Pensions (PRSA)

Personal Retirement Savings Account (PRSA’s) Pensions (Amendment) Act 2002

A PRSA is a long-term personal retirement account introduced by the Pensions Act 2002. It is designed to enable people, especially those with no pension provision, to save for retirement in a flexible manner. A PRSA will be a contract between an individual and a PRSA provider in the form of an investment account. Subject to age-based limits, tax relief will be given for contributions to a PRSA.

PRSA products will be approved by the Pensions Board and the Revenue Commissioners. Prudential supervision of PRSA providers will be within the jurisdiction of existing regulators. The Pensions Board will be responsible for supervision of a provider’s activities in respect of its PRSA products.

Employers, who do not provide an occupational pension scheme for their employees, will be obliged to provide access to at least one Standard PRSA.

It is expected that the PRSA products will not be available until late 2002 or early 2003.

Tax Rules relating to Personal Retirement Savings Accounts

Tax relief on contributions

Contributions paid into a PRSA will benefit from tax relief at an individual’s marginal income tax rate. There will also be relief from PRSI and the health levy for employees. Where PRSA contributions are deducted by an employer, the net pay arrangement will apply.

Details of this tax relief

The maximum annual tax deductible contributions are based on a percentage of the individual’s net relevant earnings. The allowable percentages rise with age. Members of an occupational pension scheme or of a statutory pension scheme may pay AVC PRSA contributions. Separate rules apply to such contributions - see paragraph on PRSA’s and AVC’s.

Relief is allowed against relevant earnings i.e. earnings from a trade, profession, office or employment. Earnings as a proprietary director or proprietary employee of an investment company are not relevant earnings. Net relevant earnings are relevant earnings less losses, capital allowances and certain payments which reduce a person’s income for tax purposes such as tax effective covenants.

The maximum allowable contributions are as follows:

Age	% of Net Relevant Earnings
Under 30	15%
30 - 39	25%
40 +	30%

Thus, for example, an individual aged 35 can gain tax relief on the lower of :

• 25% of net relevant earnings or
• The contribution paid in that year.

The 30% limit will apply, irrespective of age, to certain categories of person who typically retire earlier than usual, such as athletes, jockeys and so on.

Except in the case of an employee who is a member of an occupational pension scheme or of a statutory pension scheme, a taxpayer is entitled to tax relief on a contribution of €1,525 paid even if this exceeds the normal income-based limit.

For example, if an individual aged 23 earns €9,525, the normal limit on the tax deductible contribution is 15% of €9,525 being €1,430. If this individual pays €1,600, relief of €1,525 will be allowed, rather than the earnings based limit of €1,430.

An earnings cap of €254,000 will apply also to PRSAs as is the case with Retirement Annuity Contracts [RAC] for the purposes of tax relief. Thus, for example, where a person is aged over 40, the maximum tax relieved contribution is €254,000 × 30% = €76,200 per year.

Contributions paid in any year in excess of the maximum tax deductible contribution may be carried forward and claimed in future years subject to the annual limit for those years. Similarly, contributions paid while out of the workforce may be carried forward and claimed against future earnings on return to paid employment subject to the annual limits.

The tax relief is non-transferable between spouses in line with existing rules for RAC and occupational pension scheme contributions.

Contributions paid after the end of the tax year and before the return filing date for that year may be claimed for that tax year. The return filing date is 31 October following the end of the tax year - for example for the tax year 2002, the return filing date will be 31 October 2003.

Contributions made by an employer to a PRSA on behalf of an employee are treated as a benefit in kind of the employee. Such contributions are treated for relief purposes as made by the employee.

For example, where an employee aged 29 contributes 5% of his or her earnings to a PRSA and the employer contributes a further 10%, the employee is treated as making a total contribution of 15% in aggregate. The employee is charged on the employer’s contribution as a benefit in kind and must include this in his or her return of income.

Employer PRSA contributions on behalf of employees will be fully deductible for tax purposes in arriving at the profits or gains of a trade or profession or in a calculating management expenses of an investment company.

Contributions to both an RAC and a PRSA

Contributions to an RAC and a PRSA will be aggregated when calculating the maximum tax relief.

For example, a person aged 45 who gets tax relief on 25% of their earnings on contributions to an RAC may contribute an extra 5% to PRSAs making up 30% tax relief in aggregate.

PRSA’s and AVC’s

Employees in an occupational pension scheme or a statutory scheme may use a PRSA as an “AVC” vehicle, in other words, additional voluntary contributions may be made to a PRSA. The PRSA must be established under a rule of the main scheme or under a separately arranged scheme, approved by the Revenue Commissioners, which is associated with the main scheme.

The following age related limits will apply to the total of employee contributions to an occupational pension scheme and the “PRSA-AVC”:

Age	% of Earnings
Under 30 years of age	15%
30 - 40 years of age	20%
40 - 50 years of age	25%
50 years and over	30%

Such employees also benefit from the “tax-free” employer contribution to the occupational pension scheme which is limited by funding requirements.

Refunds of Contribution from Occupational Pension Schemes

Refunds of contributions (with interest where applicable) paid out from occupational schemes may be transferred to a PRSA without a tax charge to encourage pension funding - otherwise such refunds are charged at the standard rate [currently 20%].

Tax regime in Funding Period

The existing tax regime for pension business will apply to PRSA business, i.e. there will be tax free growth during the funding period.

Position on Retirement

Benefits can usually be provided at age 60, subject to the same “early” retirement rules that exist at present for the self-employed and employees respectively.

The options available on retirement are similar to the options introduced for RAC holders and certain other persons in Finance Act 1999. Thus a PRSA holder on retirement may take 1/4 of the fund as a tax free lump sum and may:

• Invest the balance in an Approved Retirement Fund (ARF) subject to a minimum investment in an Approved Minimum Retirement Fund (AMRF)
• Withdraw the balance in cash subject to a minimum investment in an AMRF
• Invest the balance in an annuity.

The ability to invest in an ARF is subject to the individual having a guaranteed pension or annuity from another source of at least €12,700 a year for life. If this is not the case, €63,500 or the balance in the PRSA fund if less, must be transferred to an AMRF or used to purchase an annuity payable immediately. The capital in the AMRF cannot be withdrawn until the individual reaches the age of 75.

Similarly, the ability to withdraw the balance in the PRSA fund in cash is subject to the individual having a guaranteed pension or annuity from another source of at least €12,700 a year for life. If this is not the case, €63,500, or the balance in the PRSA fund if less, must be transferred to an AMRF or used to purchase an annuity payable immediately. The capital in the AMRF cannot be withdrawn until the individual reaches the age of 75.

Where the PRSA is used as an “AVC” vehicle the maximum lump sum and pension must be in line with the occupational pension scheme rules.

There is no tax charge where the balance is transferred to an ARF. Instead any withdrawals from the ARF will be subject to PAYE at the marginal rate of tax for the year in which the withdrawal is made.

Taxation of Benefits

PAYE will apply to all annuities and other withdrawals from a PRSA other than

• A tax free lump sum [25% of the fund]
• A transfer to an ARF/AMRF or
• A transfer to another PRSA, to an occupational pension scheme or to a statutory scheme.

Death prior to retirement

Where the contributor dies pre-retirement i.e. before benefits are taken from a PRSA, the PRSA fund may pass in its entirety to the estate of the deceased person, free of income tax. Inheritance tax will apply as per the usual rules.

Death post retirement

Where the contributor dies after benefits have commenced, the taxation rules for the PRSA fund will be similar to the taxation rules for an ARF on death.

Interface with RACs

Transfers from an RAC to a PRSA will be allowed.

Interface with Occupational Pension Schemes

Transfers from an occupational pension scheme or a statutory scheme to a PRSA will be allowed where the member has been in the scheme for 15 years or less and either

• The scheme is being wound up or
• The member is changing employment.

The value of AVC contributions to an occupational pension scheme may be transferred to a PRSA without regard to the foregoing restrictions.