A PRSA is a Personal Retirement Savings Account. It was designed to be a low-cost alternative to traditional pension products and provide retirement pension benefits to those not a member of an employer sponsored pension scheme or to the self-employed.

Anyone aged from 18 to 75 may contribute to a PRSA; all contributions qualify for full tax relief at the marginal income tax rate subject to Revenue restrictions.

The contributions are invested in a range of investment funds with varying degrees of risk and reward and any growth on the contributions will be tax-free.

A PRSA holder can take benefits at any time from age 60 to 75.

When a person takes their pension benefits from either an employer’s pension scheme or from a personal pension plan, the industry describes their policy as ‘vested’.

At retirement, a person can take up to 25% of their accumulated pension fund as a tax-free lump sum. That lump sum has now been further restricted to €200,000.

The balance of the funds must be used to purchase an annuity [a pension for life] or alternatively invested in an Approved Retirement Fund [ARF].

Persons taking their lump sums must opt for the annuity or ARF at the same time.

With a PRSA however, due to a loophole, persons age 60 or more are able to access the tax-free lump sum portion of their accumulated pension fund and leave the remainder in the original PRSA which is now called a ‘vested PRSA’.

In recent years, many cash strapped PRSA holders who were still employed and technically not retiring, used this loophole to access their tax-free lump sum.

They did not take the annuity or ARF benefits because this would have increased their income and their income tax liability.

There are a number of pitfalls to beware of. For example, on death there is an anomaly in the Inheritance Tax treatment of post death distributions from a vested PRSA.

Any person considering vesting their PRSA should obtain professional pension advice first.