Tuesday 28 January 2020

Are PRSAs really worth it?

John Cradden

WHEN personal savings retirement accounts (PRSAs) were introduced in 2003, the aim was to encourage more workers to start pensions.

Part of the incentive was that they were a more flexible option for those who wanted to set up a personal pension because employers could contribute to them too.

The hope was also that the product would help to lower the general level of charges and fees for personal pensions products, which were then widely perceived as being too high.

The cynics would argue that the Government's main aim was to increase the figures for pension coverage. After all, if you are an employer and you don't have a pension scheme, you must provide access to a PRSA, but there is no obligation on the company (or even the worker) to contribute.

So, nearly 10 years on, are they a success or a failure?

According to the Pensions Board, there are now just over 200,000 PRSA contracts in existence. This compares with 150,000 at the end of 2008, and 130,000 in 2007, so the growth has been steady, if unremarkable.

Nearly 70,000 were taken out through an employer, which suggests that they have much more appeal for the self-employed than PAYE workers.

"PRSAs are the 'yellow pack' version of pensions," says Bob Quinn of Kildare-based financial advisers Money Advisor.

"They were designed to be more transparent than any other pension products on the market and to this day remain the least complicated version of a pension."

Jerry Moriarty, chief executive of the Irish Association of Pension Funds, says that, with around €3bn in assets in PRSAs now, it would be "a bit strong" to say they are a failure. He adds that charges on a standard PRSA are often lower than for personal pensions.

"However, the total number of people with pensions in Ireland has not increased since they were introduced."

Liam Ferguson, of Ferguson and Associates, says: "I think that the greatest single achievement of the PRSA has been to force providers to express charges in a format that's easily understood by everyone.

"So many other pension products are littered with jargon, such as initial units, accumulation units, bonus units and other impenetrable gobbledygook that only serves to make it harder for a client to actually understand what they're buying into," he said.

"It's written into the PRSA rulebook that PRSA charges can only be expressed as a simple percentage of the contribution and/or a simple percentage of the fund per year, which is an excellent idea."

So why have they failed to capture people's imagination?

"I think the Government has hampered the sale of PRSAs over the years by allowing complex rules to exist over the interaction between PRSAs and other forms of pension vehicles and, more recently, by creating an unfair advantage for employer contributions into occupational pension schemes over employer contributions into PRSAs," says Mr Ferguson.

For instance, he says someone who has a fund in a company scheme from a previous employment but starts a PRSA can find it "quite difficult and sometimes impossible" to transfer funds from the old company to the PRSA.

"As long as these complicated rules exist, people will continue to believe that pensions, including PRSAs, are over-complicated, a belief that a simple product like a PRSA was supposed to overcome."

Mr Moriarty confirms there are "significant disadvantages" for employer contributions paid into PRSAs and how they are treated from a tax point of view, which he says has been damaging to their uptake.

Mr Quinn says that another reason for the relative unpopularity of PRSAs is that they are not as lucrative for the seller as personal pensions, whether it's a bank or a broker.

"As a result, fund choice is very restrictive and the investment options available through a personal pension are far more robust."

In addition, he says many pension contributors are looking for safe bets and many of the cash funds in PRSA products will often provide negative results by the time the annual management charge and performance is taken into account.

"Many of these issues can be easily dealt with, but it involves the Pensions Board clipping the wings of the pension providers to a certain extent."

Indeed, PRSAs could feasibly be made the "only gig in town" in terms of personal pensions, as it would simplify things "by 1,000pc".

Irish Independent Supplement

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