A Personal Retirement Savings Account (PRSA) is a new model of pension designed for self-employed people, unemployed people, homemakers, carers and any employee who is not a member of an occupational pension scheme.
A PRSA is a contract between an individual and one of 10 authorised providers, most of which are insurance companies. For most people, standard PRSAs will be more suitable than non-standard ones, which have higher charges.
Employers who do not offer a pension scheme or who exclude employees from the scheme must have selected at least one standard PRSA and deduct contributions from payroll at the request of excluded employees.
However, thanks to the introduction of legislation protecting the rights of part-time and fixed-term contract workers performing similar work to permanent staff, these types of employees are entitled to equal treatment in respect of pensions. This means that if an employer has an occupational pension scheme, it must allow all workers into the scheme (after a period of six months' service) rather than simply offer access to a PRSA.
This is because a PRSA may give rise to a lower pension than some occupational schemes.
Standard PRSAs boast lower charges than the old-style personal pensions traditionally purchased by the self-employed, but the main disadvantage for employees is that employers are not required to contribute.
PRSAs are portable, meaning employees can keep the same PRSA if they change jobs.
In theory, people leaving occupational schemes are supposed to be able to transfer their pension funds into a PRSA. In practice, they may have difficulty doing this, as insurance companies are refusing to accept transfers.
As with other types of pensions, contributions paid into a PRSA will benefit from tax relief at the holder's marginal income tax rate, subject to annual limits.
This relief can be carried forward to future years, subject to the limits for those years. Employees can also receive relief from PRSI and the health levy.
The contributions grow in an investment fund tax-free. On retirement, a PRSA holder may take 25 per cent of the fund as a tax-free lump sum and use the balance to buy an annuity, which is taxed as income.
Alternatively, a PRSA holder may invest in an approved retirement fund (ARF). Members of occupational pension schemes can only invest their additional voluntary contributions (AVCs) into an ARF.
A consumer factsheet on PRSAs, including some of the things that buyers should look out for, is available from the Irish Financial Services Regulatory Authority on 1890 777 777 or at www.itsyourmoney.ie.
