Personal Retirement Savings Accounts (PRSAs) will fail to reach low-income workers because contributions to Special Savings Incentive Accounts (SSIAs) continue to eat into take-home pay, according to brokers.
More attractive rates of tax relief also serve to make PRSAs a better deal for people with above-average income.
Tax relief on pensions is granted at a person's marginal rate, so a contribution of €100 will effectively only cost a 42 per cent taxpayer €58. Anyone earning less than €28,000 will only pay tax at the standard rate of 20 per cent, reducing the tax incentive for taking out a pension.
"SSIAs still have three or four years to run, depending on when you took them out," said Mr Diarmuid Kelly, chief executive of the Professional Insurance Brokers Association (PIBA). "For anyone paying 20 per cent tax, their SSIA may be more efficient. If a joint-income couple put the maximum €254 a month into their SSIAs, that's €500 odd a month," Mr Kelly said.
They will then receive a 25 per cent Government top-up on their SSIA contributions. Low-income workers simply do not have the additional spare cash to invest in a PRSA, Mr Kelly added.
More likely to be excluded from occupational pension schemes, low-income workers are part of the Government's main target market for PRSAs.
Take-up of the pensions will depend on employers' attitudes, according to Mr Kelly. Employers receive a PRSI saving of 10.75 per cent of PRSA contributions deducted from payroll, without having to contribute to the schemes themselves. "If the employers gives that saving back to the employee, that might give an additional boost to the scheme," he said.
The employee would then receive tax relief of 20 per cent, PRSI relief of 6 per cent, plus 10.75 per cent of the amount they contribute.
"That has to be encouraged, although it is still very questionable whether PRSAs will reach the target market," he said. Instead, brokers believe that PRSAs will simply replace personal pensions as a means for self-employed people to save for retirement.
Those who do take out PRSAs will find it difficult to build up an adequate pension. "Even if you are relatively young, you should be putting in 15 per cent of your salary a year to get a good pension. That's quite a lot for someone on €25,000 a year. It's over €300 a month," Mr Kelly said.
PRSAs were set up under the principle that some retirement provision was better than nothing at all.
Charges were capped on standard PRSAs to make them more affordable, while the minimum contribution was set at just €300 a year, regardless of whether or not that was enough to generate an adequate pension.
Consumers were supposed to be able to stop and start contributions when they wished.
However, some PRSA providers decided to raise the bar by refusing to pay commission to brokers on contributions below €150 a month, reducing the flexibility of the products for people who wanted to receive independent financial advice before buying.
A person earning €20,000 is unlikely to be able to put €150 a month into a PRSA, Mr Kelly said, despite the fact that it is recommended that they should actually be putting in €250 a month under the 15 per cent of salary guideline.
Some providers have since reduced their thresholds. However, there is still a danger that lower-income people will have no choice but to buy PRSAs directly from bancassurers, Mr Kelly warned.
Some good news on PRSAs emerged last week when one online intermediary announced it would sell Irish Life standard PRSAs on an execution-only, nil-commission basis.
Charges on contributions are capped at 5 per cent under standard PRSAs, meaning that for every €100, most product providers will deduct €5.
But people who buy a PRSA from LA Brokers, at www.labrokers.ie, will see the full €100 invested in their PRSA fund and will only pay annual management charges of 1 per cent or less.
Mr John Geraghty, chief executive of LA Brokers, said he was trying to "look at the glass half full with PRSAs", but that the actual number of PRSAs sold by the main product providers so far was "a complete and utter disaster" for the market.
Consumers were supposed to be able to buy standard PRSAs "off-the-shelf". But by bringing out so many non-standard and standard PRSAs, the industry confused consumers, Mr Geraghty said.
