Personal pension plans and PRSAs
Personal pension plans
A personal pension plan is a private pension plan that is managed for you by a life insurance or investment company. Anyone who is self-employed or who earns an income but cannot join an employer pension scheme can start a personal pension plan. Also, if you are a member of an employer pension scheme but earn money somewhere else, you may be able to contribute to a personal pension plan.
You have to set up this type of plan yourself, arrange to pay your own contributions and claim tax relief yourself each year. You should contact Revenue for information on how to claim tax relief if you are employed, as your employer cannot usually make contributions to your personal pension plan. You can contribute to more than one personal pension plan.
Personal Retirement Savings Accounts (PRSAs)
A PRSA is a type of personal pension that is more flexible than the traditional personal pension plan. Anyone up to the age of 75 can take out a PRSA and you don’t have to be earning an income to do so.
If you are employed, by law your employer must offer you a standard PRSA if:
- There is no employer pension scheme in place through your job
- You are not eligible to join your employer pension scheme within the first six months of your service
- You are eligible to join your employer pension scheme but only for death-in-service benefits
You can also set up a PRSA if you wish to make Additional Voluntary Contributions (AVCs) but are not able to do so through your employer’s pension scheme. If you contribute to a PRSA set up by your employer, you get tax relief automatically and don’t have to claim it yourself. Your employer may also contribute to your PRSA but does not have to.
When you take out a personal pension plan or a PRSA, you can change your mind within 30 days. This is called a “cooling-off” period.
How much should you contribute?
All personal pension plans and PRSAs are set up as defined contribution schemes. As a result, the value of your pension at retirement is not guaranteed and will depend on the level of contributions you make, the growth of your pension fund and the charges you pay.
With a personal pension plan or a PRSA you have to decide how much to contribute in order to give you the income you will need when you retire. This is your ‘pension target’. The older you are when you start your pension, the more you will need to save each year to reach this target. Read more about how pensions work.
Most personal pension plans and PRSAs allow you to pay regular monthly contributions or lump sums and sometimes both. If you make regular contributions, your pension provider may automatically increase your contribution each year, at a fixed rate or in line with inflation. This is called indexation or index-linking. It allows you to build up your fund so that it keeps pace with inflation, but extra charges may apply. Make sure to find out what charges you will have to pay before you agree to increase your contributions.
It is important to review your personal pension plan or PRSA regularly to make sure you are contributing enough to get the pension you need and to make sure your charges are in line with your pension contract. Even if your contributions are index-linked, you may still need to increase your contributions so that your overall fund is large enough to give you a reasonable pension at retirement. When you take out a pension discuss the option of increasing your pension contributions in the future with the pension provider.
Transfers from PRSAs and personal pension plans
Transfers can be made from a PRSA to:
- Another PRSA. PRSAs must allow transfers to another PRSA without penalty
- An employer pension scheme of which the individual is a member
- An overseas pension arrangement, provided certain conditions are met
Transfers can be made from a Personal Pension Plan to:
- Another personal pension plan at any time
- A PRSA, provided the life insurance or investment company operating the personal pension plan is agreeable
Charges and fees
You have to pay certain charges to your pension provider for setting up and managing your pension plan.
These charges can have a significant effect on the value of your pension at retirement. Ongoing yearly charges, for example, are calculated as a percentage of the amount of your fund. So the amount charged will increase as your pension fund grows.
The charges you may have to pay include:
|Allocation rate||This is the percentage of your contribution that is invested in the pension fund. It typically ranges from 90% to 105% of your contributions. A 95% allocation means your pension provider invests 95% of your contribution and takes the other 5% as a charge|
|Entry charges and bid/offer spreads||These typically range from 0% to 5% of your contributions. If the entry or bid/offer charge is 3%, it means you pay a charge of €3 on every €100 of your invested contribution. So the value of your investment is then €97.|
|Monthly policy fee||This is usually a fixed amount taken each month if your contributions are paid in monthly and typically ranges from €3 to €6 a month. It is taken either directly from your contributions or from the value of your fund.|
|Yearly fund management charge||This is a set percentage of the value of your pension fund that is taken each year to pay for fund management and sales costs. It usually ranges from 0.75% to 1.5% of your fund value. So, as your pension fund grows, the amount taken from your fund to pay this charge increases.|
Charges vary depending on whether you have a:
- standard PRSA
- non-standard PRSA
- personal pension plan.
Standard PRSA – with a standard PRSA, the charge can’t be more than 5% of each contribution and 1% per annum of the fund value. There are certain investment restrictions on standard PRSAs but the fund choice available is broad enough to meet most people’s needs.
Non-standard PRSA – these offer a wider choice of funds than a standard PRSA but at a cost. These plans generally have higher charges than standard PRSAs and there is no set limit on these charges.
Personal pension plan – these also offer a wider choice of funds and can also involve higher charges than standard PRSAs.
Information your provider should give you?
It’s important that you read all documents that you are given because they contain important information about your personal pension plan. Keep copies of all documents for your records.
For a personal pension plan:
|Disclosure notice/key features document||You must get this before you sign up to a personal pension plan. The document outlines the details of your plan, any charges, any commission paid to the seller and the projected retirement benefits. This is a general document and figures will not be specific to you.|
|Specific information||When you take out the plan, you will be given a document outlining the specific details and figures relevant to you. This document will also give you information on your 30-day cooling off period.|
|Annual value statement||This applies to plans taken out after 1 February 2001. The statement will include information on the contribution you are making and the maturity or surrender value of the plan.|
For a PRSA:
|Preliminary disclosure certificate||You must be given this before you sign the application form. This is a general document and gives projections on what you might get on retirement based on certain contributions. This document will also give details of your 30-day cooling off period.|
|Non-standard PRSA declaration||If you choose to invest in a non-standard PRSA, you will be asked to sign this document. It explains the product and the charges that apply to it. Read it carefully and only sign it if you are fully satisfied. Keep a copy for your records.|
|Statement of reasonable projection||This gives you a projection of what you might expect to get on retirement. You should be given this seven days after you have signed up to the PRSA, each year, any time you ask for it and within seven days of you increasing your contribution.|
|Investment report||You should get this every six months and it should give you information on the performance of the investment funds that your PRSA is invested in.|
|Statement of account||You should get this every six months. The statement should show you the total contributions made to date, the total contributions made since the last statement and the transfer value of the PRSA. The transfer value is important if you are thinking about moving to another PRSA, to a Personal Pension Plan or to a work pension.|