Dominic Coyle answers your questions on PRSAs and Capital Gains.

PRSAs

I understand that the introduction of PRSAs was to make personal pensions simpler, more transparent and flexible, thereby making them cost-effective and understandable. However, it seems to me that the product is only available by way of stock market investment with all the attendant bid/offer spreads, management charges, bonuses, etc, which have traditionally confused consumers and led them to believe that the products are mainly available to line the pockets of the providers.

Are you aware if the PRSA can be made available by way of a simple bank deposit account and, if so, who are the providers?

Mr P.K., Dublin

Providers are busy blaming the weight of regulation for the difficulty they have faced to date in selling the Personal Retirement Savings Accounts (PRSAs), but your query goes to the heart of the problem.

The simple truth is that the very consumers being targeted by these products - the less well-paid, part-time and temporary staff and those who work in the home - are the same people who are most suspicious of the fund-speak of the investment community.

Quite often, these are people whose first encounter with equity investment was Eircom, with all the hype, losses and disillusionment that entails.

The answer? The companies selling these products need to get their message across clearly and in the simplest terms, especially in relation to charges.

Having said all that, it is also the case that PRSAs cannot be made available by way of a simple bank account. Why? Because they would not work.

The idea of any pension investment, including PRSAs, is to grow your contributions faster than the rate of inflation. This ensures they grow in real terms. If you put €100 into a savings product and the following year it is worth €105, it has only made money if inflation is running at less than 5 per cent and that is before you take account of charges. There is no way a bank account can do this as bank savings will always offer a lower rate than that of inflation.

The only way to achieve the growth that a pension investment needs is to put it into riskier investment where the prospects of growth are higher. So too are the risks, I hear you say. But the point of pension savings is that they are a long-term investment and losses at one stage should be offset by gains at a later stage.

For instance, figures produced by pensions consultants Buck at the end of last month show that the average pension fund is again making money after three years of horrendous losses. The recovery in performance this year has been such that, over five years (the minimum period you should examine when looking at how one pension fund performs against another), the average pension fund is back on level ground.

I accept that 0 per cent growth over five years is hardly something to cheer about but when you consider that pension funds lost more than 18 per cent of their value last year alone and that we are slowly emerging from the worst equity markets in almost 100 years, it shows how performance levels out over time.

Pension funds will invest in a range of asset classes, each of which carries different risks. First there is cash, similar to the bank accounts you are looking at. The poorer other markets are performing, the more money will be held in cash but this is generally a short-term option as cash holdings will not grow your PRSA contributions fast enough to provide a decent pension.

Second are equities, or shares. Notwithstanding Eircom's performance and the three-year bear market from which we are emerging, this is historically the fastest-growing asset class, albeit the most risky. Then there is property, which has outperformed shares in recent years and is not generally as risky (remember you are talking about commercial property here, which is more volatile than home prices). Finally, there are bonds. These are loans to government (called gilts because they carry the guarantee of the State) or to companies that generally carry a fixed rate of interest and a set date on which they must be repaid.

Ensure that you clearly understand the terms of the PRSA. If in doubt, talk to the Irish Financial Services Regulatory Authority, which has put together consumer information on the subject and regulates financial services.

Capital gains

I would like to question the practice of the Revenue Commissioners in interpreting the provisions of the Finance Act when adjudicating capital gains returns.

When I retired a few years ago, I invested a modest sum in equities, over a dozen or so companies, mostly following stockbrokers' advice. At first, some gains ensued and some capital gains tax was paid, duly availing of the £1,000 exemption allowance. However, the scenario changed rapidly and soon much more losses than gains were incurred. Despite these losses, small gains were made on other companies.

The Revenue Commissioners not only systematically disallowed the £1,000 exemption against these gains but insisted on first deducting losses or neutralising net losses where a monetary gain turned into an indexed loss. This exercise drastically trimmed the losses I had hoped to claim against gains I might make in following years.

Since this stance is found replicated in the capital gains tax guidelines made available, my question is: do the guidelines have the support of the statutes or is this another example of the Minister for Finance wanting to have his cake and eat it? Having seen income from CGT from equities shrink drastically, was it decided to manipulate the provisions of the Finance Acts? Also, would there be a justification for stating a case for the ombudsman?

Mr A.L., Dublin

I'm sorry to say that, in this case, right lies with the Minister for Finance and the Revenue. I think you are trying to have the best of both worlds - amassing losses to offset against future profits while simultaneously availing of a tax exemption for profits. I am not surprised that Revenue demurred.

The capital gains tax allowance of £1,000, now €1,270, is an annual allowance. As such, it is applied once the gains and losses from all asset sales in a given tax year - from shares, property other than your main home and anything else - are computed. It would show a generosity unlikely in tax-hungry government circles for any state to allow you to claim the exemption on those assets that made a profit and then, separately, tot up losses elsewhere and store them up to reduce your tax bills on profits in a later year.

There has been no change in the tax regime on capital gains in recent years along the lines you suggest through "manipulation of the Finance Acts". What there has been is a sharp reduction in the rate of tax levied on such gains and, as the Minister never tires of telling, this increased the CGT take. There is no case for the ombudsman, though if you feel strongly enough about it, let her tell you herself.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.