Why Choose a PRSA over an SSAP?

[dave2k]

Hi everyone. I am quite young (25) and am considering starting a pension. I would like to know why someone would opt for a PRSA with what seems like extremely high charges over an SSAP. In particular, I am wondering why someone would not choose this one:



I know I am missing something obvious here but are the returns from a PRSA after charges greater than say if I "invested" €100k through my SSAP into a high interest lump sum account (like Investec) ? I assume the return would be DIRT exempt in this case too?

Does anyone have a link to the returns each PRSA fund has achieved over the past 10 years?

Please forgive my ignorance, I do realize I am missing a huge piece of the puzzle here. Any advice would be appreciated.

 

[shaking]

Most SSAP's will have a minimum premium usually in the region of €50,000 not many people starting off a pension plan (especially at your age) will have the salary to support this kind of contribution.

You can invest in a variety of funds through PRSA's you would have to check out each life company to see how the various funds have performed. There would also be a cash / deposit fund available for you to invest in through a PRSA. The charges on a standard PRSA are capped at 5% with a SSAP you pay set up charges and then a management charge.

It's not really feasible to compare the two for a 25 yr old who is just starting out on the pension route. If you are setting up a Personal Pension the most you can contribute to it is 15% of your salary to get full tax relief. To put in €50,000 as normally required for a SSAP you'd need a salary of over €300,000

 

[dave2k]

Thanks a lot for that shaking, it actually cleared a lot up.

So am I right in assuming that I was on a €50k salary, my company (of which I am a director) could NOT contribute €50k tax free in a single payment/year?

 

[shaking]

The company can contribute €50k into the pension on your behalf, you should get whoever your financial adviser is to run a max funding quote to see what the max % is that you can contribute.

 

[8till8]

I have an SSAP and pay less than 800 pa for trustee/administration so you should shop around. Charges based on percentage of the fund is very bad value so avoid them, anyhow % charges is contrary to the idea of a 'self' pension fund, its the member that makes the investment decisions and takes the risks so there shouldn't be any % charges.
Dave2k; you ask about performance differences between the two schemes and its not possible to do this. If you have an SSAP then you are 100% responsible for the performance of the fund because your the investment manager and make all decisions (are you prepared to put the time into this?) with a PRSA you put the money in a fund which is operated outside your control.
So some of the things you need to be clear about regarding an SSAP;
1. The member is the investment manager and is responsible for all profits and losses of the pension. Therefore you need to enjoy this aspect and work at it (all be it part-time)
2. SSAP is very tax effective and can have very cheap annual charges.
3. Contributions can be made from two sources, the company and personally. Both have tax advantages and an actuary will work the amounts based on salary and age. Is your company profitable enough to make decent contributions?
4. Setting up an SSAP to put funds on deposit is contrary to the whole idea and will not make enough money for retirement. Don't waste your time on that one.

hope this helps.

 

[Conan]

As an approximation, the annual contribution at your age for Revenue max benefits would be about €27k. If you have "past service" it might be possible to add an additional lump sum contribution (say €23k) in the first year.
But we need to get specific numbers run based on your exact circumstances.
As for the PRSA v SSAP, I think you need to consider the investment strategy (longer term beyond the next 12 months) as well as the charges. Yes your SSAP could invest into a deposit account, but with ECB rates likely to be below 2% by early next year, its hardly a long term investment strategy for a 25 year old. If in the longer term you believe that you will have the time and expertise to make the investment calls, then the SSAP may well be the way to go. If you are only looking at the SSAP as a route for holding Cash for 12 months, then the upfront costs may not be justified.
My advice would be to decide on the likely longer term investment strategy (whether you will manage the funds or whether you will hire a fund management company) and then establish the most appropriate long term structure.

Conan

 

[dave2k]

I have an SSAP and pay less than 800 pa for trustee/administration so you should shop around. Charges based on percentage of the fund is very bad value so avoid them, anyhow % charges is contrary to the idea of a 'self' pension fund, its the member that makes the investment decisions and takes the risks so there shouldn't be any % charges.
Dave2k; you ask about performance differences between the two schemes and its not possible to do this. If you have an SSAP then you are 100% responsible for the performance of the fund because your the investment manager and make all decisions (are you prepared to put the time into this?) with a PRSA you put the money in a fund which is operated outside your control.
So some of the things you need to be clear about regarding an SSAP;

Thanks a million 8till8, your reply is very much appreciated. I am fully aware that all investment decisions will be on my own head. That's actually one of the pros IMHO. I do not claim to be an astute investor at all but I have always preferred to be in control of all aspects of my life and finances. Even if sometimes that is to my own detriment.

Regarding the performance comparison, I didn't mean between PRSAs and SSAPs, I meant between PRSAs. I had a look at eagle star fund performances and while I don't claim to be able to beat their funds, I would feel a lot better if it was ME PERSONALLY that made that loss rather than pay someone for that loss.

Who is your SSAP administered by?

1. The member is the investment manager and is responsible for all profits and losses of the pension. Therefore you need to enjoy this aspect and work at it (all be it part-time)

This is not a problem.

2. SSAP is very tax effective and can have very cheap annual charges.

This is the biggest pro at the moment. While I have not spoken to my accountant about this just yet (I'd like to have at least a SMALL clue about what my options are first so I'm not overwhelmed and sitting there with a blank stare). Extracting profits from the company in a tax efficient manner is something I'm still struggling with.

3. Contributions can be made from two sources, the company and personally. Both have tax advantages and an actuary will work the amounts based on salary and age. Is your company profitable enough to make decent contributions?

At the moment yes. But it appears that my age is not in my favour here.

4. Setting up an SSAP to put funds on deposit is contrary to the whole idea and will not make enough money for retirement. Don't waste your time on that one.

Well, I had planned to use the SSAP to invest in some index funds and some medium risk long term additional investments which my age does favour.

hope this helps.

It does. Thank you.

 

[dave2k]

As an approximation, the annual contribution at your age for Revenue max benefits would be about €27k. If you have "past service" it might be possible to add an additional lump sum contribution (say €23k) in the first year.
But we need to get specific numbers run based on your exact circumstances.
As for the PRSA v SSAP, I think you need to consider the investment strategy (longer term beyond the next 12 months) as well as the charges. Yes your SSAP could invest into a deposit account, but with ECB rates likely to be below 2% by early next year, its hardly a long term investment strategy for a 25 year old. If in the longer term you believe that you will have the time and expertise to make the investment calls, then the SSAP may well be the way to go. If you are only looking at the SSAP as a route for holding Cash for 12 months, then the upfront costs may not be justified.
My advice would be to decide on the likely longer term investment strategy (whether you will manage the funds or whether you will hire a fund management company) and then establish the most appropriate long term structure.

Conan

Hi Conan,
Thanks for your reply. I think I answered some of your questions just after you posted.

Seeing that I wont be able to access the SSAP until I'm at least 50, this will of course be a long term investment vehicle. The cash deposit I mentioned above was just an example. Probably a bad one.

You said:

As an approximation, the annual contribution at your age for Revenue max benefits would be about €27k. If you have "past service" it might be possible to add an additional lump sum contribution (say €23k) in the first year.

This is actually one of the key things I am after. I want to know how much salary to draw next year to take maximum tax advantage. I am really just exploring my options right now. I know I need to speak to a professional about this but as I mentioned above, I would like to have at least a small clue about what I am talking about before sitting down with an accountant or financial adviser.

 

[8till8]

Dave2k, I agree totally with you regarding making your own investments and being in charge of them, there are plenty of articles proving that monkeys throwing darts at a board to decide investment choices have same or better results than fund managers, so unless you've been eating bananas all morning, you'll probably be better off running your own show!
Regarding preformance between PRSA's I think moneymate does a comparison once a year, I recall seeing it in various newspapers and magazines.
Send me a PM and about administrator.
Regarding extracting money from a company, the SSAP is excellent for this and the actual amount is worked out by the actuary who products an annual figure and one based on past service. You can also make contributions yourself and get tax relief although this is not as tax efficient.
Regarding investment strategy/deposit funds, you make your own strategy decisions however since you're starting early you can afford to make some very high risk investments.
With respect to your accountant, you will need really good advice from your pension administrator/trustee as there is a lot to understand and you'll have to combine the two advisors approaches to understand it fully. Also on the revenue website you'll find the rules for SSAP (things you can't invest in)
Finally, SSAP generally get very little press coverage and usually the same basic format, but don't let that disguise the really strong benefits if it fits your situation.

 

[dave2k]

8till8, thanks so much for the response.

I am not trying at all to have a dig at the PRSA fund managers and I know it's easy for me to say that I could do better than them in the current economic situation. In hindsight, a 6.5% return is much better than a -60% return but would I have thought that 6 yeas ago? Probably not I just prefer a little more control and as you said, I'd like to make some more "risky" investments. At least any losses will be on my head.

I am fully aware of what I can and can not invest in and I am happy with that. Vintage cars and Yachts are not really my thing anyway

It's funny, this morning I received the monthly newsletter from my accountant which goes into a little detail about the SSAP so I think that's a good sign.

Anyway, I'll speak to my accountant next week and go from there. Thanks for all the advice and help.