Last week’s column pointed out how advantageous it can be for people who have lost their jobs and are over 50, to have a PRSA – a personal retirement savings account – instead of a more conventional company defined contribution (DC) pension.
But the PRSA option is also one that retirees, and early retirees should also be considering, say pension advisors.
At the moment, when you retire and you have been a member of an occupational pensions scheme you have a number of options:
– You can decide to take a tax-free lump sum from your fund and purchase an annuity with the balance (until 2010 you will have up to two years to buy the annuity) that will then produce an income for life.
– If you are a five per cent director of the company you can take your tax free lump sum and invest the balance in an Approved Retirement Fund;
– Or, if you have no more than 15 years membership of your occupational scheme (and it is worth at least €10,000), you can convert your benefits into ‘deferred’ benefits by leaving service just before your retirement date and then transfer your share of the occupational pension (and an AVC – Additional Voluntary Contribution, if you have one) to a PRSA, subject to certain conditions.
Michael Leahy is an actuary and financial advisor with a company called Global Pensions Options who now provides the required actuarial certificates to accommodate the transfer of occupational benefits to PRSAs, for workers who want to take this last option.
Mr Leahy explained that transferring to a PRSA just before retirement widens a worker’s options.
First, the transfer to a PRSA may allows some workers “an uplifted scale of tax-free cash” compared to the usual 3/80’s of final remuneration for every year of service.
“With a PRSA the maximum tax free cash entitlement is 25 per cent of the fund,” said Mr Leahy.
“Occupational benefits are re-valued in line with the consumer price index (CPI) from the date of leaving service to the date benefits are taken. Where benefits are taken from an occupational scheme before the normal retirement date there are additional restrictions on the amount of tax free cash that can be taken.”
Next, aside from potentially more tax-free cash, the worker who transfers his occupational pension to a PRSA can decide when they actually want to start drawing down their retirement income, says Leahy.
Note: the occupational fund holder must buy the annuity income, and if annuity rates are poor – they are linked to bond markets – your income for life could be disappointing. The annuity income also reverts to the life assurance company, and not to your family at death.
If you want to keep working at another job, or have other income you can live on for awhile such as rental income from a property you own, the PRSA option means that your entire pension fund can remain invested in one or several separate PRSA accounts.
“There is no requirement for the PRSA contracts to be with the same provider, of the same size or to have the same maturity date,” said Mr Leahy. “They are completely independent of each other and the benefits may be taken from them at different times.”
By transferring to a PRSA, you have the flexibility of taking a tax-free payment, to either buy an annuity or not, and to ‘en-cash’, or leave the rest of your money in PRSA funds.
This money can then be drawn down in stages as you need it, all the while keeping an eye on the tax-free income threshold for retired individuals and couples.
If you keep you annual income from the PRSA below this threshold – currently €20,000 for an individual and €40,000 for a married couple – your pension will effectively, be tax-free.
Not having to buy a pension annuity in retirement and being able to have a staged retirement, is something that has mainly been available to the self-employed and five per cent directors.
The PRSA early retirement option is now a possibility for many people who are part of a group pension scheme.
Before you consider it, however, make sure you understand all the cost implications: there are no fund costs or penalties to pay in transferring your occupational benefits to a ‘standard’ PRSA.
But there is a cost – usually about one per cent of the value of your pension fund – in arranging for the mandatory actuarial certificate.
There is also an annual management fee of no more than one per cent for a standard PRSA. There are no legal limits on costs associated with ‘non-standard’ PRSAs.
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