The humble PRSA – Personal Retirement Savings Account – is finally coming into its own, thanks to this recession.
The mostly unloved child of the pensions industry when it was first introduced about six years ago, it was aimed mainly at lower earners, part-time and female workers and those whose companies did not offer an occupational pension.
The number of PRSAs has now reached over 155,600, with over 88,200 employers schemes registered with the Pensions Board, though only 55,160 workers have signed up with their company scheme.
Nevertheless, the feature that has always set the PRSA apart from conventional occupational or personal retirement annuity contracts, (favoured by the self-employed and company directors) is its flexibility.
That quality is now recognised as a very useful tool indeed for redundant workers over 50, who are keen to get access to their pension fund money early.
Under the rules of most occupational or private pension schemes and plans, access is restricted to age 60 or 65 except for early retirement or redundancy. All PRSAs can be accessed from age 50.
As of last December just over 850,000 workers belonged to (circa) 91,700 defined contribution (DC) pension schemes. Tens of thousands of those workers have lost their jobs since then, and many of them are over age 50 and unlikely to find employment soon.
A member of a DC or Defined Benefit scheme (with more than two years membership) who loses their job has a number of options for their accumulated pension fund.
* They can access their fund, taking a tax-free lump sum and convert the rest into a pension for life
* They can leave their portion with the company and collect their pension at normal retirement age
* They can transfer their fund to a buy-out-bond with a different pension provider/fund manager and again, collect a pension from it at retirement
* They can transfer their share to a new employer’s pension scheme if they can get another job. (The last two options are bad value ones for DB scheme members)
* Or, and this is what makes the PRSA unique, so long as they were members of the scheme for 15 or fewer years, they can shift their accumulated pension fund into a PRSA and also gain tax-free access to the money in their fund from age 50, but with fewer restrictions on what they can do with the balance of the money.
According to Michael Leahy, an actuary and financial advisor this last option is invaluable for older workers who have lost their jobs.
At the moment, if you are over 50 and lose your job, you can claim your occupational pension, which includes restricted access to the tax-free portion of the fund. However, with the balance, you must buy an annuity, that is, a pension income for life.
Recent legislation allows you to delay this decision for two years, a concession to the fact that annuity pension rates and the income it will produce, will not be very favourable, especially not to someone who is taking their pension early anyway, before it has fully matured.
The other disadvantage of accessing the occupational pension, says Leahy, the former head of Standard Life Ireland, is that while you may be entitled to 12 months worth of Jobseeker’s Benefit (JB) when you first lose your job, afterwards you will switch to Jobseeker’s Allowance (JA).
Unlike the JB, the JA is means-tested, and the pension income you receive from the annuity could end up reducing the person’s jobseekers allowance payment on a euro for euro basis.
Their entitlement to Supplementary Welfare Allowance, including Rent Supplement and Mortgage Interest Supplement could also be affected by the annuity income.”
By transferring the occupational pension scheme benefit to a PRSA instead, says Leahy, “it should be possible for the over 50, to draw 25 per cent of the tax free cash,” which is more than they would likely be able to take tax-free from their occupational scheme.
Nor are they obliged to purchase an annuity with the balance of their now PRSA fund: “The balance of the fund will be held within the PRSA until either age 75 or until the person chooses to purchase an annuity with the money.”
If the redundant person doesn’t want to access the money in their PRSA just yet, they don’t have to, says Leahy.
They can leave their money under investment and choose a later time to provide tax-free cash, pension income by drawing down some of the money on a regular basis or convert it into a pension annuity.
And if the redundant person is able to find another job, or becomes self-employed, the PRSA can be used as a new pension fund vehicle for new contributions.
To transfer your occupational pension into a PRSA, you must arrange for an actuarial certificate, which can cost up to one per cent of the value of the fund. The Standard PRSA fund management cost is capped at one per cent per annum. Speak to your own financial advisor or contact Michael Leahy at michael-leahy@globalpensionoptions.com.
Next week: Retirement and PRSAs.
Jill Kerby welcomes reader’s letters. Please write to at The Munster Express, 37, The Quay, Waterford or directly at jmkerby@indigo.ie
