PRSA changes benefit early savers

Personal retirement savings accounts (PRSAs) are widely touted as a great option for workers who want control over their pension savings throughout their working days. Now, with recent changes bringing tax relief rules in line with company pensions, PRSAs are more attractive than ever, especially for early starters and big savers.

“Under the changes, the rules around PRSAs became a little looser, and aimed to mirror what you could do through a company pension,” commented Emma Farrelly, Senior Financial Planning Partner, Irish Life Financial Services. “Before, if an employer wanted to pay into an employee’s PRSA, the amount that employer paid was deducted from the employee’s tax relief limits, which are based on age and earnings. Now an employer’s contribution is treated as separate from the worker’s own relief limits, which is in line with the rules around a company pension scheme.”

PRSAs look even more attractive, Farrelly said, when you consider some of the other restrictions of company pensions. “With company pensions, you have the trusteeship piece, and the changes around master trusts. With master trusts it becomes more difficult to wind up a scheme because you have to wind up the whole master trust, not the individual scheme. The death benefit on a PRSA is much more attractive too. If an individual is in a company pension, and dies, the maximum that can be paid out tax-free is four times that individual’s salary – the rest is then paid out as an annuity, which is subject to tax. With a PRSA, the whole amount is paid out. From a tax perspective, upon death, a PRSA is much more beneficial.”

For individuals, especially those at the start of their working lives, a PRSA can offer many benefits over company pensions. “A PRSA is in the individual’s name,” said Farrelly. “As people move through their careers, they may work in different companies, or they might have a spell as self-employed; with a PRSA, they can have the same pension account throughout their working life. This can take away any difficulties that might occur with multiple company pensions, for instance, trying to track down old pension funds, trying to extract your benefits etc. With a PRSA, you get the correspondence, and you have the control over the funds.”

The advisory element of a PRSA is also beneficial. “Often with a company pension, you sign on the dotted line, are told to pick a, b or c, and you get a statement each year,” said Farrelly. “With a PRSA, more times than not, you will have an advisor linked to the account. At the end of the day, the person holding the account is the person saving and therefore the person who needs to know where they are at any point in time. Given that a pension is such a long-term savings plan, you will have different questions as you move through your working life, so having access to that advice is important.”

PRSAs are a great option for those who take their pension provisions seriously from a young age. “You can start a PRSA from a very young age, and you can start low, so there’s no obligation to put in big amounts. And you’re also getting tax relief.

“We really believe that PRSAs are the future for pensions. They’re also very cost-effective, there are no policy fees or anything like that. Most people want something that they understand, that they know what they are doing and that they know what will happen when they retire. PRSAs are so straightforward in that regard. It’s really about putting the power back into your hands.”