Bank proposes new pension scheme

Brian O’Mahony, Chief Business Correspondent

The Bank is proposing a Bonus PRSA scheme that reverses the way tax relief is applied to pension contributions.

In essence it suggests a 1 for 3 Tax Bonus to be applied to PRSAs which contrasts with the 1 for 4 SSIA plan.

This would give those on the basic 20% tax band relief of up to 25% on their investment. It is also proposed that a Tax Bonus of 1 for 2 be offered in the first year on all new policies taken out before May 1 2008 which is 12 months after the last SSIA matures.

This proposal is a response to a request by the Minister for Social Welfare, Seamus Brennan, who has asked the industry to make recommendations to him before he publishes his review of the market in September.

Currently 900,000 Irish workers do not have private pensions and are totally reliant on the state pension which is the lowest social welfare pension in Europe at less than 30% of average earnings.

In effect the bank says such a move would go a long way to increasing Ireland’s national pensions coverage from its current low of 52.4 percent.

The aim is to get it to 70% of the population by the start of 2007.

The Bonus PRSA, combines elements of the SSIA with lessons learned from the introduction PRSAs.

They are “easy to understand and offer a clear incentive for long-term saving,” said Brian Forrester, managing director of Bank of Ireland Life/New Ireland.

Currently, tax relief at 20% or 42% applies to PRSAs introduced two years ago.

The bank is against ending the 42% tax relief as proposed elsewhere in submissions to the Minister.

It is also strongly against moving towards a mandatory scheme fearing this would become the maximum the majority of people would set aside for their retirement from that date.

So far the bank says the PRSA experiment has had dismal results. Just 51,000 have been taken out compared with the 350,000 required between 2003 and 2006 to meet the 70% coverage targets.

In its research the bank has found that up to 50% of PRSA sales are substitutes for Personal Pensions, while 90% of the employer PRSA pension offerings have no contributing members.

Stressing the value of mimicking the SSIA format, the bank pointed out that 1.1million people took out SSIA’s and those who have got involved are comfortable with the commitments they made.

To continue the savings, habit PRSA’s need to be repackaged along similar lines, Mr Forrester said. The idea is to get people to be buyers of pensions, he said.

“If we can apply the same principles to long-term savings into PRSAs, we have a real chance of raising the national pensions average.”

“We believe that our proposal is worthy of close examination and we have today submitted it to the Minister for Social & Family Affairs ” he said.

Concern over the failure of PRSAs to capture the public’s imagination has forced the Minister to bring forward his pensions review by one year from September 2006 to this September.

If something isn’t done soon, the current “young affluent Irish population face a dramatic fall in their income at retirement”, he warned.