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The pension revolution continues Back  
The Pensions (Amendment) Bill 2001 introduces the long awaited personal retirement savings accounts. These open up the possibility of both employees and self-employed persons having personal pension funds which they may take with them from job to job, or venture to venture.

Since it is a one to one relationship between the PRSA provider (think of them as the pension company) and the individual, it offers the prospect of pension savings being at last understandable by the man in the street.

It is something that could hardly be said about the existing arrangements involving occupational pension funds and retirement annuity contracts.

Not yet available
Before the excitement gets too intense, there are some points to remember. It is impossible to go out and get a PRSA right now. The Bill has only been published. It still has to go through the Oireachtas. Cross your fingers that it is not interrupted by an election before the President signs it.

It is likely that no PRSA accounts will be available in the market place until the middle of 2002.

Once they do become available, a prudent investor would probably wait to see how a competitive market develops between providers of PRSAs. While charges are capped in the Bill, they are capped at a relatively high level. If there should be true competition between PRSA providers, PRSA investors might well hope that the actual level of charges in the market place would be significantly lower than the caps.

Time will tell. Some insurers have suggested that small contributions require a relatively high level of charge to be economic.

A further aspect to be borne in mind is that a large number of persons are presently in occupational pension schemes organised on a defined benefit basis. Such schemes offer a relatively high level of security and certainty to the pensioner as to the level of his benefits. They expose the employer to open ended liability for contributions to the scheme.

There is already a tendency for employers to seek to avoid such schemes in favour of defined contribution schemes. These reverse the normal profile, with the employer having certainty as to his financial exposure, and the employee bearing the uncertainty as to the level of his ultimate pension. The PRSA is essentially a defined contribution vehicle. It is difficult to see how it could operate in a defined benefit context.

It is of course not impossible for that to happen - the contract between the individual and his employer could ensure that the employer is obliged to make open ended contributions to the PRSA adequate to fund a specified level of pension. But the probability is that the introduction of PRSAs will mark an acceleration of the move away from defined benefit schemes and towards defined contribution schemes.

This does not mean that a PRSA has no attractions to a person in a defined benefit scheme. He may still wish to divert his additional voluntary contributions (AVCs) away from his employer’s scheme and into a PRSA.

What of tax?
The Bill itself is largely given over to administrative matters. These include a pension ombudsman, regulation of PRSA providers, and detailed changes to existing pensions legislation. Those seeking details of the taxation aspects of PRSAs will be disappointed. There is no reference to taxation in the Bill.

The intended taxation treatment was disclosed in a government press release of April 2001. The broad outline of the taxation provisions are in line with existing taxation provisions for occupational pension schemes and retirement annuity contracts. Broadly speaking, the contribution by the self-employed individual, employee, or employer is tax deductible within certain limits. The fund itself is free of taxation on its income and gains. The individual beneficiary is entitled to withdraw a specified sum free of tax on retirement but is chargeable to income tax on all further payments to him out of the fund. A PRSA fund can pass under the will of a deceased person subject to normal inheritance tax rules.

The principal differences between the disclosed taxation proposals and those which exist at present for existing pension schemes are that self employed persons, and those not in pensionable employments, are permitted a higher level of tax deductible contributions between the age of 30 and the age of 50. The percentage of reckonable earnings which attract tax relief when contributed towards the pension are 5 per cent greater under a PRSA than they are under a retirement annuity contract.

This has been stated to be as an encouragement to individuals to take up pensions. It is also of course an encouragement to them to take up PRSAs rather than retirement annuity contracts, something which is less easy to understand as a policy objective.

For example, between the age of 40 and the age of 50 an individual may contribute to a PRSA 30 per cent of reckonable earnings, subject to tax relief, but would be limited to 25 per cent of reckonable earnings if he seeks tax relief on payment to a retirement annuity contract.

The advantage outlined above is somewhat mitigated by the fact that it would seem that the earliest age at which an individual may encash his PRSA (whether in the form of a pension or part withdrawal as a tax free sum) is 60 years. Other forms of pension provision can allow a person to retire in some cases from the age of 50.

Wait for legislation
The Press Release on taxation makes relatively easy reading. But there are indications in it that the legislation to implement it, when it is published, will be tortuous. The PRSA is a ‘one size fits all’ product. It has to be capable of coping with an individual who is also a member of an occupational pension scheme, an employee who is not in an occupational pension scheme, and a self employed person as well as allowing for contributions when a person is simply unemployed!

The indications are that in applying various limits to tax relief for contributions, and to tax free lump sums on retirement, an attempt will be made to bring together the tax treatment of all forms of pension provision with which an individual may be involved.

Perhaps the most significant element of the PRSA is that a PRSA holder is entitled to convert his fund into an approved retirement fund (ARF). He is not obliged immediately on retirement to use any part of it in the purchase of an annuity or pension.

An ARF is in many respects similar to an individual’s investment portfolio. Although it is held by an agent on his behalf, and subject to tax consequences on encashment, it is otherwise a part of the individual’s own assets. He may bequeath it to his heirs, and invest it as he pleases. It is not something that need die with him.

Hitherto employees in occupational pension schemes did not have the ability to convert the value of their pension fund (other then the part represented by AVCs) into an ARF. They were committed to the pension to be provided by the pension fund or to the annuity trap. Self employed persons, and employees not in occupational pension schemes are already entitled to make their pension provision through an ARF. The PRSA appears to complete this process for most employees.

The economy
It will be interesting to see what macro economic effects the move across Europe towards increased pension provision will have. One would expect that if large parts of the population are persuaded to make increased provision for future pensions, current consumption would drop, and increased waves of investment money would descend upon a limited range of quoted companies available on stock exchanges.

Will we see contracting economic activity side by side with increasing share prices? Where will Mr McCreevy’s revolution end?

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