Put your money to work so you don't have to

The arguments for pensions are well rehearsed. We are living longer and could need more money for residential care. Laura Slattery reports.

We should be able to enjoy our retirement years and not be reliant on minimal State support. And, unlike most other investments, we can get tax relief on our pension contributions.

For people convinced by the need to prioritise pension planning but who are not members of company pension schemes, a new range of products has arrived on the market following years of Government and industry debate.

Personal Retirement Savings Accounts (PRSAs) are flexible, individual pensions that are not tied to any one employer.

But with eight providers and almost 50 separate PRSA products already approved by the Pensions Board and the Revenue (with more on the way), how do people choose which is the most suitable and the best value for their needs? The table opposite includes details of the PRSAs offered by seven companies that have already entered the market or are just about to launch.

With EBS set to join the fray with its standard PRSA on April 22nd and three more potential providers awaiting approval, it may be prudent to wait and see how the market shapes up before jumping in.

However, employers who do not offer a company pension scheme or who exclude certain employees will have to give staff access to a standard PRSA by September 15th. That leaves only five months to work through the marketing ploys of various firms and determine the difference between the PRSAs.

Standard and non-standard: Firstly, people will have to choose between a standard PRSA and a non-standard PRSA.

Standard PRSAs are a simple, off-the-shelf pension vehicle for people to save for their retirement. There are some limits on the funds standard PRSAs can offer but they can give prospective pension holders a good return on their contributions.

They also have one major advantage: charges are capped by the Pensions Board. EBS and Ark Life, AIB's life assurance subsidiary, have decided to sell only standard PRSAs.

Mr Brian Woods, finance director for Ark Life, says that standard PRSAs in effect carry the Pensions Board's "kitemark", while non-standard PRSAs are simply a way for the industry to make more money. The Pensions Board has said it is particularly pleased with the number of standard PRSAs on offer.

Non-standard PRSAs are more expensive. Customers will have to decide if the potential to make higher returns through funds only available through non-standard PRSAs is worth the cost.

Is it really a good idea to plump all of your retirement savings into specialist funds such as a Pacific Basin equity fund or Friends First's ethical investment fund? Most people don't have the investment know-how to make such a decision in the first place and will have to seek advice. This may be the ideal approach to such an important financial commitment, but it also adds to the cost.

Standard PRSAs, on the other hand, were originally constructed as a "one-size-fits-all" pension that could be sold with little or no advice.

Mr Pat Surlis, national pensions sales manager at Bank of Ireland Life, admits that people would need to be well informed on the vagaries of the stock markets to make the specialist funds available under non-standard PRSAs work to their advantage.

Pensions are a long-term investment: it is impossible to know which market will outperform over 30 or 40 years, so people in these funds would have to make a number of switches throughout the term to stay ahead of the game. They would also need to ensure their investment is properly diversified.

Default investment strategy:PRSAs will have a default investment strategy option for people who don't feel confident enough to make their own choice of investment strategy. This strategy is the one significant way of differentiating between various standard PRSA products.

The default investment strategy places customers' funds in a managed fund, which will initially invest about 75-80 per cent in equities. Equities are the most volatile of investment classes, but has historically given the best returns over the long term. In recent years, retiring workers who were members of defined-contribution pension schemes or holders of personal pensions have seen their pension fund depleted just as it was about to mature, as turbulent markets wiped almost a fifth of the value off the average managed pension fund in 2002.

If these pension funds had been moved away from equities and into more stable investments like bonds, property and cash, pension holders would have had greater protection from market falls. The default investment strategy on PRSAs is designed so that this happens automatically as people approach retirement.

Some default strategies shift the investment mix more gradually than others. Hibernian, for example, has 10 separate tranches in its default strategy according to the number of years away from retirement. So a 40-year-old customer will have a higher weighting in property and fixed-interest investments than a 25-year-old.

Bank of Ireland and its subsidiary New Ireland also err on the side of caution, steadily reducing equity exposure over 15 years. Ark Life, on the other hand, starts consolidating equity gains just four years before retirement, although people who have less than seven years to go when they first take out the PRSA are treated differently.

Past performance and future commitment: Past performance statistics included in the table opposite show that the asset managers for certain companies have outperformed others over a 10-year period. These figures come with a critical health warning that past performance is no guarantee of future returns: just because Eagle Star achieved the best returns over the past 10 years doesn't mean it will always stay ahead of the pack - it has been less successful in recent years.

People trying to pick a PRSA should also consider providers' likely ongoing commitment to the market.The more competitive the market, the better off consumers will be. However, there is speculation that some providers will abandon PRSAs over the next few years, deciding that the market simply isn't lucrative enough to make playing by the Pensions Board's rules worth the effort.