Will the PRSA become the go-to pension product?

Since its introduction in 2002, the Personal Retirement Savings Account (PRSA) has always been a decent pension product – but never the great pension product that it could be.

 

When all is stripped away, the PRSA can be viewed as a long-term personal retirement savings plan comparable to an investment account made to allow flexible retirement savings.

 

The main draw for the PRSA product to date has been its flexibility. You can apply for a PRSA regardless of your work status or position. You can change jobs and keep using the same PRSA and at little or no cost you can switch from one PRSA provider to another. You are not charged or penalised if you decide to increase, decrease, or cease your contributions. You must also be given access to a Standard PRSA if your company does not offer you access to an occupational pension plan or if the plan has restrictions such as the ability to make AVCs (additional voluntary contributions).

 

So, despite the great flexibility and retirement options of the PRSA, it always carried daft limitations and especially when compared to rival pension products such as the standard occupational pension and the Executive Pension product.

 

Notable downsides to the PRSA are being stripped away year after year and by successive Finance Bills. The Finance Bill 2022 was no exception and in particular relating to the disapplication of Benefit in Kind (BIK) on employer contributions to a PRSA above the age related percentage earnings limits.

 

Prior to the changes, the PRSA holder’s personal tax relief limit for PRSA contributions (ranging from 15% – 40% of €115k depending upon age), effectively capped employer contributions to the PRSA and any such contributions above the age/earnings limit were deemed an employer funded benefit which was not exempt from BIK.

 

Let’s take an example of a 45-year-old with total relevant earnings of €60k. Collectively, annual contributions from the employee and employer to a PRSA could not exceed €15k without incurring a BIK on additional contributions from the employer above that €15k limit. This made the retirement funding possibilities of the PRSA incomparable to those of a Retail Master Trust (previously an Executive Pension) where maximum funding is possible to allow an annual retirement fund of up to 2/3rds of final salary.

 

This type of funding flexibility is particularly important for Business Owners and SMEs who quite often delay saving for their own retirement in lieu of investing in their business and creating jobs. So, to date, the PRSA pension product has not provided them with sufficient scope to make meaningful contributions through their company and in the 10-15 years prior to expected retirement.

 

On the surface, the Finance Bill 2022 has changed all that, where in effect the tax relief treatment of personal contributions is disentangled from employer contributions. Contributions to a PRSA are added to the list of employer-funded benefits that are exempt from BIK in accordance with S118(5) of the Taxes Consolidation Act of 1997.

 

Now that this long-standing thorny issue for PRSAs seems to have been resolved by the Finance Bill 2022, the net result should be a rising popularity of the PRSA product for both small group pension schemes and Business Owners alike. Afterall, and to supplement this change, there are a handful of other advantages of the PRSA relative to occupation pensions schemes.

 

So, there are now seemingly no limits to funding retirement through a PRSA and up to the €2m Standard Fund Threshold (SFT). However, the main market providers of PRSA products will take their time over the coming months to interpret the legislation and to wait for favourable signals from Revenue, prior to capturing the changes within product design and marketing materials and rolling them out through their various distribution channels.

Will the PRSA become the go-to pension product?