under the control of a 'custodian' within the 21-day period.