Are you self employed and finding it difficult to decide how to save for retirement and which Pension product is the most suitable for you?
Pension products can be complicated, and so this may leave you confused as to whether you are making the right choice for the best self employed pension suited to you. It is essential that you get right advice from the outset to ensure that your retirement plan is set up for success!
Life can also be especially busy managing your own business, so it is easy to put pension planning last on the agenda. When it comes to retirement planning it is advisable to contact your financial advisor and allow them to help manage your pension, so you can get back to managing your business with peace of mind.
So where do I start, and which option should I choose?
Self Employed Pension Options:
Self-employed individuals have two main options when it comes to pensions:
- Personal Pension Plan (PPP)
- Personal Retirement Savings Plan (PRSA)
Personal Pension Plan
Personal Pensions, or Retirement Annuit Contracts (RAC’s) are usually the most popular choice for self-employed individuals who are saving for retirement given the various benefits the product offers, such as a wider range of investment choices and potentially lower charges and where self-employed individuals whose income is more varied (discuss later).
This is a personally owned pension that is held in your name, which is issued by a life assurance company where both you and your business can contribute to and receive tax relief at your Marginal rate of 20 or 40%.
This plan would build up a cash sum payable to you at retirement, in return for the contributions that you pay into the plan (these can be either regular or once-off contributions).
Personal Retirement Savings Account
A Personal Retirement Savings Account “PRSA” is a personally owned pension that lets you save for retirement on your own terms. You can decide on how much and how frequent you want to contribute. Contributions made to a PRSA are invested in pooled investment funds, which are provided by both unit trusts and some life assurance companies.
Let’s Compare the Two:
As set out by Revenue, both self employed individuals and employees who are not members of an occupational pension scheme (if your employer does not offer you a pension scheme) are eligible to contribute to a Personal pension, and must have a source of taxable “relevant earnings” in the current tax year, or in a previous tax year.
Personal Pensions are most suitable for self-employed individuals or professionals (e.g., Doctors, solicitors, farmers, contractors) who want to pay into a pension and want broad-ranging investment options, with no contribution charges.
A PRSA is open to everyone, irrespective of your employment status (whether you are working or not). You can take out a PRSA if you are self-employed or working for a company.
PRSA’s are most suitable for self-employed individuals who are looking to contribute to a pension but not completely certain about their cash-flow or income stream. They may also decide to become an employee rather in the near term.
With a Personal Pension, you can increase your contributions, or make a once-off contribution at any stage so you are in control of your contributions. Payment holidays are also allowed, but this is usually limited to 12 months.
Contributions can be started and stopped at any time and allow for once-off or regular contributions. PRSA’s are portable, so if you move jobs, or even take a career break, you can take your PRSA with you.
Fund Choice & Charges:
Pension plans can carry two possible charges built-in, the first being the Annual Management Charge (AMC) on the accumulating fund and the second would be the charge on regular contributions
There can be minimum contributions required but you have a wide choice of investment fund options to choose from.
Charges are also deemed to be lower on Personal Pensions when compared to PRSA’s but it is not always the case. Because a Personal Pension is a contract between you and the life insurance company, the Provider may offer more flexible options available to you as they don’t need prior approval on charging structures from the Pension Authority. This is ideal for the Self-employed as the life insurance company can offer a better rate for higher contributions.
Should you go for a PRSA, you have to decide between a standard PRSA or a non-standard PRSA.
There are certain investment restrictions on standard PRSA’s (set out in legislation), so you are more limited to funds that are available on a PRSA (when comparing Personal Pensions) but there is enough selection to meet most people’s needs.
The charging structures are transparent for PRSA’s with a maximum of 1% Annual Management Charge (AMC) and a minimum of 95% allocation rates. I.e., if you pay €100 into a pension, €95 is invested and the other €5 is deducted in charges, and 1% of the value of the fund is deducted as a charge annually.
These offer a wider range of funds than your standard PRSA.
With non-standard PRSAs, the there are no maximum limits on charges and they can be higher or lower than that standard PRSA’s based on the contract – but again, you usually have a greater choice of investment funds (other than pooled funds) in which to put your money.
Tax relief on Pension Contributions
A private self employed pension offers substantial tax breaks and incentives, including;
- Tax relief on contributions – You can claim tax relief on contributions at your higher rate of income tax, claim up to 40% tax relief on all your pension contributions.
- Tax free growth – You do not pay tax on investment growth within your pension fund (No CGT, DIRT, or income tax).
- Tax free lump sum – You Can take up to 25% of your fund as tax free cash when you reach age 60 up to a maximum of €200,000.
Max Contributions Allowable:
Contributions are limited by your age and income level, and full tax relief within these limits may be obtained.
The maximum amount of earnings allowable for calculating tax relief is €115,000 per year.
For example, if you are age 45 and earn €80,000, you can get 40% tax relief on your annual pension contributions up to €20,000.
When it comes to retirement both Personal Pensions and PRSA’s offer the same minimum draw-down age of 60 where benefits can be taken, i.e. the 25% tax-free lump sum up to a maximum of €200,000. Lump sums more than €200,000 are then subject to standard rate income tax.
The remainder of your accumulated fund (75%) can then be used to purchase an annuity or reinvested in (transferred to) an Approved Retirement Fund (ARF) via a life insurance company, that can be used to make future withdrawals.
Generally, benefits may be taken between the ages of 60 to 75. It is possible to take an early retirement (before the age of 60) in the event of ill health (serious illness) or certain other limited circumstances.
If you were to die before retiring, the value of your pension would be payable to your estate and is administered in accordance with the provisions of the owner’s will.
Does a Self Employed person get a state pension?
Yes, self employed individuals do have access to the State Pension. However, without a private pension in place the State Pension alone may not be enough to meet your income needs in retirement.
To illustrate this, the current Irish State Pension is €253.30 per week (personal rate 2022). The average wage is €862 per week (CSO – Q4 2021). This leaves a shortfall / average weekly gap of €608.70.
As per your personal situation, our Financial Advisors can help put a pension plan in place that will determine the amount you need to contribute to meet your retirement income objectives.
Financial Advice & your Risk Profile
The first step you should take is to get advice from a Qualified Financial Advisor who will assess your current financial situation that will help put together a suitable plan tailored to your specific needs, thereby helping you make an informed decision.
What are the best self employed pensions Ireland?
- Both Personal Pensions and PRSA’s offer the three beneficial tax breaks i.e. contribution relief, tax-free growth, and the tax-free lump sum.
- Personal Pensions offer the same fund (investment) choices as a non-standard PRSA’s, but with lower charges.
- If you are a Self Employed Sole Trader and are most likely to remain so in the long run, a Personal Pension may offer better value than a PRSA.
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