PRSAs

Personal Retirement Savings Accounts

PRSAs are a way for people who are not members of company pension schemes to save for retirement.

It is hoped PRSAs will increase the proportion of the Irish workforce with a private pension from 50% to 70%. A review of PRSAs took place in 2006.

From the 15th of September 2003, employers who do not offer a pension, or who exclude employees with more than 6 months' service, must select at least one standard PRSA and deduct contributions from payroll at employees' request.

Contributions paid into a PRSA will benefit from tax relief at the holder's marginal tax rate, subject to annual limits. This relief can be carried forward to future years, subject to limits. Employees also receive relief from PRSI and the health levy. Contributions from an employer to a PRSA will be treated as Benefit in Kind.

People currently not in employment and not paying tax can also invest in a PRSA. Importantly, this includes housewives. The tax relief can be rolled up and claimed at a future date on return to work etc.

PRSA holders can switch from one provider to another. If it is an employer-nominated PRSA, they also keep the same PRSA when they change jobs. It is intended that PRSA holders will be able to transfer PRSA assets into occupational pension schemes should they become members at a later date.

Contributions placed in the investment fund grow tax-free. On retirement, a PRSA holder may take 25% of the fund as a tax-free lump sum and use the balance to buy an annuity, which is taxed as income.

A PRSA holder may invest in an Approved Retirement Fund (ARF) rather than buying an annuity. Withdrawls are subject to PAYE. This option is not available to people in occupational pension schemes.

The Pensions (Amendment) Act, 2002 provided for the introduction of PRSAs in the Irish market.
The following is an extract of information on the Act and PRSAs, that was issued by the Pensions Board of Ireland: -

What is the Pensions (Amendment) Act, 2002?
The Pensions (Amendment) Act, 2002 ("the Act") arises out of decisions by Government in relation to:

• the Pensions Board's report to the Minister for Social, Community and Family Affairs "Securing Retirement Income", and,
• other reports by the Board to the Minister, in which recommendations were made with the objective of improving the quality and extent of pensions coverage. It also takes account of issues arising from the practical application of the Pensions Act, 1990 ("the Principal Act") since it was introduced.

What exactly does the Act do?

The Act amended existing provisions of the Principal Act and inserts new provisions and new parts in that Act. In particular the Act provided for the introduction of a framework for Personal Retirement Savings Accounts (PRSAs) and their associated tax reliefs and arrangements, and the establishment of a Pensions Ombudsman.

What are Personal Retirement Savings Accounts (PRSAs)?
A PRSA is

• an investment vehicle used for long term retirement provision by employees, self employed, homemakers, carers, unemployed, or any other category of person.
• a contract between an individual and an authorized PRSA provider in the form of an investment account.

There are two types of PRSA - namely a Standard PRSA and a non-Standard PRSA.

How will the PRSA benefits be determined?

The PRSA benefits will be determined by the contributions paid by and on behalf of the contributor and the investment return on those contributions. The PRSA contributor is the beneficial owner of the underlying assets, which may not be used as a form of collateral.

What are the key features of all PRSAs?
The features include:-

Approval: the Pensions Board and the Revenue Commissioners jointly approve PRSA products.

Investment: Each PRSA provider will be obliged to prepare a Default Investment Strategy (DIS) for each product which complies with specified requirements. The DIS will be an automatic investment strategy to be applied unless the contributor indicates otherwise (in writing) - the strategy will be linked to general good practice for investment for retirement and be certified by the PRSA actuary.

The DIS will provide for investment in, apart from temporary cash holdings, pooled funds. Standard PRSAs will only be permitted to invest, apart from temporary cash holdings, in pooled funds, i.e. a collective investment scheme or an internal linked fund the benefit of which is made available by means of a contract of insurance.

While no restrictions are laid down for investments held outside the DIS, regulations may be introduced in this regard.

What charges apply?
A list of what is and what is not included by way of a charge is set out in the Interpretation of Part X of the Act.

The charges are capped at 5% of contributions charge and 1% annual management charge for standard PRSAs, and 1-1.5% approx. annual management charge for non-standard PRSAs.

How are these charges expressed?

The charges are expressed as a percentage of contributions and/ or PRSA assets, and may vary by product, method of distribution/ payment, type of investment held, duration, size of contributions / assets.
Charges may not be expressed in cash terms.

What charges cannot be applied?

Charges cannot be applied arising from

• · transfers received by the PRSA provider from another PRSA provider or from other pension arrangements,
• termination of contributions or transfer of funds
• the suspension of or recommencement of contributions.

Is there a maximum level of charges?

Yes, in relation to Standard PRSAs (see below).

Charges for a Standard PRSA may be discretionary up to the maximum level of charges permitted for such a PRSA.
Charges for non-Standard PRSAs may be discretionary and do not have a stated maximum level.
The PRSA provider will be obliged to give prior notification of at least 2 months to the contributor in advance of any changes to the PRSA charging structure.

Who may contribute to a PRSA?

Contributions may be made by individuals regardless of their employment status. Employers may contribute but are not obliged to do so.

Is there a minimum level of contributions?

Yes, PRSA providers cannot impose a minimum contribution greater than
(a) EUR:300 per annum, and
(b) EUR:10 per electronic transaction, or
(c) EUR:50 per transaction for other methods of payment.

Contributions received by PRSA providers must be held in a custodian account.

What are the characteristics of a Standard PRSA?

A Standard PRSA is a PRSA whose characteristics include:

Maximum charges - PRSA providers will be prohibited from imposing charges in excess of 5% of contributions paid and 1% per annum of the PRSA assets.

Investment - In terms of investment a Standard PRSA will only be permitted to invest, apart from temporary cash holdings, in pooled funds.

Mandatory Employer Access - An employer who is not operating an occupational pension scheme or whose scheme limits membership eligibility or imposes a waiting period will be obliged to provide access to at least one Standard PRSA for his employees.

Marketing - A Standard PRSA may not be marketed or sold if the purchase of this product is dependent on the purchase of any other product (e.g. life assurance).

Disclosure - Restricted disclosure requirements (subject to Regulations) may apply to a Standard PRSA.

What is a PRSA provider?

The Act defines a PRSA provider as

• an investment firm authorized in accordance with Council Directive 93/22/ EEC of 10th May 1993 by a competent authority where the firm's authorization permits it to engage in PRSA activities;
• a life office authorized in accordance with Council Directive 79/267/EEC of 5 March 1979 by the Department of Enterprise, Trade and Employment to transact specified classes of insurance;
• a credit institution which produces, markets or sells PRSA products.

This means, for example, that existing investment business firms and financial entities who are appropriately licensed/licensed by the Central Bank of Ireland or the Department of Enterprise, Trade and Employment may be PRSA providers. Other entities who wish to be a PRSA provider should apply for the requisite authorization to undertake this type of business activity.

Does an employer have to provide access to a PRSA?

An employer is obliged to provide mandatory access to at least one Standard PRSA where -
(a) he does not operate an occupational pension scheme; or
(b) he operates an occupational pension scheme for his employees,
BUT

• the eligibility for membership of the scheme for retirement benefits does not cover all employees;
• employees have to wait more than six months from joining the company to be included in the scheme for retirement benefits;
• scheme members are provided with death in service benefits only.

What must an employer do to provide access to a Standard PRSA?

To provide access to a Standard PRSA, an employer must:

• enter into a contract with at least one PRSA provider to enable employees to participate in a Standard PRSA,
• notify employees of their right to contribute to a Standard PRSA
• allow PRSA providers or intermediaries reasonable access to employees (who would be entitled to reasonable paid leave) to discuss Standard PRSA contracts,
• make deductions from payroll at the employees' request.

What is the position in relation to payment of employee contributions to a PRSA?

The Act provides that an employer who, at the request of the employee, makes deductions from payroll in relation to PRSA contributions must remit these contributions to the custodian account of a PRSA provider within 21 days following the end of the month in which the deduction was made. An employer cannot make any deduction from this payment.

What is the position in relation to employers' contributions to a PRSA?

In the event of an employer making contributions on behalf of a member (he is not obliged to do so) a similar timescale to that for employee payroll deductions will apply. An employer cannot make any deduction from this payment.

What information does the employer have to give in relation to PRSA contributions?

The employer must advise both the employee and the provider in writing at least once a month of

(a) the total amount deducted from the employee's salary, and

(b) if appropriate, the total amount paid by the employer on behalf of the employee in the preceding month or if the previous statement was given less than a month before, in the period since the previous statement was given.

The employer may satisfy this requirement by notification on whatever documentation is normally provided to the employee in relation to salary details e.g. payroll slip.

Does the employer have any responsibility in relation to the investment performance of a Standard PRSA?
No. An employer who enables his employees to participate in a Standard PRSA has no responsibility in relation to the investment performance of the Standard PRSA chosen by an employee.

What is the role of the Pensions Board concerning the regulation of PRSAs?

In general, the Pensions Board is responsible for the regulation, supervision of and compliance with the PRSA provisions of the Act. The Board and the Revenue Commissioners will be jointly responsible for the approval of PRSA products.

Prudential supervision of PRSA providers will remain within the jurisdiction of existing regulators. The Board will be responsible for the monitoring and supervision of a provider's activities in respect of its PRSA products which will, inter alia, involve examining various reports submitted to the Board by providers in accordance with statutory requirements.

Other features of the regulatory role of the Board regarding PRSAs are set out in the Act.

What is the role of the PRSA actuary?

The obligations placed on the PRSA actuary include the following:

• · To determine the extent to which the provider has complied with statutory requirements.
• To certify that (a) charging practice reflects illustration details and complies with the statutory requirements, and (b) the product complies with statutory requirements.

Regulations will be issued in relation to the matter above.

Will persons be entitled to information before entering into a PRSA contract?

Yes. A PRSA provider will have to give a person a Preliminary Disclosure Certificate before they enter into a PRSA contract. This Certificate will have to show the reasonable expectation of the ultimate benefits based on certain assumptions on a generic basis.

Will information on commission and charges have to be disclosed by PRSA providers?

Yes. Full disclosure of all potential and actual commission and other charges payable by contributors will be required. This information will have to be provided:

• to a person entering into a PRSA contract, and
• to a PRSA contributor other than a Standard PRSA contributor.

Also, any proposed changes to charges to be made under a PRSA contract will have to be notified to contributors at least 2 months prior to the proposed change.

Will PRSA providers have to disclose any statement of projections concerning PRSAs?

Yes. Providers will have to disclose a Statement of Reasonable Projection (SRP) to persons on entering a PRSA contract and to PRSA contributors. The SRP must contain information as follows:

• The reasonable expectation of the ultimate benefit based on assumptions, related to future contributions and investment returns on an individualized basis.
• Advice as to the importance of
  • making adequate provisions for retirement, and
  • obtaining appropriate financial advice
• Warnings for the benefit of a potential or actual contributor to a PRSA - details to be specified in Regulations.
• A statement relating to the value of the State Old Age Contributory Pension. Details will be set out in Regulations.

When will the Statement of Reasonable Projection (SRP) have to be disclosed to persons?

The provider must issue the SRP within 7days on entering into a PRSA contract. It should be noted that the PRSA contract is not enforceable against the person until 15 days following the date of issue of the SRP.

When will the Statement of Reasonable Projection (SRP) have to be disclosed to PRSA contributors?

The SRP will have to be disclosed to contributors:
(a) annually and it must be in printed form
(b) on request, subject to reasonable notice but the provider may not require more than 7 days notice
(c) where there is an increase in the number or amount of charges
(d) on the happening of any event to be specified in Regulations.
The SRP must be issued within 7 days of the event at (c) above