- You don’t need to stop working to access your fund from age 60.
- You don’t have to invest in the stock market or risky assets; you can put your money in a simple bank account.
- Just because you are in your 40’s or 50’s it is not too late to start a pension.
- Tax relief is at your highest rate – 40% of your €1 back if you are a higher rate tax payer, 20% if you’re in the lower bracket. (*maximum limits do apply)
Individuals who have the opportunity to run their own business, really have the golden ticket to fund for their retirement planning. Obviously cash-flow is key; but if you have the profits then the possibilities are extremely generous.
I’m going to give a brief overview of some of the tips and tricks that are available; yes we use pension accounts (what’s a pension account?) but it really is cash extraction from your business in the most tax efficient manner.
- Maximum Funding – the basics
- Spousal Employment – how it works
- Funding for Tax Free Cash only
- Funding after the age of 70
- Funding after accessing your benefits
- Death in Service – how will my funds be dealt with?
Employers may make whatever payment necessary to an employee’s pension fund, to build up a fund that would provide their employee with a pension of 2/3rd final salary plus a widow’s and dependant’s pension.
Owner Director, aged 54, earning €80,000 per year. No previous pension funding has been done. Started the business in 2000.
Owner/Director is entitled to a nominal yearly pension of €52,800 for life.
|Option 1||Annual contribution of €155,000 now to age 60. Paid from the business with no benefit in kind implications.|
|Option 2||Single Contribution of €855,700 and annual contribution of €73,698 per annum|
As evidenced in this example, the amount of money that a business can contribute to a pension scheme on behalf of its ‘employee’ and claim tax relief on is enormous. Funding can be compressed into a short period of time or even done at the point of retirement.
Each individual has a lifetime pension fund limit of €2,000,000 (subject to sufficient earnings) – Have you reached your max?
The current tax laws favour couples with 2 individuals working. By your spouse working in your business or employed by you (if self-employed), they could earn up to €24,800 @ 20% tax rate - this could mean reducing your household income tax bill by €4,960. Your spouse could also fund his/her pension out of the business under normal max funding rules.
Funding for Tax Free Cash only
All employees who are members of an occupational pension scheme are entitled to a TAX FREE lump sum of 1.5 x final salary provided they have 20 years’ service with the employer. This is very valuable option for those who have a small fund or starting paying into a pension later in their career.
Funding after the age of 70
Even if a company director is in their 70’s never had the opportunity or cashflow to build up a pension fund previously; it’s not too late. The company can make a contribution and the individual can access their benefits as normal. Service up to the age of 70 would be counted for max funding purposes.
Funding after accessing your benefits
You get to have a ‘second bit of the cherry’. An employer can fund the difference between what the employee had in their pension fund and what they could have had using maximum funding limits. There are some restrictions when taking advantage of this option; one cannot take a further lump sum – it must be invested straight into your ARF or to purchase an annuity. You must follow the rules of when you previously accessed your retirement benefits.
Death in Service – how will my funds be dealt with?
The treatment of pension funds on the death of the employee can be one of the more misunderstood areas. Please seek individual advice on your own individual circumstances. If an employee dies ‘in service’ the next of kin is entitled to a lump sum of 4 x final remuneration* plus a refund of the value of the employee’s own contributions. Any balance of the fund must be used to purchase an annuity (income for life). The scheme rules will determine who the lump sum is paid to. This can be an issue for the following clients:
- Company director not being paid a salary at the moment
- Large fund but modest salary
- Large existing fund far inexcess of 4 x salary
- Clients who are experiences ill-health.
*These figures are used for the purpose of this example; individual quotations must be sought for each specific case.
All details and information provided within this article are for general informational purposes only and should not be used as the basis for any form of agreement or advice. It is of a generic nature and does not take into account your own particular circumstances. O’Leary Insurance Group makes no representations as to its accuracy and will not be liable for any errors, omissions or losses arising from its use.