PRSAs:The Pensions Board has made proposals aimed at engendering an enthusiasm for pensions similar to that which made the Special Savings Incentives Accounts (SSIAs) such a hit when they were introduced four years ago.
The success of the SSIA products is attributed to the matched contribution approach, by which the State pays €1 into the accounts for every €4 that the saver puts in.
The board is recommending a similar approach to pensions, focused on the Personal Retirement Savings Accounts (PRSAs) introduced in 2003. PRSAs were meant to be a low-cost portable pension vehicle aimed at people in low-paid and short-term employment who traditionally did not make any pension provision.
They have not proved a success and the board is now recommending that the State contribute €1 to the accounts for every €1 put in by workers, subject to an unspecified maximum.
The matching contribution would be instead of the tax relief currently available on PRSA contributions. The €1 for €1 contribution would be broadly equivalent to giving tax relief at the higher rate of 42 per cent for all personal pension contributions regardless of income, which is another key recommendation of the report. The board is also recommending that PRSA contributors "be allowed a limited access to their funds before retirement".
"Contributors would be entitled to withdraw up to 30 per cent of their accumulated funds tax- free before age 45," says the report. The trade-off for this would be that when the individual retired at 60, they would only be able to take 20 per cent of their pension in a tax-free lump sum, rather than the current 25 per cent.
"The facility to withdraw part of the fund will make this structure more attractive to young savers," says the report.
However, the board believes that its recommendations would be broadly neutral in terms of tax revenue. The switch from tax relief to direct matching would means that employers would lose the PRSI savings they get on pension contribution made by employees. Employers "would therefore face increased costs, though this will rarely be more than 0.5 per cent of payroll before tax", according to the board.
In addition, the reduction in the amount that can be withdrawn tax-free at 65 would balance the cost of allowing money to be withdrawn early.
Employer contributions would continue to be treated as a business expense, says the board.
The report says the concept of matching funding should be looked at as away of fostering other pensions products. However, it has restricted itself to examining how it can be used in the context of PRSAs as introducing it would require only minimal structural change. One of the main attractions, says the report, is that all taxpayers would get the same benefit regardless of tax rate.
The report also looked at ways in which regulatory and other obstacles to people taking out PRSAs can be reduced. They want to eliminate the requirement for the broker or company selling the PRSA to carry out a detailed examination of the purchaser's finances first.
This is "aimed at restoring PRSAs to what was envisaged in the original National Pensions Policy Initiative report, i.e. a simple contract that, because of the contract approval requirements, could be sold or bought with minimal compliance," according to the report.
Another beneficial side-effect would be to improve the economics of selling PRSAs, which have proved unattractive for a number of financial institutions.