The WALLACE Financial Guide to understanding a PRSA
PRSA
A PRSA is a private pension plan, separate from the State pension scheme and is available from a range of financial companies, including banks and insurance companies. Anyone can take out a PRSA, regardless of their employment status. It is essentially, a tax-efficient savings account set up by you to save for your retirement.
A PRSA is extremely flexible: you (and your employer, if applicable) can gain tax relief on contributions to it; you can take it with you when you change jobs or employment and you can start, stop, increase or decrease your contributions at any stage. There are two types of PRSAs available: a standard PRSA and a non-standard PRSA. The key difference between the standard and non-standard PRSA is: Standard PRSAs have a maximum fund management charge of 1% and a maximum contribution charge of 5% but have restrictions on the types of funds you can invest in; non-standard PRSAs don’t have limits on charges but may have a wider choice of funds including guaranteed funds which may be attractive to you.
How much should I invest in my PRSA?
You can start a PRSA by investing as little as €25 per month, however, there are a number of things you should consider before deciding on your monthly amount: what age you’d like to retire at, your current age, the length of time to your retirement, and your existing income. General consensus suggests you should aim to retire on two thirds of your current income (this figure will include the State Pension). Because a PRSA is flexible you can keep your contributions at a consistent amount or you can decrease them or increase them, when appropriate, helping you to achieve your ideal retirement fund. You can also boost your PRSA with a lump sum payment at any stage
What are the tax advantages of a PRSA?
A PRSA is an extremely tax-efficient way for you to save for your retirement. Your monthly contribution to your PRSA qualifies for income tax relief at your marginal tax rate: for example, if you pay tax at the 40% rate, for each €1 you contribute to your PRSA you can claim 40 cent back in tax relief. To give you an idea how much this will save you annually: if you invest €1,000 in your PRSA per year, it will actually only cost you €590, after income tax relief. There are limits to the income tax relief you can get from the Government. The maximum contributions which you can get income tax relief on in a year vary by your age in that year:
| Age | Amount which qualifies for
Tax Relief as a % of Net Relevant Earnings* |
|---|---|
| Under 30 | 15% |
| Age 30 to 39 | 20% |
| Age 40 to 49 | 25% |
| Age 50 to 54 | 30% |
| Age 55 to 59 | 35% |
| 60and over | 40% |
*To a maximum NRE of €115,000
In addition, the growth achieved by your PRSA is not subject to tax. This means that you gain from any investment growth and income your PRSA earns.
How do I decide where to invest my PRSA?
You may be relying on your PRSA to provide an important source of income in retirement, so it’s vital that you invest it wisely. There are many options available to you, from low and high risk funds investing in particular types of assets to managed or mixed funds investing in a spread of assets and self-directed funds, where you choose the funds or assets in which you invest. The PRSA you decide to invest in should offer you a diversified range of investment options that can meet your changing circumstances over time. Any choice you make should be based on the level of investment risk you are comfortable with and should take into account your financial circumstances and goals. It is important to understand that the value of your PRSA can fall as well as rise, depending on which funds or assets you invest in.