Pensions for Company Directors – Frequently Asked Questions

1. Why should I set up a pension, I don’t believe in pensions, my company/property is my pension?
2. Which type of pension should I choose – a PRSA or an Executive pension?
3. How much can I have my company contribute?
4. When can I access my pension?
5. When should a Company Director review their pension options?

Answers

1. Why should I set up a pension? I don’t believe in pensions, my company/property is my pension.

Even if you don’t believe in pensions the fact is that pension legislation can facilitate you taking up to €200,000 out of your company tax free and a further up to €300,000 at 20% which is far more efficient than paying a marginal tax rate of 52%.

You pay tax on your income in retirement but your effective tax rate in retirement is normally substantially lower than it was during your working life.

A third benefit and one that many people don’t realise the power of, is gross roll-up. Funds within a pension accumulate tax free. This means that the compounding effect is far greater than for funds outside of a pension structure.

2. What should I choose – a PRSA or an Executive pension?

There are a number of differences between a PRSA and an Executive pension which we can go through with you.

Many people will be focussed on maximising contributions, which we deal with in the next question.

3. How much can I have my company contribute?

The amount which your company can contribute to a PRSA and offset against corporation tax is equivalent to your earnings from the company in the year of assessment. The method for calculating the maximum contributions which your company can make to an Executive Pension is too complex to explain here but, unless you are taking a very small salary or have already accumulated significant pension funds, most of the time it is not a limiting factor.

For example a married male aged 50, intending to retire at age 65, taking a salary of €75,000 p.a. and with ten years service and no existing pension, could have his company make contributions of €94,667 p.a. to his Executive pension and this could be offset against trading profits in the year it is made to reduce the company’s corporation tax bill. If you have past service with company where contributions weren’t made the amount the company can contribute will usually be very substantial. If you are interested in setting up a pension you can commence your enquiry by asking us to calculate how much your company can contribute to an Executive Pension for your benefit using this button;

4. When can I access my pension?

You will be able to set a normal retirement age of anywhere between age 60 and age 70. It is possible to access your pension from age 50 subject to certain conditions or before age 50 in the case of ill health early retirement.

5. When Should A Company Director Review Their Pension Options

• If you have an existing product it’s a good idea to have it reviewed. High charges on a pension eat into it’s value over time. Charges have reduced in recent years so make sure that you’re not contributing to a ‘Celtic Tiger’ pension.
• If your pension was arranged through a bank or a tied agent of a life assurance company it’s likely that you can do better by reviewing what’s available in the market.
• Company pension contributions are fully allowable for Corporation Tax purposes so prior to company year end is a great time to consider whether you want to have the company make an additional contribution to mitigate the company’s Corporation Tax bill.
• Even if you are at the point of retirement there may be valuable tax planning options open to you. You should not mature your pension without exploring the opportunities which are available.
• If you are selling your company this is also an excellent time to consider the tax implications and how these could be mitigated using pension legislation. We can work with your Tax Adviser to ensure that your tax bill is minimised.
• It is a little known fact that pension opportunities don’t end when a Company Director retires. If you retired with less than the Revenue maximum pension there may be scope to correct this. Many Company Directors who retired in the years following the global financial crisis left with a smaller pension than they could have. If the business is now cash rich it may be possible to extract this tax effectively, even after retirement.
• If you have an existing company pension and you are in ill health you should seek advice from a competent adviser about possible risks to your pension in the event of your death, and how these can be mitigated.

If you are interested in discussing this further please give us a call on 01 546 1100 or book a 15 minute video call with us here.

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