Personal Retirement Savings Account or PRSA’s were introduced in 2003 where for the first time Employers were obliged to offer a PRSA facility to their employees. The product was rolled out by insurance companies however given its overall structure and remuneration incentives, its uptake was extremely low.
Pension changes in 20 years since the launch of PRSA’s?
- The State Pension has evolved with the Total Contribution Approach to calculating benefits, possible future amendments to the level of PRSI and retirement age. From January 2024 flexible drawdown between 66 and 70.
- Auto Enrolment (AE) yet to be finalised and rolled out. • Pension Simplification underway through the IDPRTG (Interdepartmental Pensions Reform and Taxation Group Report)
- IORPS 1/11 and the creation of Master Trusts for Group and one member Executive Pension Schemes.
The last two points above in Pension Simplification and the Enforcement of IORPS 11 have resulted in significant changes to the PRSA pension contract. Arguably these amendments have now made the PRSA the contract of choice.
In summary, the IORP II regulatory requirements are complex and are far too onerous and costly for mainstream employers. The increased governance required has resulted in the wind of up of existing Occupational/Executive pension schemes written Post April 2021 and forced transfers into either PRSA’s or Master Trusts. Those Executive Pensions written pre April 2021 have a 5 year derogation until April 2026, however trustees and insurance companies are now directing individuals to make this decision sooner.
Benefits of a PRSA versus a Master Trust for an individual?
- PRSA’s are a simple flexible pension which an individual can avail of regardless of their employment status. PRSA’s are not subject to the IROPS II Legislation which limits certain funds and property holdings.
- The 2022 Finance Act abolished the BIK (Benefit in Kind) tax provision on employer contributions into a PRSA. This change now allows Employers to contribute to a PRSA with no upper limit on contributions. Thus, company owners and their family members in Bone Fide employments drawing a salary, can now fund up to the Standard Fund Threshold of €2m each. The Master Trust arrangement is still subject to “funding checks” to ensure contributions are within limits.
- PRSA’s are portable and can be easily moved from one employment to another without the need for a Trustee. Trustees are required for a Master Trust.
- Individuals can have multiple PRSA’s and phase drawdown. Whereas Executive/Master Trust arrangements must come into payment at the same time if from the same employment.
- Investment/Property company directors receiving a salary under schedule E now have the opportunity for this company to make an Employer contribution into a PRSA’s as above (no BIK and no funding limits). This same individual cannot be a member of an Executive/Master Trust for this employment however.
- The Death benefits for PRSA are greater where the full value of the PRSA will be paid to the individual’s estate if they die before retirement. If the individual is in active member of the Executive/Master Trust the lump sum is limited to 4 x final remuneration plus a refund of member contributions.
- The main reason an individual would use the Master Trust arrangement over the current PRSA is where they are funding for a pension lump sum based on their salary and service. PRSA only allow 25% of the Fund as a tax free lump sum.
This is an area of retirement planning which will be subject to further legisative changes and will therefore need to be closely monitored.
2024 and the Future?
There are future changes anticipated from the IDPRTG which include:
- The abolishment of Personal Pensions and Personal Retirement Bonds (existing contracts to remain) leaving the PRSA the sole transfer pension contract.
- Removal of the requirement for a Certificate of Benefit Comparison for Company transfers to a PRSA.
- Whole of Life PRSA’s – the removal of the upper age limit of 75 for drawing income from a vested PRSA which will allow individuals to build and drawn down their pension benefits until death via one pension contract. This will impact the post Retirement ARF market.
- Enhancements to investment and charging flexibility on PRSA products.
The recent changes in the 2022 Finance Act have been the most extreme developments since the inception of the ARF in 1999. With the benefits and future amendments noted above, the current PRSA landscape is only going to become more popular and inevitably result in the PRSA becoming the contract of choice for both individual and business.
Author: Hugh Maloney, FCA, CFP®, QFA, SIA, Managing Director of Quinlan Financial. To find out more go to https://www.