PRSA’s were created under legislation in 2002. They were marketed as the flexible, transferable pension plan. But the take up of them was very low as people stayed away from them. They are a lot more popular now with a lot of people making inquiries about setting up a PRSA. A lot of the time, I tell them that a personal pension plan may be more suitable, so the obvious question is “what’s the difference between the two?”.
First of all, it is important to point out what is the same between a Personal Pension and a PRSA. They are both pension plans for retirement. You get the same tax relief on contributions, you invest in funds the same way.
At retirement, your options are the same, 25% of the fund is paid out tax free. With the remainder, you can invest in an ARF or purchase an annuity.
There are two types of PRSAs:
The maximum charges permitted under a Standard PRSA is set out in legislation. They must be given as a percentage and are prohibited from being an actual amount.
A Non Standard PRSA may have higher of lower charges.
But, all charging structures have to be approved by The Pensions Authority before they can be sold to the public. And it is not that cheap to submit a PRSA for approval, so providers only select a small number of contracts for approval. They cannot deviate from these approved charging structures without getting new approval from The Pensions Authority. This makes them quite rigid.
A Personal Pension plan on the other hand is a contract between you and the insurance company. The provider may offer lots of different options as they don’t need to obtain prior approval or pay to have different charging structures. This is especially beneficial to those who are paying higher amounts as the provider will offer a better rate for a higher premium. Personal Pension plans have contracts that are a lot cheaper than those on offer from PRSAs. They can also charged a fixed amount. This is typically a policy fee of €3 – €4 a month but do not apply to all contracts.
When PRSAs were introduced, The Pensions Authority didn’t want people investing in high risk funds, so they limited the fund choice available through the Standard PRSA. They typically excluded regional equity funds such as Emerging Market equities or other such volatile choices. The PRSA also has a default fund option, which is usually a lifestyle fund (equity exposure reduces as you near retirement). If you implement a Non Standard PRSA, there is a greater fund choice but not necessarily the full suite of funds available from a provider.
Under the Personal Pension, the full suite of funds provided by the provider is available. It is up to you to chose which fund you want. You won’t be offered a default fund, you pick it yourself.
Under a PRSA, your employer can make contributions to your plan. If they do, it is counted against the maximum tax relivable contribution that you can make e.g. a 45% can contribute 25% of salary to a pension. If their employer contributes 5%, the employee can contribute 20%. If the employer contributes to the pension or it is the PRSA set up through your employer, you can access your fund from age 50 onwards if you are retiring or left that employment.
Under a Personal Pension, your employer cannot make contributions to your plan. If they want to, you can set up a company paid pension plan. Under this plan, the employer contribution does not count against your personal maximum, so they can contribute 5% and you can pay in the full 25% yourself.
Under Personal Pension plans, you can only access your pension from age 60. For company pensions, it is from age 50, if you are retiring or have left that employment.
You cannot have risk benefits such as life cover or income protection bundled in with your PRSA. This is allowed under Personal Pension plans but I strongly advise against ever doing this. The cost of cover is very cheap when you are young and unlikely to claim. As you get older and the risk of a claim increases, the cost increases dramatically and it ends up eating into your pension fund, which you have planned on using to fund your retirement.
No transfer penalties are allowed under PRSA’s. If you have €100,000 in your PRSA, €100,000 must be transferred to and invested into the new PRSA.
Under some Personal Pensions, there are early exit penalties if you transfer your benefits to another provider in the first 5 years. These penalties are to protect the provider where they have paid the advisor a commission or added a bonus payment to the clients fund. By imposing penalty periods, they discourage advisors and clients from “churning” the pensions to get commissions/ bonuses from a number of different providers, costing them all money. There are Personal Pensions that don’t have early exit penalties though.
In some circumstances, under Personal Pensions, if you transfer to another provider, the actual amount invested may be less than the amount transferred. This would typically happen for smaller amounts (a PRSA is probably a more suitable pension in this case) or where the advisor is taking too much commission.
Those are the main differences between the types of pension plans. The whole pension landscape is due to change in 2019 and there is a good chance that Personal Pensions will be done away with. The Pensions Authority are looking for more control over pensions in Ireland and currently Personal Pensions are outside their remit. This could lead to higher charges for some people and a standardisation of fees, so those paying higher contributions don’t benefit from lower charges.
If you have any questions, drop me an email at steven@bluewaterfp.ie