What is an Executive Pension?
An Executive Pension is a pension plan that is set up by a limited company/employer. It is designed to help Company Directors and Executives save for retirement and grow their wealth substantially. It allows you to transfer profits from the company’s bank account into the pension thereby turning company profits into personal wealth.
Benefits for the Directors
As a Company Director, instead of taking your profit as income and therefore paying 40% Income tax, you put it in your pension. There is also potential for a broader scope for tax free cash at retirement.
Benefits through the Company
When the company contributes to the pension you are reducing the profits in the business. Here, the company is allowed to record the pension contribution as a company expense, reducing the company’s corporation tax. The contributions are not subject to a benefit-in-kind charge in your hands for income tax purposes. By making a contribution through the company, rather than a personal/salary payment, you are exempt from paying PRSI, as it’s not paid as income.
How much can a Company contribute to a Directors Pension in Ireland?
The employer can contribute as much as is needed to provide the maximum benefits allowed by Revenue at retirement. As a Company Director, Revenue allows you to build up a pension fund that will provide you with a pension of 2/3rds of the final pensionable salary – subject to a maximum fund value of €2 million.
This offers a huge advantage over Personal Pensions as these plans are limited to age-related limits and an earnings cap of €115,000, whereas Executive Pensions are not.
Click on the below link if you would like to know how to extract profits from the company in the most tax-efficient manner…
Advantages of a Directors Pension
- Tax Efficient – Employer contributions are exempt from Income Tax, PRSI, and USC, and is not subject to benefit-in-kind (BIK) for income tax purposes.
- Contributions – There is significant scope available to fund for past service through a Special Contribution.
- Tax-free Lump Sum – Potential for larger tax-free lump sum through salary & service route.
- Flexibility – Any contributions made by a company to a Directors Pension are flexible. You can increase your contributions, or make a one-off contribution, at any stage.
- Tax Relief – Higher tax-deductible contribution levels for Directors, unlike personal pension age-related limits.
- Choice – Offering a wide range of investment options, designed to meet your needs.
- Early Retirement – Benefits can be accessed from age 50 onwards (subject to conditions).
When can I draw down on my Pension?
You could retire and access benefits as early as age 50, with trustee permission, and where employment has terminated (no longer be an employee of the company).
The amount of benefits on retirement depends on the level of contributions paid and the investment return earned on those contributions.
You are entitled to the take benefits in one of two ways:
– A once-off lump sum of 25% of the value of the fund, and;
– The balance of the fund must be used to invest in an Approved Retirement Fund (ARF).
– A once-off lump sum of up to one and a half times final salary, and;
– The balance of the fund must be used to invest in an Annuity.
To note, its important that you discuss the implications of an early retirement with a Financial Advisor before making a decision.
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