The Irish pension system is complex and bewildering. It’s difficult to know what you should be striving for as a director, or how much time you need to put away each year in order to achieve your desired retirement income. Let’s take a look at the two most common types of directorships: PRSAs and Executive Pensions.
Because there is no draw down, the PRSA has excellent tax efficiency. This contrasts to most personal pension plans, which tax growth each year as it grows. An intermediate-term pension provides a more flexible alternative to a lifetime annuity that may be subject to the extreme degradation of value of death benefits and encashment fees, resulting in an effective tax rate on withdrawal that can exceed 80%.
The major distinction is that pension payments are not subject to the PRSA tax imposed by Revenue.
There are no specific legal requirements for your employer to contribute or otherwise assist you in establishing an Executive Pension program – it’s conceivable that a business won’t want to. A director who has not paid into the plan may still take it as an “entitlement” at retirement.
For most people who pursue executive pensions, the goal is to produce a tax-efficient income or take advantage of “entitlements” that have accumulated throughout their career at the firm.
While some individuals may be hesitant to address these priorities until they are quite close to retirement (or have amassed enough other assets), many more will find themselves pushed into earlier access as a result of a lack of knowledge or comprehension on the part of employers and HR departments, who frequently mix up personal and executive pensions when interacting with employees.
As an employer, tax benefits are more appealing and the maximum contributions are far greater. You can’t claim your full 40% personal contribution allowance because they’re subject to normal revenue rules that relate with age.
Where there’s also usually an earnings cap of €115,000 for personal contributions, the sky is your limit when it comes to employer-funded pension plans. Revenue allows you to build up a fund which will provide 2/3rds of your final salary as retirement income – subject only to a maximum value that has not yet been reached and can be left intact without any penalty on death or withdrawal.
Taking your benefits earlier:
If you’re seeking for an early retirement option, the Executive Pension Scheme may be worth exploring. Age 50 onwards (provided that employment has terminated) and poor health are additional reasons why someone might be able to collect their pension sooner than expected. The typical age to receive funding in this plan is 60 years old or older, but if these requirements are met, earlier withdrawals are feasible as well!
A referral who was also a new client had already done some research and wanted to start their own Personal Retirement Savings Account (PRSA) as soon as possible.
They were hesitant about retirement approaching and that they were late in starting, but the tax benefits accessible to individuals their age group (25%), it appeared like an opportunity not worth passing up!
Both clients were Company Directors, having launched their successful Limited Company 5 years earlier. They each made €40,000 p.a.
| PRSA | Executive Pension (via Company Structure) | |
| Maximum Allowed for Tax Purposes | €10,000 for him
€10,000 for her | €72,000 for him
€53,000 for her
|
| Who pays the contribution | Them from their personal bank account |
The company as an allowable expense
|
|
What Tax relief is available to the individuals
| Depends on their Personal Tax Rate but up to 40% |
No effect on their personal tax affairs as the company is paying contributions |
| When can the funds be accessed
| Between ages 60 & 75
| Between the ages of 60 & 70
|
| How much can be taken tax free
| Up to 25% of the Pension Value or €200,000 whichever is higher
| Up to 25% of the Pension Value or €200,000 whichever is higher
|
| What happens the balance
| Used to purchase a guaranteed income or invested in a Post Retirement Policy
| Used to purchase a guaranteed income or invested in a Post Retirement Policy |
1. increase their future pension provision greatly each year from a possible €20,000 to €125,000 p.a. if their budget allowed
2. Have no reduction in their Take Home Pay
3. Use their business assets to build their future personal assets, “converting the company wealth to personal wealth”
4. Have the same options from age 60 regardless of the structure used based on the current pension rules.
If you’re a business director and aren’t sure if any of these circumstances apply to your company setup, please email me at [email protected] with any queries regarding your pension requirements or call 087 2872206 to talk.
Contact us using the details below or submit your query.
Riordan Financial Brokers Ltd trading as Riordan Financial (C30375) is regulated by the Central Bank of Ireland. When providing advice, Riordan Financial does not consider the adverse impacts of investment decisions on sustainability however this can be discussed on a case-by case basis with the individual client.
