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

How secure do I want my pension to be?

Or perhaps it might be more correct to ask how secure do I want my pension vehicle to be? Pension holders, other than those in defined benefit schemes, are already carrying an investment risk, a risk that the performance of their pension may be less than they had projected.

But what about the security of the pension structure itself? What if I have my pension with an insurance company where my pension assets are held on that company’s balance sheet and that company gets into difficulty?

Of late we have been contacted by a number of advisors in relation to pooled funds and querying the ability of the person running a fund to invest in assets that were not in the original investment proposal for that fund. We have to say that this is very rare however it is getting aired in the media at the current moment in time because of controversy elsewhere.

Taking all the feedback we are getting it is clear that advisors see the security of pensions as a significant matter. Perhaps they are looking at the UK where the current thinking is that an advisor who does not consider the security of the pension vehicle when recommending a pension to his client can be deemed to be negligent.

So, what can ITC do about security of pensions? Well, for a start we can try to get the views of the industry on a more formal basis. In that regard we have already convened a discussion where we have invited people with a significant interest in this area to express their views.

We would also like the view of the industry in general.  We would really appreciate feedback on what you as an advisor would like to see in terms of pension security. For example:

• What way would you like to see pensions structured?
• Are there any specific measures that you think would make pensions more secure and help to promote confidence in the industry?

For our part we will collate the responses and report back to you.

We will utilise that feedback to ensure that we have the most secure pension structures possible.

So please, get emailing and let us know - we value your opinion!

 Sean McLoughlin 

Part 5: Standard v non-standard PRSAs

There are two types of PRSA – a Standard PRSA and a non-Standard PRSA. The main differences between them are the charges and investment options.

What is a Standard PRSA?

1.     A Standard PRSA has maximum charges of 5% on the contributions paid and 1% a year on the managed funds

2.    Apart from temporary cash holdings, these types of PRSAs can only be used to invest in pooled funds, also known as managed funds. These are typically internal linked funds of an insurance company or a collective investment scheme.

3.    A Standard PRSA may not be marketed or sold if purchasing it is conditional on also buying some other product, such as life assurance.

What is a non-Standard PRSA?

A non-Standard PRSA does not have a maximum limit on charges and allows investments in funds other than pooled funds. This is the great feature of non-standard PRSAs - the PRSA holder can potentially invest in anything he/she wishes subject to the Revenue investment rules.

A key thing to take note of is that the SORP for a non-standard PRSA must contain the following warning notice:

“It is recommended that you seek professional financial advice about the nature of this PRSA contract”

Conclusion

Simple differences but notably the non-standard offers a lot more flexibility in terms of investment choice.

Paul Gilmer

Part 4: Transfers - to and from a PRSA

One of the great benefits of the PRSA as a pension vehicle is its ability to interact with other pension products in terms of transfers. Here are some of the things it can do:

Occupational pensions

1.   Transfer to an occupational pension scheme is possible subject to the trustee’s consent.

2.  Can receive a transfer from an occupational pension scheme provided the period for which the individual has been a member of the scheme is 15 years or less and benefits have not become payable. The 15 year restriction does not apply to AVC transfers. Certificate of Comparison and Written Statement required.

Personal Pensions

3.   Can receive a transfer from a personal pension subject to the rules of the personal pension.

4.    A personal pension cannot receive a transfer from a PRSA.

Approved Retirement Funds

5.    At the point of retirement, a PRSA holder can elect to take their lump sum and transfer to an Approved Retirement Fund. However, once having elected to ARF, the client cannot transfer back to a PRSA.

Vested and Non-vested PRSAs

6.    A non-vested PRSA can move to another non-vested PRSA without any restrictions or charges being incurred.

7.    Revenue have recently confirmed that a vested PRSA can move to another vested PRSA.

Buyout Bonds

8.    Transfers from and to a buyout bond are not permitted.

International Pensions

9.    PRSAs have specific provisions facilitating transfers to or from pension schemes outside the State.

We will expand on some of the points above in later blogs in the series but what is clear from the above is that the PRSA is the ideal pension vehicle not only for its transferability but also as a vehicle for consolidation of a client’s domestic and international pension arrangements.

Paul Gilmer

Part 3: PRSA versus Personal Pension

The PRSA was conceived as a replacement for Personal Pensions. It was originally intended by the Pensions Board that following the launch of the PRSA in 2002, that Personal Pensions (RACs)  would be phased out. However it has not quite worked out like that, with the personal pension continuing to co-exist alongside the PRSA.

Much of the reason for the continued existence of the RACs  is down perhaps to the approach of the larger life companies who tend to not be fans of the more onerous disclosure requirements attaching to PRSAs.

That is a pity because the PRSA offers significant advantages over personal pensions. Let us look at some of these key advantages:

• Transfers - The PRSA can receive transfers from occupational pensions and can also transfer to an occupational pension. That is a huge plus compared to personal pensions which are quite restricted from a transfer perspective.
• Post Retirement - The PRSA can be used to both accumulate a pension fund and later to pay it out. There is no post retirement mode for RACs.
• Transfer Costs - By law there can be no transfer costs associated with a transfer of pension assets into or from a PRSA. However there may be transfer charges on transfers from a personal pension
• Preserved Benefits - Both PRSAs (prior to vesting) and RACs offer a preserved benefit which can go without deduction of tax to the estate of a pension holder on their demise.
• Beneficial Owner - The Pensions Act Sec 98(1) makes it clear that “a contributor to a PRSA shall be the beneficial owner of the PRSA assets of that PRSA”.  No such provision exists for personal pensions.

In conclusion when we look at the above it might be difficult to justify choosing a personal pension over a PRSA.

Sean McLoughlin

Part 2: PRSA Reporting

One of the many advantages of the PRSA, from a client’s point of view, is the extensive reporting obligations imposed on the PRSA provider by the PRSA Regulations. From the advisor’s point of view this is the boring bit! You don't need to worry about them, as the PRSA provider we will look after all that. However, it might be useful for you to know.

1. A Preliminary Disclosure Certificate (PDC) must be provided to the client before they enter into a contract. The PDC specifies the benefits and the level of them which the client could reasonably expect to receive from the PRSA contract. The PDC is required to disclose all potential and actual commissions payable and details of any other charges. Note in a Non Standard PRSA this is usually a generic document.
2. Statement of Reasonable Projection (SORP) must be furnished to the contributor within seven days of the date of signing up to the PRSA. The PRSA provider is required to ensure the SORP contains a cancellation notice and information regarding charges. Following on from this, an SORP should be provided to the client on an annual basis. 
3. The PRSA provider is required to give to the client a Statement of Account at intervals not greater than six month’s duration.  This statement of account must:
• Show the total contributions paid since inception and, where a statement of account has previously been issued, the total contributions paid since the last statement.
• Where appropriate, distinguish between employer and employee contributions.
• Contain the PRSA value at the date of preparation of the statement. For this purpose the value is taken as the amount that would be available for transfer on the date of preparation of the statement.
4. The PRSA provider must provide an Investment Report to the client, at intervals not greater than six months, showing the investment performances of all funds in which the PRSA has invested in.

There is an old saying that says a camel is a horse designed by a committee. Well if that is the case a PRSA is definitely a pension designed by a committee of actuaries! No matter, it achieves a great result and we will deal with the onerous parts, so you can focus on the benefits the PRSA brings. 

Paul Gilmer

Pension Providers in the Firing Line

So here we are again – another pension provider under scrutiny, talks of shortfalls on funds, inspectors appointed, followed by negative reports in the media, the pension industry is caught again in the crosshairs.

Of course those of us who are a while in the pension industry will have seen negativity heaped on our industry before.  We had Equitable Life leaving hundreds of thousands of pensionholders short as they were unable to pay what they had promised. And we had Scottish Provident again leaving pension holders short as they slowly wound down their business in Ireland.

So what can we do? How can we demonstrate to people that their funds are safe and that not all pensions are subject to the same risks?

When Independent Trustee Company was founded 18 years ago we looked at existing pensions and we identified two key risks that could potentially cause harm to a pension holder and we took steps to eliminate them. These two risks are:

·         Balance Sheet Risk, and

·         Pooling Risk

Balance Sheet Risk

Balance Sheet risk occurs when a pension provider keeps the pensionholders assets on its own balance sheet. Effectively the clients pension assets and the pension providers own assets are held together on the balance sheet of the provider and if that provider gets into difficulty as we have seen with Equitable Life and Scottish Provident  then the clients assets can be called upon. 

In these circumstances the client unwittingly takes on a risk that he is not being rewarded for, though perhaps more importantly he faces the potential loss of some or his entire pension.

In the UK they have woken up to this problem and where an advisor fails to adequately explain the difference between assets being held on the provider’s balance sheet versus being held at arms length, they risk a future claim.

The solution is simple but effective. At Independent Trustee Company we hold no client assets on our balance sheet, all the pension assets are held under trust. This includes not just the ITC SSAS which is by its nature a trust but also the ITC ARF and our newly acquired ITC PRSA. No mixing of assets can occur and as a consequence we truly believe that we have the safest pensions on the Irish Market.

Pooling Risk

The second risk is pooling risk. This occurs when client assets are mixed together for administrative reasons. A typical example is a client asset account where all funds received from various pension holders are lodged and perhaps also where all funds paid out by the pension provider are paid out from.

The potential risk here is that clients’ funds can get confused, one client gets credited with the assets of another, or perhaps on the payments side a client is charged with a payment that relates to another client. The result is at best administrative confusion, at worst complete organisational and system chaos.

So how do you minimise the possibility of that happening?  Again the solution is simple, at Independent Trustee Company, each and every pension holder has a separate bank account even before  funds are contributed/transferred. And if they engage in an investment that is specific to them they have further separate accounts there also.

Of course if they combine with a number of other pensionholders to invest in say a syndicated property that investment will be a combined account. However only the portion that relates to the investment is combined, the pensionholders other assets are kept separate.   

We have found over the years that these two guiding principles allow our clients, (and indeed ourselves, those that regulate us, and those that insure us) to sleep well at night.  Perhaps these principles are what our industry needs going forward.