If you’re setting up a pension plan for your employees, deciding which one to opt for can be a challenge.
The choice is often presented as one between more flexibility (Personal Retirement Savings Accounts) or a higher rate of contribution (Occupational Pensions Schemes) but, in reality, the options are far more complex.
Personal Retirement Savings Accounts (PRSAs) have already been around in Ireland for a while – since 2002, in fact. They’re designed to give you as much flexibility as possible when trying to save for retirement.
But, while they provide employees with an individually tailored plan, they often incur higher charges and restrictions that actually limit what an employee can do with their plan.
With this in mind, it’s not surprising that OPSs, which tend to carry lower direct costs and a higher contribution limit are the pension plan of choice for many employers.
Here are our top six ways that an OPS can trump a PRSA for employees:
- No benefit-in-kind tax for employer contributions
Under the PRSA system, employees pay a fairly hefty tax of 7% – sometimes even 8% – on contributions made by their employer. In an OPS, they pay no such tax at all.
- Gives employees more options on retirement
While PRSAs are designed to give employees plenty of flexibility in how they save for retirement, when it comes to the range of options for taking those benefits on retirement, the OPS is the clear winner.
- No taxes on transfers overseas
Under the OPS system, if employees decide to transfer their pension plan to another country, no additional tax charges apply.
This gives the OPS a definite advantage over the PRSA, as providers of the latter are obliged to deduct income tax at an employee’s marginal tax rate from a transfer to an overseas pension plan.
- Easy to transfer in benefits from other plans
PRSAs are created on an individual basis, with a pension plan set up for each employee that they can take it with them – even if they change employment.
The drawback is that when they make the switch they can face restrictions and incur additional costs.
With an OPS, on the other hand, employees can transfer their pension value and benefits over to a new plan with a new employer, with little or no costs or restrictions.
- (Potentially) lower fees
The annual management charge for a PRSA generally starts at 1% – but, for an OPS, the management fees can be lower.
- Higher tax-allowable contributions for employees
Lastly, for employees that plan to make significant contributions to their pension plan, the OPS is the clear winner.
The PRSA limits include employer as well as employee contributions, which are taxed as benefits-in-kind. This means that the cut-off point for employee contributions that qualify for tax relief is much lower than for the OPS.
Clearly, both plans have their advantages. But, overall, an OPS structure often offers the most when it comes to the crunch.
That said, there may be specific reasons why a PRSA works better for your organisation, and it’s really worthwhile looking through them in detail to make sure you know exactly what to expect, before making your choice.
Which do you think would work best for you? Have you already got an existing plan in place and are thinking of changing? Let us know what’s on your mind!