Personal Retirement Savings Accounts (PRSAs) Employers Obligations

Personal Retirement Savings Accounts (PRSAs) Employers Obligations

Foreword by Mary Coughlan TD Minister for Social and Family Affairs A Chara, I welcome the publication of this booklet as a useful and timely guide for employers which sets out the legal obligations with regard to Personal Retirement Savings Accounts (PRSAs). This booklet will be a valuable tool for employers to help bring pension awareness into the workplace. The information provided in this booklet will also help employers to meet their obligations before the 15th September deadline to provide access for their employees to a Standard PRSA, on and from that date. I believe that PRSAs as a portable new pensions product are a key development in encouraging flexible retirement savings. This booklet is the first of three that form part of the National Pensions Awareness Campaign. Take up of the new products has been slow to date, and these publications allied to the general awareness campaign by the Pensions Board is aimed at increasing coverage amongst the workforce from its current level of 50 to 70 per cent. Pension awareness is extremely important, and will become more so, as our older population continues to grow in numbers and life expectancy extends, and this booklet and campaign will help address that need. Is mise le meas, Mary Coughlan TD Minister for Social and Family Affairs

1. Introduction The purpose of this booklet is to describe employers legal obligations with regard to Personal Retirement Savings Accounts (PRSAs). The Pensions (Amendment) Act, 2002 ( the Act ) which was passed into law on 13 April 2002 introduced the framework for PRSAs and their associated tax reliefs and arrangements. The Act arose out of decisions by Government in relation to the Pensions Board s Report to the Minister for Social and Family Affairs Securing Retirement Income and, other reports by the Board to the Minister, in which recommendations were made with the objective of improving the quality and extent of pensions coverage. In its report to the Minister Securing Retirement Income, the Board recommended the introduction of a new style of private pension savings account the PRSA. This low-cost, easy access, investment account is designed to allow people to save for retirement in a flexible manner. The PRSA is also designed to be owned by an individual, regardless of their employment status, to be transferable from job to job, and to be available from a variety of providers. Since February 2003 the Board, which has responsibility for approving PRSA products and monitoring the activities of PRSA providers in respect of their approved products, has approved a total of 52 products; 19 of which are Standard PRSAs and 33 are non-standard PRSAs. A list of PRSA providers and their products is available on the Board s website on www.pensionsboard.ie 1

Where employers do not operate an occupational pension scheme, or, where there are certain restrictions applying to the occupational pension scheme then they are required under the legislation to ensure that their employees have access to at least one Standard PRSA. This provision comes into mandatory effect on 15 September 2003. There follows in a Frequently Asked Questions (FAQ) format a guide to PRSAs from the employer s perspective. Throughout the FAQs you will find terms printed in italics. These are explained in the Glossary at the end of the booklet. 2

2. PRSAs Explained What is a PRSA? A PRSA is a contract between an individual and an authorised PRSA provider in the form of an investment account that can be used to save for retirement. It is a type of defined contribution arrangement where the investment return is tax exempted. There are two types of PRSA a Standard PRSA and a non-standard PRSA. What are the key features of all PRSAs? All PRSA products must be jointly approved by the Pensions Board and the Revenue Commissioners. In addition all PRSAs are obliged to offer a Default Investment Strategy (DIS). The DIS adopts an investment profile that is expected to meet the reasonable expectations of a typical contributor for the purpose of making savings for retirement. The DIS is applied unless the contributor indicates otherwise in writing. What is a Standard PRSA? A Standard PRSA is a contract that has maximum charges of 5% on the contributions paid and 1% per annum on the assets under management. Charges may be discretionary up to these maximum levels. Apart from temporary cash holdings, investments are only permitted in pooled funds. A Standard PRSA may not be marketed or sold if the purchase of the product is conditional on some other product e.g. life assurance being bought at the same time. 3

What is a non-standard PRSA? A non-standard PRSA is a contract that does not have maximum limits on charges and/or allows investments in funds other than in pooled funds. How do PRSAs impact on employers? All employers will be required by 15 September 2003 to have entered a contract with a PRSA provider so that access to at least one Standard PRSA will be available for all excluded employees on and from that date. In summary excluded employees are: employees of an employer who do not offer an occupational pension scheme, or employees who are included in an occupational pension scheme for death in service benefits only, or employees who are ineligible to join the scheme and who will not, under the rules, become eligible to join the scheme for pension benefits within six months from the date they commenced employment, or employees who do not have access to AVCs through their occupational pension scheme. 4

3. Employers Obligations To Provide Access to PRSAs When will I be required to provide access to a Standard PRSA? The mandatory access requirement becomes law on 15 September 2003. What must I do to provide access to a Standard PRSA? You must: enter into a contract with a PRSA provider, notify excluded employees that they have a right to contribute to a Standard PRSA, allow the PRSA provider or intermediary reasonable access to your excluded employees at their work place, allow reasonable paid leave of absence to enable such excluded employees to set up a Standard PRSA, subject to work requirements, make deductions from payroll at your employees request (see PRSA Contributions). Do I have to give any advice to my employees in relation to PRSAs? No, but you must allow your PRSA provider or intermediary reasonable access to your employees in order to brief them on PRSAs. 5

I have a small workforce, less than five employees do I still have to provide access to a Standard PRSA? Yes all employers regardless of the size of their workforce are obliged to provide access to a Standard PRSA if those employees fall into the category of excluded employees. I have a number of part-time, fixed term contract and seasonal employees do I have to provide access to a Standard PRSA for these employees? Yes, all employees, whatever their status, must be given access to a Standard PRSA if they fall into the category of excluded employees. Do I have to provide access to a PRSA even though I operate an occupational pension scheme? No, provided all employees, including seasonal, part-time workers etc are eligible to join the scheme for pension benefits within six months of joining service. However, if you have only one excluded employee, you would still have to provide access to a Standard PRSA for that employee. What is the position in relation to Additional Voluntary Contributions? If you have an occupational pension scheme that does not currently offer a facility for Additional Voluntary Contributions (AVCs) you are also obliged to make available a Standard PRSA. This will require an amendment to the scheme rules. You should also note that PRSAs will replace one member AVC Schemes. Group AVC Schemes can convert to PRSAs at any time. 6

What obligation do I have in respect of employee contributions to PRSAs? Employers must pass over to the relevant account of the PRSA provider employee contributions within 21 days of the end of the month in which the contributions were deducted. You cannot make any deduction from this payment. Do I as an employer have to contribute to PRSAs on my employees behalf? Employers may contribute but are not obliged to do so. However, if you decide to contribute to your employees PRSA, a similar timescale to that for employee payroll deductions will apply. You cannot make any deduction from this payment. Do I have any responsibility in relation to the investment performance of PRSAs? No, the Act is very clear that an employer which enables its employees to participate in a Standard PRSA will have no duty to those employees regarding the investment performance of that Standard PRSA. What happens if I do not comply with the statutory requirements to provide access to a Standard PRSA? You may be found guilty of a criminal offence in accordance with the Act, for which fines and penalties ranging from 1,500 to 12,700 and/or imprisonment for terms of one or two years may be imposed. 7

4. PRSA Providers What is a PRSA provider? Investment business firms, insurance companies and credit institutions may be authorised PRSA providers. The actual products to be sold are approved jointly by the Revenue Commissioners and the Pensions Board. Where can I find a list of approved PRSA products? A list of approved PRSA products and the respective providers are available on the Pensions Board website on www.pensionsboard.ie If I enter into a contract with a PRSA provider, must my employees who want to take out a PRSA have to take out this Standard PRSA with that provider? No, an employee can go to any authorised PRSA provider but you are not obliged to make deductions from payroll for that employee. In such a case they would make PRSA contributions directly to the provider, by, for example, direct debit or cheque. Are PRSA providers obliged to disclose information in relation to PRSAs? Yes, the Act prescribes a range of information to be disclosed by PRSA providers to contributors. Full details in relation to content, manner, frequency etc of disclosure are set out in Regulations. Can transfers be effected between PRSA providers? 8 Yes, a PRSA contract must permit the transfer of PRSA assets from one provider to another without imposing a transfer charge. A provider to an employer nominated Standard PRSA that facilitates employee payroll deductions of contributions must accept transfers of any PRSA assets held elsewhere by such employees.

5. PRSA Contributions What must I do in relation to payment of my employees contributions to a PRSA? You must, if requested, deduct employees contributions from payroll and remit all contributions, employee and employer (if any), to the relevant account of the PRSA provider within 21 days of the end of each month. You cannot make any deduction from this payment. Is there a minimum level of contribution? Yes, there are upper limits placed on the minimum contribution levels that a PRSA provider may require. These are 300 per annum, 10 per electronic funds transfer, or 50 per transaction using other methods. What information will I have to give in relation to PRSA contributions? You will have to advise both your employees and the PRSA provider in writing at least once a month of: a) the total amount deducted from the employee s salary, and b) if appropriate, the total amount paid by you on behalf of the employee in the preceding month or if the previous statement was given less than a month before, in the period since the previous statement was given. You may satisfy this requirement by notification on whatever documentation is normally provided to your employees in relation to salary details, e.g. payroll slip. 9

6. Benefits How will my employees PRSA benefits be determined? Your employees PRSA benefits will be determined by the contributions paid by and on behalf of them and the investment return on those contributions. Your employees as the PRSA contributors are the beneficial owners of the underlying assets of the PRSA contract. The assets may not be used as a form of collateral. When can my employees draw on their PRSA benefits? Benefits can normally be taken between ages 60 and 75. In certain circumstances benefits can be taken earlier e.g. retirement from employment at age 50 or over or, if at any time, an employee becomes permanently incapacitated. What options will be available to my employees at retirement? PRSA proceeds in relation to periods when the employee was not a member of an occupational pension scheme may be taken 25% in cash, tax-free and the balance can be used to buy an annuity for life or transferred to an Approved Retirement Fund (ARF), subject to the usual conditions including AMRF requirements or withdrawn in cash subject to PAYE and the AMRF conditions. PRSAs accumulated while the employee was a member of an occupational pension scheme will be subject to the existing treatment of occupational benefits. Full details of benefit options are set out in A Guide to Personal Retirement Savings Accounts (PRSAs) which has been prepared by the Office of the Revenue Commissioners. This document can be viewed on the Revenue s website on www.revenue.ie 10

Do my employees have to take all of their PRSA benefits at retirement? No, they can choose to take gradual benefits from their PRSA and continue to make PRSA contributions subject to benefits commencing and contributions ceasing at age 75 at the latest. What happens if an employee dies before taking his/her PRSA benefits? Where death occurs before benefits are taken from a PRSA, the PRSA fund will pass in its entirety to the employee s estate, free of income tax. Inheritance tax will apply in the normal way. What happens when death occurs after the PRSA benefits commence? The position depends on the type of pensions option the employee chooses at retirement some of which will have certain guarantees. More information on this can be obtained in the Revenue guide referred to above. What happens if any of my employees become seriously ill? If any of your employees become seriously ill, they can draw on their PRSA benefits immediately, regardless of their age. This is subject to Revenue requirements. What if any of my employees move on to new employment? As a PRSA is their personal pension plan they can bring it with them from job to job, and from employment to self-employment or vice versa. PRSA benefits can be transferred to an occupational pension scheme or to another PRSA. 11

Can occupational pension scheme benefits be transferred to PRSAs? Transfers from an occupational pension scheme to a PRSA will only be allowed where a member has been in the scheme for 15 years or less and either: the scheme is being wound up, or the member is changing employment. The value of AVC contributions to an occupational pension scheme may be transferred to a PRSA without regard to the foregoing restrictions. Are there disclosure requirements concerning transfers from occupational pension schemes to PRSAs? Yes, a transfer value cannot be accepted by a PRSA provider unless the member has first been provided with a certificate comparing potential benefits from the occupational pension scheme and the PRSA and a written statement as to why a transfer to a PRSA would or would not be in his/her interests. These disclosure provisions do not apply in certain circumstances. What about refunds of ordinary contributions from occupational pensions schemes? Employees who are entitled to refunds of contributions on leaving service can opt to transfer the refund to a PRSA, instead of taking it subject to standard rate tax deduction. The scheme rules may need to be amended to allow for such a transfer. 12

Do occupational pension schemes have to accept transfers from PRSAs? It is intended to introduce Regulations to provide for the transfer of PRSA assets to: a) a defined benefit or defined contribution scheme, and b) to arrangements for the provisions of retirement benefits established outside the State to the same extent that transfers are permitted from a scheme. 13

7. PRSA Tax Reliefs Will my employees benefit from tax relief in respect of their PRSA contributions? Yes, contributions paid to a PRSA will benefit from tax relief at an individual s marginal rate. The maximum relief in any one year is expressed as a percentage of Net Relevant Earnings (broadly earnings from a trade, professional employment less certain allowable expenses) subject to an earnings cap of 254,000 per annum. The maximum allowable contributions for tax purposes in any year are as follows: Age % of Net Relevant Earnings Under 30 years of age 15% 30-39 years of age 20% 40-49 years of age 25% 50 years and over 30% Relief will also be given from PRSI and the Health Levy. How does this work? When you deduct qualifying PRSA contributions from your employees, the net pay arrangement will apply. This means that PAYE, PRSI and Health Levy deductions will be calculated on your employees wages or salaries net of PRSA contributions. You will be able to operate the net pay basis once you hold a PRSA net pay certificate. 14

What about contributions to an AVC-PRSA? Employees in occupational pension schemes may pay AVCs into a PRSA. In these circumstances the normal limits for tax relief purposes, described above, apply to the total employee contributions. Do I, as an employer, get tax relief on any contributions I make to an employee s PRSAs? Yes, contributions paid by employers are fully deductible for Corporation Tax purposes. Contributions paid by you are treated as a benefit-in-kind. Your employees are then entitled to tax relief on these contributions subject to the limits on the relief. In practice, it s likely that a benefit-in-kind charge will only arise where the total contributions in any one year exceed the annual limit. Are the PRSA investments taxed? No tax is charged on the investment income earned by PRSAs. Where can I get more information on the tax rules relating to PRSAs? Full details are available in the Revenue guide referred to in Section 6 (PRSA Benefits). 15

8. Glossary of Terms Additional Voluntary Contributions (AVCs): means voluntary pension contributions made by a member of a pension scheme over and above the amount of contributions (if any) that are required under the rules of the scheme. Defined Benefit: means where the amount of a pension benefit is specified by formulae in the rules of the pension scheme. Defined Contribution: means where the amount of a pension benefit depends on the accumulated value of contributions paid to a pension scheme and the investment returns earned on those contributions. Default Investment Strategy: means an automatic investment strategy that is linked to general good practice for investment for retirement and is certified by a PRSA actuary. The DIS provides for investment in, pooled funds. Occupational Pension Scheme: means a pension scheme set up by an employer to provide retirement benefits for employees. This term is used interchangeably with company pension scheme. Pooled Funds: means a collective investment scheme or an internal linked fund the benefit of which is made available by means of a contract of insurance. 16

9. The Pensions Board The Pensions Board was established by the Minister for Social Welfare under the terms of the Pensions Act, 1990. Its main functions as set out in that Act and amending legislation, most recently the Pensions (Amendment) Act, 2002, are: to monitor and supervise the operation of the Pensions Act and pension developments generally, including the activities of PRSA (Personal Retirement Savings Account) providers, the provision of PRSA products and the operation of PRSAs; to issue guidelines or Guidance Notes on the duties and responsibilities of trustees of schemes and Codes of Practice on specific aspects of their responsibilities; to issue guidelines or Guidance Notes on the duties and responsibilities of PRSA providers in relation to PRSA products; to encourage the provision of appropriate training for trustees of schemes, and to advise the Minister on standards for trustees; to advise the Minister on all matters in relation to the Pensions Act and on pension matters generally. Occupational pension schemes must register with the Board, and most schemes must pay an annual fee to meet the Board s administrative costs. The Board can act on behalf of pension scheme members who are concerned about their scheme; it can investigate the operation of pension schemes; it has the power to prosecute for breaches of the Pensions Act and to take court action against trustees for the protection of members and their rights. 17

In relation to PRSAs, the Board and the Revenue Commissioners are jointly responsible for the approval of PRSA products in order to provide for the protection of PRSA contributors and the need for effective supervision of the production, marketing and sale of such products. The Board can collect fees on an annual basis from PRSA providers to defray the costs of the supervision of this function; it can act on behalf of PRSA contributors who have concerns about their PRSAs; it can investigate the state of a PRSA product, the PRSA provider in respect of its PRSA activities and employers in relation to statutory requirements of the Pensions Act; it has the power to initiate prosecutions for breaches of the Pensions Act. The Pensions Board includes representatives of trade unions, employers, Government, pension scheme trustees, the pensions industry, consumer interests, pensioner interests and various professional groups involved with occupational pension schemes and PRSAs. 18

10. Further Information The following booklets are also available free of charge from the Pensions Board: So You re a Pension Scheme Trustee? A brief guide to the duties and responsibilities of trustees of occupational pension schemes. Is My Pension Secure? * A guide to the protections provided by the Pensions Act. Selecting Member Trustees A guide to the participation by members in the selection of occupational pension scheme trustees. What Do You Know About Your Pension Scheme? An overview of the information which trustees of occupational pension schemes must give. The Pensions Board * An introduction to the Board, its functions and its membership. What Happens to My Pension if I Leave? A guide to the preservation and transfer of benefits for early leavers under the Pensions Act. A Brief Guide to Pensions A guide to help you understand your pension scheme and its benefits. 19

What Happens When Your Pension Scheme is Wound Up or Merger/Acquisition Takes Place? A guide to trustees and pension scheme members on the winding up of a pension scheme and on the effects of mergers/acquisitions on pension schemes. A Guide to Your Scheme s Annual Report A guide to pension scheme members to assist them in reading and understanding their scheme s Annual Report. A Brief Guide to the Pension Provisions of the Family Law Acts Guidance on the pension provisions of the Family Law Act, 1995 and the Family Law (Divorce) Act, 1996. Securing Retirement Income National Pensions Policy Initiative. A brief guide to Report of the Pensions Board. A Brief Guide to Annuities A guide to annuities and how they work. A Brief Guide to Integration Guidance on the integration of occupational pension scheme benefits with the benefits payable under the Social Welfare system. Women and Pensions A guide on pension provisions for women. Pensions (Amendment) Act, 2002 Frequently Asked Questions (FAQs) 20 *Also available in Irish

Verschoyle House 28/30 Lr Mount St Dublin 2 Tel 01 613 1900 Fax 01 631 8602 Email pb@pensionsboard.ie www.pensionsboard.ie No liability whatsoever is accepted by the Pensions Board, its servants or agents for any errors or omissions in the information contained in this booklet or for any loss occasioned to any person acting or refraining from acting as a result of any statement in this booklet. August 2003