The starting point of our work will be a review of existing retirement planning structures where we will analyze performance, cost, flexibility, funding and the tax planning efficiency of the scheme. From here we can make recommendations on the most suitable method of retirement planning for your own particular circumstances. Our approach will be holistic insuring that your retirement planning is integrated with your overall remuneration planning and your tax planning. How you choose to pay yourself is at least as important as how much you choose to pay yourself.
Owner directors/Key employees
Directors Insured Pensions
This is a retirement structure where you use the services of an insurance company; these are employer sponsored pensions where contributions can be made by both the employer and the employee. Company contributions qualify for relief against corporation tax and employee contributions for relief against income tax. Funds grow tax free and are typically invested in a choice of managed funds administered by the insurance company until the chosen retirement age, which is usually 60 or 65.
Self Administered Retirement Trusts
We don’t believe that investing in insured directors pensions as described above is the best way for everyone to achieve their retirement planning goals. Many would argue that too much of your money is lost paying for a front office administration service in order to get to the back office investment service. Also commissions on these types of products are very high and don’t differentiate between large and small contributions. In our view the alternative, Self Administered Retirement Trusts (SART’s) which top executives around the world have been using for years is a much better option for those in a position to control their remuneration. They are one of the most sophisticated, tax efficient, wealth accumulation vehicles available for proprietary directors and senior employees in Ireland today. These are the key points to note:
- A limited company may establish a trust fund for the benefit of its proprietary directors. Cash can be transferred from the Profit & Loss account of the limited company into the Trust Fund, and this transfer can be treated as a trading expense. Thus, corporation tax is reduced by the transfer.
- Beneficial ownership of the money leaves the limited company and transfers to the benefit of the named proprietary director. Despite this fact, there is no tax whatsoever levied on the proprietary director.
- The Trust Fund can make virtually any investment it cares to (property, stocks and shares, cash deposits, government or commercial loan stock…etc) and it pays no income tax on income generated and no capital gains tax on gains made.
- The amount of tax-free money that can be invested on an annual basis, and/or removed at the far end, is expressed as a percentage or multiple of the declared salary of the particular proprietary director.
- The Trust Fund can be accessed, at the discretion of the proprietary director, at any time after reaching the age of 50. In any event, the Trust will have to be dissolved when the individual reaches the age of 75 and, therefore, there exists a 25-year window for access.
- As the beneficial ownership of the amounts transferred has altered, the assets of the Trust Fund (other than in fraudulent trading cases) are protected from creditors of the limited company in the future.
When compared to the more traditional insurance company pensions SART’s win in every category including:
- Fees and annual charges
- Transparency
- Flexibility
- Investment options
But the feedback we get from our clients would suggest that most of all it’s the feeling of “being in control” that makes this option for retirement planning stand out.
Most people are now aware of the tax breaks associated with a pension scheme but still year after year the statistics reveal how few people tax full advantage of these tax breaks. The answer is clearly in the fact that the tax break message has been lost in the negativity of investment performance or a general distrust of salesmen and insurance companies.
What a SART crucially allows you to do is to separate the tax planning decision from the investment decision.
With the traditional insured pension your money (or what’s left of it after charges) is immediately invested in an insurance company’s investment fund on the day your cheque is cashed and subsequently market conditions may or may not go in your favor. Your investment decision is linked to the tax planning decision whether you like it or not.
With your SART you transfer funds into a bank account and all of it arrives there intact, (yes there are no deductions from your initial contribution), you then benefit from the tax break on the contribution while your funds remain on deposit. When the timing is correct you make a decision to invest elsewhere, or not, depending on your attitude to risk. This allows you to use the SART as a tax planning tool and separate that from any subsequent investment decisions you may or not make.
Insured pension
These retirement plans are available to anyone who is self employed or is in non pensionable employment, the amount you can contribute is expressed as a percentage of your net relevant earnings up to a ceiling of €115,000. The level of contribution that will qualify for tax relief * is as follows:
- Under 30 15%
- 30 to 39 20%
- 40 to 49 25%
- 50 to 54 30%
- 55 to 59 35%
- Over 60 40%
*Tax relief rates outlined are those currently applying as at 31/01/2011
Self Invested Pensions (SIP’s)
These retirement vehicles have become very popular in recent years because they offer all the benefits of the traditional insured personal pension but typically offer greater investment flexibility. Despite the generous tax breaks it is clear that many self employed people remain skeptical about pensions because too often they have been “sold” a pension by a salesperson who was more interested in the first years premium and the commission it would generate than any long term tax or retirement planning for the individual.
We offer a different approach which focuses on integrating your remuneration, tax and investment planning. This will insure that you not only get to keep more of what you earn but you do so in a way that makes sense for your particular circumstances. Whether you should use a PRSA or a SIP will depend on a numbers of factors which we can establish through our initial meetings.
PRSA’s
These retirement vehicles were introduced to the Irish market by the Pensions (Amendment) Act 2002 to try to address what was perceived as a serious problem with the lack of private pension provision in Ireland and the issues that could arise from a dependence on the current state pension which is less than €12,000 per annum. These low cost, flexible and portable retirement funds allow individuals to contribute on the same scale as personal pensions. The charging structure for a standard PRSA from authorized PRSA providers is regulated to insure charges do not exceed 5% on new contributions or 1% annually on the fund. The key features are:
- Contributions qualify for income tax relief and the fund itself is tax exempt.
- It can accommodate both personal and employer contributions
- You can increase or decrease contributions as required (with revenue guidelines for your age) without penalty
- It can be moved from employer to employer or from one authorized provider to another with penalty.
There is also a non standard PRSA option which will generally offer greater investment choice but will not have capped charges like the standard option.
Options on retirement
There are a number of options available to you at retirement, but typically the maximum tax free lump sum will be taken and the balance of the fund will either be transferred to an approved retirement fund or used to purchase and annuity depending on your circumstances. The key to maximizing the potential of your retirement fund is to understand the implication of the choices you make earlier in the process and to dove tail your retirement planning with the other relevant tax concessions that may be available to you.
We actively manage our client towards retirement with all of the relevant business exit and estate planning considerations in mind. This gives you the piece of mind of knowing there are experts in this area looking after you and your family’s best interest. There are many revenue rules and regulations that govern this area which is why it is vital to get good advice as early as possible, some of the key things for consideration and relevant revenue rules are:
Approved Retirement Fund (ARF)
If your retirement fund comes from a personal pension, a PRSA, a directors pension (where you own over 5% of the voting rights of the company) or from Additional Voluntary Contributions (AVC’s) to an employer sponsored pension scheme then you can elect to transfer your fund to an ARF. This is essentially a tax free fund which will hold and hopefully grow you retirement fund tax free during your retirement. Investment growth or any income earned from the fund will accumulate in the fund free of capital gains or income tax up to age 75. You will however pay income tax on withdrawals from the fund.
Approved Minimum Retirement Fund (AMRF)
If you choose to invest in an ARF at retirement you must have a guaranteed pension or annuity of €18,000 per annum. If this is not the case then you must invest €119,800 in an Approved Minimum Retirement Fund until age 75 otherwise known as an AMRF or use €118,500 of your retirement fund to purchase an annuity from a Life assurance company. The idea here is to insure you have a protected minimum fund until age 75 which can then be used to generate a regular income thereafter.
Tax free lump sum
Those who are in employer sponsored defined contribution group pension schemes can take up to 150% of their final pensionable salary as a once off tax free lump sum. Those who qualify for an ARF will have the option to take 25% of your retirement fund as a tax free lump sum. We can’t think of any cases where it does not make sense to take this option when it becomes available, which is only once, giving that the balance of your fund will eventually be subject to income tax on drawdown.
Annuities
If you are a member of an Employer sponsored defined contribution group pension scheme you will be required to use the balance of your retirement fund (after you take your tax free lump sum) to purchase an income for life through an Annuity, this is called compulsory purchase annuity or CPA.
In simple terms an annuity is an exchange of a lump sum for a regular income from an authorized annuity provider. The rate which you will be offered will depend on a number of external factors such as current interest rates and personal factors including:
- Your age when you purchase the annuity, this can range from age 50 to 75
- The type of annuity you want, i.e. single life or if it includes spouses pension when you die.
- The guaranteed period of payment, this insures payment for a minimum term regardless of when you die.
- Whether or not you want escalation in payment.
This income is subject to income tax and in some cases government PRSI levies.
