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Ellis Financial | PRSA's at a glance

Ellis Financial | PRSA's at a glance

PRSA's at a glance

Personal Retirement Savings Account (PRSA's) are a new type of pension. They are designed to be a low-cost, easily understood and portable pension.

Everyone can take out a PRSA. You can contribute to a PRSA even if you’re not working at that time.

You can contribute to your PRSA by payroll deduction from your wages or by direct debit from your bank account.

You can contribute as little as €300 p.a. to your PRSA. Your employer can contribute to your PRSA, but is not legally obliged to do so.

You will be able to bring your PRSA with you from job to job.

You can normally draw on your PRSA fund at any time between ages 60 and 75.

There are no limits to PRSA benefits. When you draw on your PRSA, 25% of the accumulated fund can be taken tax free, with the balance being used to purchase a taxable pension for life or invested in an Approved Retirement Fund which you can draw on during retirement.

How do PRSA's affect you as an employee?

If you are not currently a member of a company pension plan you might consider setting up a PRSA for the provision of long-term retirement savings.

Your employer will be obliged to provide mandatory access to at least one Standard PRSA where there is no company pension plan in place.

Employers will also be obliged to provide mandatory access to at least one Standard PRSA where membership of an existing company pension plan does not cover all employees or is subject to a waiting period of 6 months or more, or where members are provided with death in service benefits only.

If this is the case, under the legislation your employer will have to offer:

Employers will not be obliged to contribute to a Standard PRSA on behalf of employees. The above requirements will become mandatory for employers to implement from the 15th September 2003.

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How do PRSA's affect you as an employer?

As an employer, you will be obliged to provide mandatory access to at least one Standard PRSA where there is no company pension plan in place.

You will also be obliged to provide mandatory access to at least one Standard PRSA where membership of an existing company pension plan does not cover all employees or is subject to a waiting period of 6 months or more, or where members are provided with death in service benefits only.

If this is the case, under the legislation employers will have to:-

As an employer you will not be obliged to contribute to a Standard PRSA on behalf of employees.

The above requirements will become mandatory for employers to implement from the 15th September 2003.

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How do PRSAs affect you as a self employed individual?

A self-employed person such as you, who is not trading through a company, might consider using a PRSA to make provision for long-term retirement savings. You are already entitled to contribute to a Personal Pension Plan with a life assurance company. Following the introduction of PRSAs, you will have three main options:

What about tax relief?

Below is some information about how your PRSA is treated for tax purposes. You should remember that this information is based on current tax law, and cannot be guaranteed throughout your policy. Under current tax law, your PRSA contributions qualify for tax relief. You can contribute as much as you choose, but you can only claim tax relief within Revenue limits.

The maximum contributions allowed for tax relief are as follows:

AgeMaximum Annual % of net relevant earnings
Up to 30 yrs15%
30 to 39 yrs20%
40 to 49 yrs25%
50 to 54 yrs30%
55 to 59 yrs35%
60 and over40%
NOTE: Automatic entitlement to tax relief is not guaranteed.

The 30% limit will apply, irrespective of age, to certain occupations where early retirement is customary, such as athletes, jockeys and so on.

Your "earnings" are your annual income (that is, earnings from a trade, profession office or employment) less deductions defined by the Revenue Commissioners.

The maximum earnings for tax relief purposes in any year are €254,000. Except if you are a member of a pension scheme, you are entitled to tax relief on a contribution of €1,525 paid even if this exceeds the normal limits detailed above. Any contributions above your tax relief limits may normally be carried forward to future tax years.

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Contributions to a Retirement

Annuity Contract and a PRSA will be added together when calculating the maximum tax relief.

If your employer is contributing to your PRSA, the upper limit for tax relief will be based on the total of your employer’s contributions and your contributions to your PRSA.

Refunds of contributions (with interest where applicable) paid out from occupational pension schemes may be transferred to a PRSA without a tax charge.

If you are an employee in a occupational pension scheme or a statutory scheme, you can make additional voluntary contributions into a PRSA. This is called a PRSA AVC. The PRSA must be established under a rule of the main scheme or under a separately arranged scheme, approved by the Revenue Commissioners, which is associated with the main scheme.

The tax relief on contributions into a PRSA AVC is the same as outlined in the table above. If you are in pensionable employment only additional voluntary PRSA contributions will be eligible for tax relief. The investment return on your PRSA fund is tax-free.

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Investment Strategy

In the past, you had no control over the fund you had built up for retirement - you had to buy an annuity. Now, there is a new option - Approved Retirement Funds, or ARFs, as they are more commonly known. Put in simple terms, ARFs give you more freedom in retirement.

Can I invest my PRSA fund in an ARF?

Yes. If you are contributing to a PRSA, you can invest the fund generated by your contributions into an ARF when you retire. This gives you the freedom to choose how best to use your retirement fund.

While in an ARF, your investment growth is not taxed. You can make regular withdrawals from your ARF (which are subject to tax) to provide you with a pension income, and you are free to withdraw your money at any time.

With an ARF, you can decide when to access your fund, and you retain control over how your pension fund is invested.

Instead of investing an amount in an ARF, you may take it as a lump sum. This lump sum is subject to PAYE at source and the health levy. You may also choose a combination of ARF and taxable lump sum.

Before you can invest in an ARF or take a taxable lump sum, you must have a guaranteed lifetime income of at least € 12,700 per annum or have invested at least € 63,500 in an AMRF (see below) and/or annuity.

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AMRF

An Approved Minimum Retirement Fund is similar to an ARF. However, you cannot access the capital of this fund before age 75, but you can access fund growth.

ARFs and the family silver

If you choose to buy a basic annuity when you retire, your pension will stop when you die. The funds in your ARF are available to your family after your death. This can be appealing if you want your spouse or children to benefit from the PRSA contributions you have made throughout your life.

Tax implications of passing on your ARF/AMRF

On death, any funds held in an ARF in your name are payable to your estate. You are free to bequeath them to whomever you wish. The tax treatment of the fund depends on who inherits the funds.

If the ARF is to be transferred to an ARF in your spouse's name, or in cash to children under age 21, there is no income tax to be paid. If moneys are transferred to a spouse in cash, income tax is payable as if the moneys had been withdrawn by the deceased ARF holder.

If moneys are transferred to children aged 21 and over, tax is payable at the standard rate (currently 20%). Tax is due at the deceased's marginal rate if the assets are transferred to any other persons. Capital Acquisitions Tax may also be payable, unless the moneys are paid to a spouse or to children aged 21 and over.

Inheritance planning

Although the taxation rules on passing on an ARF are somewhat complex, they do open up a great opportunity for tax-efficient inheritance planning. This will be an area where good advice will greatly assist you.

Are ARFs subject to tax?

Withdrawals from an ARF are subject to PAYE at source and the health levy.

You also have the option to use a mix of ARF/AMRF investment and an annuity to provide you with an income in retirement.

Please note that you can continue to make contributions to your PRSA after you have taken retirement benefits.

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Annuities - an income for life

You may want the security of a guaranteed level of income in retirement with respect to all your funds. This is not always possible with an ARF. For example, if you take too large an income from your ARF early on, you could exhaust your fund. If you don't want to take this risk, you should consider purchasing an annuity. Annuities will provide you with a guaranteed income for life. You can also provide an annuity benefit for your spouse after your death.

We can give you an indication of the annuity rates available on the market.

Are annuities subject to tax?

Income from an annuity is subject to PAYE at source and the health levy.

You also have the option to use a mix of ARF/AMRF investment and an annuity to provide you with an income in retirement.

Please note that you can continue to make contributions to your PRSA after you have taken retirement benefits.

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