No PRSI on Employer PRSA

I know - snappy title. The Department of Social Protection have confirmed that contributions by an employer to a PRSA do not generate a PRSI liability for the employee. Such contributions do, however, generate a USC liability.


In clarifying this, the powers that be have gone less than half-way to rectifying a known anomaly between PRSAs and Occupational Pension Schemes. Employer contributions to Occupational Pension Schemes are not a Benefit in Kind and therefore do not generate a liability for the employee in respect of tax, PRSI or the USC. Employer contributions to a PRSA are a Benefit in Kind and, while tax relief offsets the tax and now the PRSI liability has been removed, the liability to the USC remains.

When PRSAs were launched, less than eight years ago, they were designed to be low-cost, transparent, portable pension savings vehicles that would encourage more people to save for their retirement. Why the Government is now discriminating against them in favour of the older type Occupational Pension Schemes is beyond me.

Image: graur codrin / FreeDigitalPhotos.net

National Solidarity Bond - is it any good?

Details of the National Solidarity Bond were announced last week, the idea having first surfaced in the most recent Budget speech. The idea is that you invest an amount of money from €500 to €250,000 for a period of ten years, after which you get a State-guaranteed return of 50%, which is fixed from the outset.

In further detail, the return is 50% Gross over 10 years (AER 4.14%) consisting of 10% in 10 annual payments of 1% which are subject to DIRT at the prevailing rate (currently 25%) plus a 40% Tax free lump sum at the end of 10 years.

The net after tax return is 47.5% (AER 3.96%) assuming DIRT remains at 25%. Minimum investment is €500. Maximum individual investment is €250,000 (or €500,000 from 2 joint applicants or €750,000 from 3 joint applicants). If you do not have €500 to invest there is a facility to save through regular lodgements. You can access your money at any time by giving 7 days notice. There are no fees, charges or sales commissions.

The money will be used by the Irish Government. As the blurb says - "The Government of Ireland wants to make it easy for residents of Ireland to help to fund the Government’s capital investment programme, develop important infrastructure, stimulate economic recovery and create employment."

Looking at it purely as an investment option, I'd say it should only be considered by someone who is 100% sure they do not need access to their savings earlier than ten years as otherwise the rate of return will be just 0.75% per year after DIRT tax, which is paltry. If you are going to leave it for the 10 years, the return of 4.14% per year, before DIRT tax, isn't going to make you rich but it may be useful as a safe haven alternative to bank deposits for some long-term cash. This of course assumes you have confidence that a guarantee by the Irish State is a safe haven.

It is irritating that the 1% levy on other savings & investment products doesn't apply to this bond, which is an example of the Government using the tax laws to suit their own causes.

Further details available here.

(Note: This product is not available via brokers. The above article should be considered a personal opinion and not professional advice.)

Public Servants should consider retiring now

I recently looked at a pension projection for a 61 year old hospital consultant, working for a HSE hospital. The projection gave him details of his pension and lump sum from the superannuation scheme should he retire now, as well as the projected figures if he stays to age 65.

The twist, however, is the fact that the projections take no account of the 15% salary reduction to which he will be subjected, as a result of Budget 2010. Because public service pensions are based on a percantage of final salary, if your salary is reduced by 15%, your pension will be also.

But in the Budget, a window of opportunity was provided. "To ensure that any increase in the number of retirements can be managed, the legislation on pay reductions in the public service will provide that any retirements in 2010 would be on existing, pre-cut pay terms." So any Public Servant retiring in 2010 will have their pension based on 2009 salary level.

Given that Public Service pensions accrue at a rate of 1/80 or 1.25% of final salary for each year of service, a higher earner facing a pay cut of 15% would take 12 years to build up the lost pension entitlement, unless pay increases come back into fashion during that period. Someone facing a pay cut of 8% would take over 6 years to build up the lost pension entitlement.

So if you're a Public Servant and within sight of pension age, you might do well to consider retiring now. Which is presumably a deliberate move by the Minister.