Some Planning Benefits of a PRSA

A previous blog looked at the advantages a Vested PRSA has over an ARF. This blog considers some of the key planning features inherent in a PRSA:

1. Transfers- A PRSA can receive in benefits from occupational pension schemes, personal pensions and other PRSAs. No other pension structure has this flexibility.
2. Phased retirement- It is possible to have multiple PRSAs and retire from the PRSA as required thereby accessing your tax free lump sum over a multi-year period. With the recent changes to the tax fee lump sum cap, the PRSA offers the individual the ability to make more use of their income tax exemption limits.
3. Better disclosure and reporting-The regulatory regime surrounding the PRSA is probably the most thorough of any financial product available in Ireland.  In addition to the normal checks and balances imposed by the Central Bank on the PRSA provider, there are an additional set of checks imposed by the Pension Board and supervised by the PRSA actuary.  In addition to the tighter regulatory regime there are more comprehensive regular reporting requirements to the individual investor in a PRSA contract than for most other pension structures.
4. 100% allocation rate and no exit penalties- On transfer business, a PRSA provider must give an allocation rate of at least 100% and cannot impose exit penalties.  This gives individual clients much more flexibility if their financial needs change and they need to access their funds.  It also means that PRSA providers are more likely to lower the annual management charge rather than enhance the allocation rate as they don’t have the protection of the exit penalties.
5. Flexibilty – A PRSA can exist as a pre-retirement vehicle (Accumulating PRSA), as a post lump sum vehicle (Vested PRSA) or as a drawdown vehicle (Drawdown PRSA). Being able to use the one vehicle pre and post retirement results in significant cost savings and planning opportunities.
6. Availability – A PRSA can be used by employees, directors, those with self-employed income and those with no earned income at all.
7. Public Sector AVCs – The option of paying AVCs into a PRSA is enormously popular in the public sector where the choice of providers is otherwise severely restricted. Ironically, the current financial crisis is making such AVCs more popular than ever as civil servants become aware of the possibility that their pension benefits could be reduced.

For Pension Advisors the flexibility and planning potential inherent in a PRSA has led to its current success. None of the recent legislative changes have altered the natural advantages it enjoys over other pension vehicles. From a standing start in 2003 PRSAs are now the fastest growing area of the pensions market.

Paul Gilmer

1. Why the Vested PRSA is replacing the ARF as the most flexible retirement option

On the face of it, ARFs were finally accepted into the larger pensions family in the Finance Act 2011 when they were made available to all retiring members of Defined Contribution arrangements. However their increased recognition in legislative terms, while welcome, brings it line with a ‘Vested PRSA’ which has existed for some time..

Some of the attractions of the PRSA as a post retirement vehicle are:

1. Deemed drawdown-There is currently no compulsory drawdown requirement on a PRSA in retirement. An individual has the option at retirement to leave their assets invested in their PRSA until age 75 thereby deferring the payment of such taxes.
2. Pensions Levy – The pensions levy, while it applies to a PRSA pre-retirement, does not apply to a vested PRSA post retirement.
3. UK property-The UK tax authorities have sometimes had a difficulty recognising the Approved Retirement Fund (ARF) as a pension vehicle and as a consequence any UK rental income arising in the ARF is potentially subject to UK tax. They have had no difficulty recognizing the PRSA.as a pension vehicle.
4. Early Retirement -  If you are a company owner/director looking to retire early, and you have an occupational pension, the Revenue are likely to insist that you sell your shares in the employer company. However when you are retiring from a PRSA, while the Revenue will insist that it is a genuine retirement, they do not require a sale of shares.
5. Estate planning- As stated above you can transfer your benefits at retirement to a number of PRSAs, and you can access these over a number of years. The value of a PRSA where no lump sum has been drawn down, can pass directly to your estate on your death, effectively acting as a form of life assurance for those pension holders up to the age of 75 who do not need to access all their funds. This offers advantages over an ARF where once the 25% tax free lump sum has been drawn, further withdrawals are subject to income tax.(Note there may be pensions levy implications)  
6. Flexibilty- Assets in a Vested PRSA can at a later stage be transferred into an ARF. Under current rules ARF assets cannot be transferred into a PRSA. 
7. Pension Adjustment Orders: A little known feature of pension orders is that they can sometimes be varied at a later stage, creating a lot of heartache for people who thought they had a final settlement.   It is possible to  block the variation of a pension settlement on separation and divorce when the pension vehicle is a PRSA. However, this facility is not available for an Approved Retirement Fund. 
8. Defer the AMRF requirement: The recent Finance Act increased the AMRF requirement to €120,000. This requirement does not kick in for a PRSA until it becomes ‘in payment’ i.e. a further drawdown is taken from from the PRSA after the lump sum has been taken. The AMRF requirement is immediate for ARF holders who do not have a guaranteed pension income of €18,000 at the time of transfer to the ARF. 

PRSAs are playing an increasing role as a retirement planning vehicle. Whilst the ARF is still the retirement vehicle of choice for many clients, the flexibility of the PRSA offers Pension Advisors significant planning opportunities for their client at retirement. 

Paul Gilmer