The new portable pensions vehicle, the Personal Retirement Savings Account (PRSA), is aimed at previously neglected groups such as part-time workers, employees of small firms and those who move in and out of paid employment. Last week's preview of the Pensions Bill included details of the tax treatment of PRSAs, which will come on stream early next year. The Government has affirmed its commitment to the PRSA as a low cost, easy access, personal investment account designed to allow people to save for retirement in a flexible way. Contributions paid into a PRSA will benefit from tax relief at an individual's marginal rate of tax. In the case of PAYE workers, income tax, PRSI and the health levy will be calculated on pay less the pension contribution.
There are limits on the maximum annual tax-deductible contributions based on a percentage of the person's earnings. The allowable percentages rise with age as follows: Under 30 - 15 per cent; 30 to 39 - 25 per cent; and Over 40 - 30 per cent.
The 30 per cent limit will apply to certain categories of people in the younger age groups who typically retire earlier than usual, such as athletes and jockeys. There is a provision for people on lower incomes as each taxpayer is entitled to tax relief on a contribution of £1,200 (#1,525) even if this exceeds the normal limits as a percentage of salary. At the other end of the scale, there is an earnings cap of £200,000 for PRSA tax relief. Contributions paid while out of work may be claimed against future earnings on return to paid employment, subject to the annual limits. The tax relief is non-transferable between spouses. On retirement, a PRSA holder may take one-quarter of the fund as a tax-free lump sum and may: invest the balance 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.
The ability to invest in an AMRF and to withdraw the balance of the PRSA fund in cash is subject to the individual having a guaranteed pension or annuity from another source of at least £10,000 for life.
The forthcoming Pensions Bill will also contain provision for a pensions ombudsman and a mechanism to deal with the treatment of fund surpluses where pension schemes are wound up.
