People are living longer & most of us hope to lead very active lives in retirement. One of the consequences of this is that most people would need more income in retirement than the state pension provides if they are to maintain the lifestyle they had prior to retirement. Providing for the financial aspect of your retirement is a long term project. The earlier you start providing for a pension the better, in terms of the compounding effect of investment returns.
Retirement planning is one of the most important aspects of personal financial planning. Due to the complexity and myriad of options, the input of a Professional and Independent Adviser is essential. As Qualified Tax Advisors, Donnellan & Co. can help you plan for your retirement in a tax efficient manner.
When planning your retirement Donnellan & Co. will guide you through the steps involved in calculating your required retirement fund. We will take into account other income you might have and determine how much you need to start saving now to reach the target you set at retirement age. We will take into account other factors such as your investment risk profile, required investment growth and match these to pension options available in the market place. We will also explain the tax relief available on pensions and ensure you are maximising this where possible.
Perhaps you are one of the many people in Ireland who are disappointed with the performance of your pension in recent years. If you would like to talk to someone who can explain how pensions and their charges work, call us today. The charging structure is very important in pension planning and you shouldn’t be paying more than you need to.
At Donnellan & Co. we believe in transparency and for this reason with client agreement we prefer to charge fees for setting up pensions with our pension providers and do not take commission from life assurance companies for pension set up. This would normally result in a cheaper pension charge, which will allow for greater pension growth.
Pension Structures Available:
1. Personal Pensions / PRSA’s
Personal Pensions /PRSAs are for self-employed (Schedule D) earners, or those who do not wish to avail of the employer-sponsored pension scheme.
The maximum funding that you will receive tax-relief on is:
| Age | % of Taxable Earnings |
|---|---|
| <30 | 15% |
| 30 to 39 | 20% |
| 40 to 49 | 25% |
| 50 to 54 | 30% |
| 55 to 59 | 35% |
| 60 and over | 40% |
The tax relief outlined above is based on our understanding of current practice as at March 2011 and may change in the future.
2. Executive Pensions / Company Directors Pensions
If you are a Company Director, you can provide greater pension funding through your company, than would be possible if you were self employed.
The following are the benefits of Retirement Planning through your company:
- Contributions are deductible in computing your corporation tax.
- No benefit in kind implications
- Pension fund grows tax free
- 25% tax free cash at retirement
- Early retirement from age 50
- Lump sum death & disability benefit may be included
How much can a Proprietary Director invest into a Pension Fund?
Some directors do not realise the amount of pension funding that is allowed / possible through a company. A common misconception pertains to the level of pension investment allowable by Revenue. Many think that it is limited by the age related earnings cap that applies to the self employed.
However, the amount of money a company can contribute to a director’s pension on behalf of a proprietary director can be substantial. A company may make whatever contributions are necessary to build up a pension fund which will provide a director with a pension of 2/3rds of final pensionable salary – subject to a maximum salary of €115,000 and a maximum fund value of €2.3m.
The chart below shows the maximum contributions an employer could make and get full tax relief on these payments as at March 2011 and may change in the future. The figures are based on the assumption that no existing pension provision exists and the individual has 10 years pensionable service at age 60.
| Age | Maximum Annual Contribution (as % of salary) |
|---|---|
| 35 | 86% |
| 40 | 108% |
| 45 | 144% |
| 50 | 216% |
| 55 | 432% |
The following is an example of a company with a surplus fund of €50,000 each year for 5 years prior to the retirement of a company director aged 60.
| Option 1 | Option 2 |
|---|---|
| Pay €250,000 as salary | €250,000 contributed to Pension Scheme |
| Salary €250,000 | Fund at 65 €298,765* |
| Less tax @ 41% -€102,500 | Tax Free Lump Sum €74,691 |
| Plus PRSI @ 4% -€9,735 | AMRF/ ARF €224,074 |
| USC - -€16,818 | |
| Net Amount €120,947 |
* assumes 6% growth per annum over 5 years. €50,000 paid as salary each year. PRSI 4%, USC 7% for earnings > €16,016 for self employed 2011.
If we assume the Director wants to access the funds and does not invest in an ARF but takes the full amount at retirement age 65 less tax.
| Total fund @ 65 | €298,765 |
|---|---|
| Tax Free Cash 25% | €74,691 |
| €224,074 | |
| Less tax @ 41% + 7% (USC) | -€106,874 |
| Net Amount | €117,200 |
| Plus tax free cash | €74,691 |
| Total | €191,891 |
In this example the director would still come out better than had he taken the money as salary from the company. In addition the director has saved his company Corporation Tax of €31,250 in the process (assuming 12.5%).
3. Small Self Administered Pensions (SSAP) / Self Invested Personal Pension (SIPP)
A Small Self Administered Pension Scheme (SSAP) is an occupational pension scheme with less than 12 members. More commonly it is a single member scheme. It can be used where family members work and own a business together or for groups of company directors or for a single owner director.
The scheme is self-administered, which means that you do not buy a pension from an insurance company and you decide yourself what the pension fund will be invested in.
Under Revenue rules all SSAPS must have a Revenue approved Pensioneer Trustee. This will be a person or a company who is independent of the business and who is a professional pension trustee. This person or company will have experience in dealing with and setting up pensions.
The Revenue Approved Pensioner Trustee will be your pension administrator and together with them we can show you how to get started and will tell you what rules and regulations you need to follow.
The difference between this type of pension and any other pension is that instead of giving your money to an insurance company for them to invest, you make the investment decisions for yourself. There are some restrictions on how you can invest the money. A sample of some of those restrictions is below:
- You can’t use the pension fund to purchase a holiday home and there are strict rules regarding the purchase of overseas property.
- You cannot purchase shares in the company that you own or are a director of.
- Personal items cannot be bought, for example, art, jewellery, vintage cars, yachts, etc.
- Investments in private companies (not listed on the stock exchange) can only be a maximum of 5% of the pension’s assets and a maximum of 10% of the private company’s share capital.
A Self Invested Personal Pension (SIPP) is the personal pension version of the self administered pension scheme (the self employed and employees in non pensionable employment can avail of the SIPP). This gives the self employed individual the same opportunity to make decisions and take control over their pension scheme. Similar restrictions apply in terms of the assets that can be invested in and arms length rules etc.
Please note that the provision of this product or service does not require licensing, authorisation, or registration with the Financial Regulator and as a result it is not covered by the Financial Regulator’s requirements designed to protect consumers or by statutory compensation.
4. Buy Out Bonds / Personal Retirement Bonds
We live in a time where people may change jobs many times during their lifetime. If each job has its own Occupational Pension Scheme, this could mean you end up at retirement with lots of pension funds accumulated in lots of schemes. This can lead to several problems.
- The scheme Trustee(s) must sign off any requests to withdraw or transfer your benefits, either at or before retirement. So you need to keep track of the Trustee of each scheme until you retire. This may prove difficult if, for example, your former employer winds up the company or is sold before you retire.
- You may not be aware of what fund(s) each of your retained pension benefits is invested in, or what the ongoing charges are and it may hard to get answers on this from trustees.
- You may have little or no control over the investment choices for your pension, even though you will be the sole beneficiary of these funds.
You can avoid the above scenario if you bring your funds with you to the new employers pension scheme (assuming they have a scheme). This may not always be possible. If your current employer only offers a PRSA, there are restrictions placed on transferring from an Occupational Pension Scheme to a PRSA. Or if you become self-employed, you cannot transfer funds from an Occupational Pension Scheme to a Personal Pension Plan.
A potential solution is a Personal Retirement Bond or Buy Out Bond. A Buy Out Bond is a lump sum pension policy, which you choose, into which you can transfer an existing fund from an Occupational Pension Scheme. You choose the fund manager and you choose the fund – Managed Funds, Equity Funds, Property funds etc. are all available. Self-directed Buy Out Bonds are also available, allowing you to choose your own shares or even buy a property if the fund is large enough. Once the Trustee of the Occupational Pension Scheme has arranged for your fund to be transferred into your chosen Buy Out Bond, you then have full control over your fund and the scheme Trustee has no further connection with it.
A word of warning – if you have retained benefits in a Defined Benefit pension scheme, with a guaranteed pension at retirement, it may not be advisable to forfeit these valuable guarantees in order to transfer to a Buy Out Bond. We can help you make the decision if required.
