Pensions & PRSA
There are a number of different terminologies related to the operations of pension payments. These can cause confusion. In addition there are varying limits which an individual is eligible to contribute depending on age and personal income levels.
A brief synopsis is attached below but further information can be provided by contacting us directly.
Personal Retirement Savings Account (PRSA)
A PRSA is a long-term personal retirement account introduced by the Pensions Act, 2002. It is designed to enable people, especially those with no pension provision, to save for retirement in a flexible manner. A PRSA is a contract between an individual and a PRSA provider in the form of an investment account. Subject to age-based limits, tax relief will be given for contributions to a PRSA.
Tax relief on contributions
1. Contributions paid into a PRSA will benefit from tax relief at an individual’s marginal income tax rate. There will also be relief from PRSI and the health levy for employees. Where PRSA contributions are deducted by an employer, the net pay arrangement will apply.
Details of this tax relief
2. The maximum annual tax-deductible contributions are based on a percentage of the individual’s net relevant earnings. The allowable percentages rise with age. Members of an occupational pension scheme or of a statutory pension scheme may pay AVC PRSA contributions. Separate rules apply to such contributions – see paragraph 6.
2.1 Relief is allowed against relevant earnings, i.e. earnings from a trade, profession, office or employment. Earnings as a proprietary director or proprietary employee of an investment company are not relevant earnings. Net relevant earnings are relevant earnings less losses, capital allowances and certain payments which reduce a person’s income for tax purposes such as tax effective covenants.
2.2 The maximum allowable contributions are as follows:
| Age | % of Net Relevant Earnings |
| Under 30 years | 15% |
| 30 – 39 years | 20% |
| 40 - 49 years | 25% |
| 50 - 54 years | 30% |
| 55 – 59 years | 35% |
| 60 years and over | 40% |
Thus, for example, an individual aged 35 can gain tax relief on the lower of
20% of net relevant earnings
or
the contribution paid in that year.
Position on retirement
9. Benefits can usually be provided at age 60, subject to the same ‘early’ retirement rules that exist at present for the self-employed and employees respectively.
10. The options available on retirement are similar to the options introduced for RAC holders and certain other persons in Finance Act 1999. Thus a PRSA holder on retirement may take one-quarter of the fund as a tax free lump sum and may:
- invest the balance in an Approved Retirement Fund (ARF) subject to a minimum investment in an Approved Minimum Retirement Fund (AMRF),
- withdraw the balance in cash subject to a minimum investment in an AMRF,
- invest the balance in an annuity.
11. The ability to invest in an ARF is subject to the individual having a guaranteed pension or annuity from another source of at least €12,700 a year for life. If this is not the case, €63,500 or the balance in the PRSA fund if less, must be transferred to an AMRF or used to purchase an annuity payable immediately. The capital in the AMRF cannot be withdrawn until the individual reaches the age of 75.
12. Similarly, the ability to withdraw the balance in the PRSA fund in cash is subject to the individual having a guaranteed pension or annuity from another source of at least €12,700 a year for life. If this is not the case, €63,500, or the balance in the PRSA fund if less, must be transferred to an AMRF or used to purchase an annuity payable immediately. The capital in the AMRF cannot be withdrawn until the individual reaches the age of 75.
13. Where the PRSA is used as an ‘AVC’ vehicle (see paragraph 6 above), the maximum lump sum and pension must be in line with the occupational pension scheme rules.
14. There is no tax charge where the balance is transferred to an ARF. Instead any withdrawals from the ARF will be subject to PAYE at the marginal rate of tax for the year in which the withdrawal is made.
Taxation of Benefits
15. PAYE will apply to all annuities and other withdrawals from a PRSA other than:
- a tax free lump sum [25% of the fund],
- a transfer to an ARF/AMRF,
or
- a transfer to another PRSA, to an occupational pension scheme or to a statutory scheme.
