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Turning Company Profits into Personal Wealth

Turning Company Profits into Personal Wealth

Executive Pension arrangements are perhaps the most tax efficient way of providing pension benefits for Company Directors, key employees, and family members employed in the business.

 

If your business is doing well and generating healthy profits, now may be the time to start extracting it from your business!

 

As a Company Director or spouse employed in the business, one of the most attractive and tax-efficient ways to extract profits from the company and turn them into personal long-term wealth is by way of transferring those profits into a company pension.

 

Where the company has excess profits which the company directors wish to transfer into a company pension, it is often more tax efficient for the employer to make an employer pension contribution to an Executive Pension. The advantage here is to avoid a personal tax liability for the member which would be the case when using other profit extraction methods such as increasing salary/bonuses or taking share dividends.

 

Conventional extraction methods will cost you more:

You may decide to take profits from your company in the more conventional ways, but these will just leave you paying more tax:

 

  1. If you take it by way of salary, you may have to pay income tax at up to 40%, USC up to 8% and PRSI up to 4%.
  2. If you take it as dividends, you would pay tax at up to 40%.
  3. If you use the money to buy a car for yourself, you pay Benefit in Kind at up to 30%.
  4. If you sell your company, you pay Capital Gains Tax at 33%.
  5. In the event of death, Capital Acquisitions Tax at up to 33% applies.

Therefore, by transferring your profits into a Company/Executive Pension you can reduce the above forms of personal tax liability.

 

 

Tax Advantages of a Company Pension Scheme

 

 

Transfer Profits into Pension | How does Max Funding work?

 

Employer contributions are not restricted by age related limits unlike member/employee contributions, but instead are related to the cost of providing retirement benefits based on “two thirds” of salary (where there is at least 10 years service at retirement). This can result in very generous contribution amounts.

 

Contributions are allowable as either Ordinary Annual Contribution or Special Contributions. The maximum allowable ordinary annual contributions to a scheme include all Employer, Employee and Additional Voluntary Contributions (AVC’s) made to the scheme in the company accounting period.

 

It is worth noting that it is possible to pay an Ordinary Annual Contribution by either regular monthly, quarterly or annual payment or by way of single premium.

 

Special Contributions are normally paid by single premium and can be used to backdate periods of salaried service which were previously not pensioned.

 

The below information is needed to calculate the maximum contribution that would benefit you on a tax efficient basis when funded by the company:

 

  1. Age
  2. Salary
  3. Gender
  4. Marital status
  5. Chosen retirement age
  6. Date that salaried service commenced & potential service
  7. Value of pension benefits relating to previous & current employments

 

 

Ordinary Annual Contribution Calculation

 

Emma is 35 and married and has a salary of €50,000. She has a Personal Pension currently valued at €100,000. She has no definitive plan for a retirement date but wants to maximize pension contributions now to the best arrangement available.

 

The Revenue limits around personal contributions mean that the maximum personal contribution she could make to a pension would be €10,000 (20% x €50,000).

 

However in Emma’s case, her salary comes from her company. As a result the company itself can make contributions to an Executive Pension arrangement on Emma’s behalf.

 

Turning Company Profits into Personal Wealth

 

As you can see the company can make a far greater contribution on Emma’s behalf than Emma could make personally under the personal age related limits. For the purpose of the calculation we have assumed Emma’s NRA to be age 60 as she has no specified retirement date and wishes to maximize contributions.

 

 

Special Contribution Calculation

 

There is also the potential for companies to make pension contributions on behalf of employees for previously unfunded service with the company. These contributions are known as Special Contributions.

 

James is 50 and has his own company from which he takes a salary of €40,000. James set up his company fifteen years ago, taking a salary for each of these years but has no previous pension funding in place. James wishes to retire at age 60.

 

Turning Company Profits into Personal Wealth

 

As you can see the company can make a far greater contribution on James’s behalf in respect of previous service than James could make personally under the age related limits. The employer could immediately make a very large Special Contribution for James from the outset.

 

Revenue limits around personal pension contributions does allow backdating where prior to the 31st October in the current year, James could make a contribution and offset against last years income tax bill but limited to age and earnings attained in the previous year. Assuming earnings were the same this would equate to 25% of €40,000 or €10,000.

 

However, Revenue also allows that contributions may be made in respect of previous service by an employer using an Executive Pension arrangement. The calculation is based on the member’s current salary and all previous years with the company where they took a salary. This can be particularly beneficial for late starters to pension funding.

 

 

Tax Relief for Employer Contributions

 

Tax relief may always be attained on Ordinary Annual Contributions in the year in which they are made.

 

Tax Relief on Special Contributions can also always be attained in the year in which the contribution is made where the Special Contribution is equal to or less than the corresponding ordinary Annual Contribution made in the same year.

 

A huge plus is that employers/the company can get corporation tax relief on allowable contributions at the rate of corporation tax which is currently 12.5%. No employer PRSI is paid on employer pension contributions to an occupational pension scheme.

 

There are further tax advantages as any contribution made is invested in a pension fund which enjoys tax-free investment growth with no DIRT, Exit Tax or Capital Gains Tax applicable to any investment return achieved by the contribution. It can also provide a Retirement Lump Sum which is tax-free up to €200,000.

 

 

How do I get started?

Contact us for Financial Advice

 

The rules governing overall contributions to Executive Pensions can be complex.

We recommend that you seek advice from one of our Financial Advisors first to make sure the company pension is set up correctly, and to maximize the overall contributions and tax-efficiency.

 

Need some assistance?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

 

Pension Auto-Enrolment

What is Pension Auto-Enrolment?

 

Pension Auto-Enrolment (AE) is a new savings and investment scheme for employees where financial returns are paid out to participants on retirement, in addition to the State Pension. It is being set up as not enough people have occupational or supplementary pension coverage to help maintain a reasonable standard of living in retirement above the level of the State Pension.

 

The proposed Irish Auto-enrolment system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. According to the Central Statistics Office’s Pension Coverage Survey 2021, the rate of supplementary pension coverage is around 66% of Ireland’s working population (outside of the State pension), and this could be as low as 35% in the private sector.

 

How will the Auto-Enrolment system work?

 

The auto-enrolment system is scheduled to go live from 1 January 2024, and will apply to approximately 750,000 employees who are aged between 23 and 60, earning over €20,000 across employments, and who are not already enrolled in an occupational pension scheme. Eligible employees will be automatically enrolled in the scheme but will have the choice after six months of participation to ‘opt-out’ or suspend participation. Those who opt out will be automatically re-enrolled after two years.

 

The Government as the new Central Processing Authority (CPA) will be responsible for, amongst other things, contribution collection, compliance, the allocation of pooled contributions to registered providers (RPs), the allocation of pooled investment returns to participants, and the overall administration of the auto-enrolment system.

 

How much will it cost?

 

The level of required auto-enrolment contributions will be gradually phased in over a decade. Contributions will be paid by employees, and matched by their employers with both employer and employee contributions starting at 1.5% of Gross Earnings and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). The State will top-up the rest. When allowance is made for the proposed Government top-up, this will lead to a total contribution being paid to a member’s pension account of 14% of Gross Earnings from 2034 (6% employee, 6% employer, 2% Government top-up).

 

The rates and time-frame are summarised as per below:

 

Phased Contributions

 

Employer contributions and the State top-up will be capped at a maximum €80,000 of an employee’s gross salary. Employees may contribute on earnings greater than €80,000 if they wish.

 

What the State Tax Incentive offers

 

Under the proposed auto-enrolment system the Government plans to operate a new incentive system to encourage pension savings by topping up member contributions. As outlined above the Government will contribute €1 for every €3 of member contributions.

 

Auto-enrolment will not replace tax relief available for private supplementary pensions. The Government has confirmed that the new system will run alongside the existing tax relief system available to pension savers participating in occupational pension schemes, PRSA and Personal pension products whereby individuals receive marginal income tax relief at either 20% or 40% (up to certain contribution limits) on their pension contributions.

 

The cost per €1 to member summarised below:

 

State Contribution under Auto-Enrolment

 

 

Investment Fund Options

 

The CPA will assign four commercial investment companies to become Registered Providers (RP’s) for the CPA. The role of the RP’s will be to provide investment options and act as investment managers for auto-enrolment contributions. They will invest contributions on behalf of individual participants and will be required to offer four fund types: 1. Conservative, 2. Moderate risk, 3. Higher risk, and 4. Default (The default option is required for people who do not nominate a preferred fund type and is a key element in a successful auto-enrolment system).

 

Should I wait for Auto-Enrolment?

 

Auto-enrolment is seen as a viable solution to address the lower pension coverage in Ireland, and could encourage people to be more financially aware of the importance of saving for their retirement. Although a positive move by government, there are many reasons why you should not wait for auto-enrolment and consider setting up a pension scheme for yourself and/or your employees now.

 

As outlined above, the auto-enrolment state tax incentives are less generous than the current tax relief incentives available for higher rate taxpayers.

Here’s why you should consider setting up your own Private Pension now:

 

  1. With a Private Pension, you can get up to 40% tax relief on your personal contributions now. For example, under existing rules if you contribute €1,000pm, and are on the higher rate of income tax, then you will receive tax relief of €400pm, meaning that your contributions of €1,000pm will only cost you €600pm. Under auto-enrolment the State will pay €1 to every €3 saved i.e. your contribution would be €667pm and the State’s contributions is €333pm. Please note that limits apply to the above.
  2. There is a wide range of excellent performing funds of different risk levels across the various pension providers, however, under the current auto-enrolment proposal, there is only a choice of 4 funds to choose from which can potentially limit your pension growth and flexibility.
  3. Auto-enrolment presents a risk that individuals will take a backseat and leave their contributions at the minimum contribution level which may not be adequate to sustain their current or desired lifestyle in retirement.

 

In order to secure your financial future, starting a pension is one of the smartest financial decisions you can make. When choosing a pension, having all the information you need is key.

 

Therefore, sound advice by a Qualified Financial Advisor is invaluable. Our Advisors can guide you through the process and help you select the right plan for your circumstances.

 

All of us have different goals for our retirement and this is why it would make sense to take personal control of your pension and retirement planning – to have access to all of the investment options available to you alongside a tailored strategy to help you get there.

 

Need some assistance?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

 

What happens to my pension plan when I leave a company?

 

We frequently come across this question: “What happens to my pension plan when I leave a company?” Nowadays people are changing jobs or even careers more frequently than they used to, and it has also become a common occurrence to leave Pension savings behind with past employers. When moving from one job to another there are many important things to consider – your Pension is certainly one of them.

 

Leaving your Pension behind may be the easier route to go but it may negatively impact your Retirement Planning if it is not incorporated with your overall long-term plan.

 

This can also be a good opportunity to sit down with your Financial Advisor and review how you are meeting your Retirement objectives or how you can improve on them.

 

Leaving Service Options:

 

It’s important to note that your pension benefits are managed and legally owned by the trustees of the scheme (these include but are not limited to companies like Aon, Mercer, and Willis Towers Watson), and when departing from your company your legal status will change from an ‘Active’ to a ‘Deferred’ member of the scheme. We will later assess the downsides of staying on as a ‘Deferred’ member.

 

When leaving your employer you should receive what is known as a ‘Leaving Service Options letter’, or your ‘Pension Benefits Options Statement’. This document will include important information such as the date you joined the scheme, the date you left, the value of your Pension, and finally setting out your choices available to your particular situation upon leaving. It is therefore vital that you receive this document.

 

Essentially, you have three main options when leaving your employer.

 

  1. Leave your Pension where it is (do nothing).
  2. Transfer your Pension to your new employer.
  3. Move your Pension into an account in your own name (Personal Retirement Bond / Buy-out Bond).

 

Option 1: Leave your Pension where it is (do nothing)

 

Although the easiest option, leaving your Pension behind is the least recommended particularly because Pension schemes are under no obligation to keep any engagement with you nor provide you with annual updates on how your pension is being managed or invested. Therefore, you are left in the dark without freedom to make investment decisions.

In many cases, employees Pension savings are actually moved out of investments and into cash leaving them unable to outperform inflation and the associated charges within the fund. As a result, this hinders the growth of your Pension and may set back your Retirement goals and objectives.

 

If you are considering leaving your currently employer, and are looking to review your ; we would implore you to answer the following questions:

 

  • Are the charges fair and transparent?
  • Is the Pension Provider responsive?
  • Has your Pension performed well?

 

If your answers to the above questions did not bode well with you then it would be wise to consider taking your Pension with you.

 

Pros:

  1. As a deferred member, you will still be able access your pension at retirement date; ie, take a tax-free lump sum; and transfer the funds into an annuity, or opt for an Approved Retirement Fund (ARF).

 

Cons:

  1. The Trustees of the scheme are not obligated to keep in contact with you (no regular updates).
  2. Your Retirement options are subject to the scheme rules (including early Retirement).
  3. Bigger schemes have limited Investment options since they cater for large groups of employees (your investment could under-perform).
  4. No access to Financial Advice after you have left the company.
  5. When moving jobs, you run the risk of forgetting about the plan and losing contact with it over time.
  6. Passing away before retirement could complicate matters for your dependents.

 

Option 2: Transfer your Pension to your new employer

 

You can consider moving your existing benefits over to your new company’s pension scheme thereby consolidating your retirement benefits, however, not all schemes allow this and you would have to check first.

 

The advantage here is that you will have everything under one roof and it will be easier to work out your overall pension benefits and how much income you would expect in retirement, rather considering a number of different pots.

 

On the downside, transferring your pension benefits would require you to sell up existing assets in order to transfer them to the new fund. This would introduce the risk of being out of the market for a considerable period, and depending on market conditions, this could mean you selling out at a lower price and buying at higher one.

 

Pros:

  1. Pension consolidation – maintaining control over your pension pot and keeping it together in one place.

 

Cons:

  1. You may lose accumulated rights of salary and service if you move move into the wrong type of scheme being offered.
  2. If you move jobs again, you will have to address all previous concerns and requirements of moving into new scheme.
  3. You miss the opportunity to move the fund into your own name (taking complete control over your money and Investment choice).

 

Option 3: Move your Pension into an account in your own name (Personal Retirement Bond / Buy-out Bond)

 

A Personal Retirement Bond (PRB) is a product that is specifically designed to take benefits from your previous employment. This includes giving you greater control to administer your own pension savings, and a better investment strategy allowing you to invest at your own attitude to risk (with added benefit of guidance from a Financial Advisor). You also have the option to move the bond from one pension provider to another if you feel you could get better value on charges, fund allocation rate, and access to funds, etc.. However, it cannot be further contributed to.

 

This route allows you to completely cut ties from your old employer, which means no more involvement of Trustees. The charging structure (Annual Management Charge) can be a higher with PRB’s depending on the funds (or asset classes) chosen but this is considered along with the performance (and active management) of the fund over time. In saying that, you will have the benefit of transparency of charges (which are more competitive than company pensions).

 

Pros:

  1. Full control over your pension and Investment decisions (fund is owned by you personally).
  2. A Financial Advisor can put together a tailored investment strategy (based on your attitude to rick) to help you reach your retirement goals and objectives.
  3. Your accumulated rights are preserved (salary and service details recorded) giving you access to your tax-free lump sum entitlement, and increasing your options to draw on retirement.
  4. Move your PRB from one provider to another efficiently.
  5. Your benefits can be taken from age 50 (as with the company scheme).

 

Cons:

  1. Annual Management Charges can be higher depending on the funds/assets classes chosen.

 

What happens to my pension plan when I leave a company?

 

What do we recommend?

 

In most cases, the Personal Retirement Bond is the most practical route, it is a simple, straightforward way to take your pension entitlement with you when you change jobs. The Pension savings that you have built up are yours, so why not take personal control of the assets you own.

 

With the ongoing support of impartial Financial Advisors, we will first establish if this is the right option for you, and if so, we can help guide you through the Pension transfer process and ensure that the funds are set up correctly, managed effectively, and monitored continuously!

 

What happens at Retirement Date?

 

On retirement you can take a tax-free Lump Sum of either:

  1. 25% of your fund, or;
  2. A maximum of 150% of salary, based on salary and service.

The maximum tax-free Lump Sum you can take is €200,000.

 

The remainder of your fund can then be used to purchase:

  1. A guaranteed income for life (Annuity), or;
  2. Transfer the balance (after the Retirement Lump Sum is taken) into an Approved Minimum Retirement Fund (AMRF) or Approved Retirement Fund (ARF).

 

How do I begin the transfer process from my old employer?

 

If you are currently planning on leaving your Employer or looking to take old Pension benefits that were previously  left behind, the first step is to contact the HR Department at the company and request your ‘Leaving Service Options.

 

The HR department or pension administrator will make a request to the trustees on your behalf to issue you with your ‘Leaving Service Options Letter‘ outlining the current value of your benefits and your available options.

 

What happens to my pension plan when I leave a company?

After you have received this document you may feel free to give us a call on 01 253 3242.

 

     Drop us a call here     

 

Alternatively, if you would like to speak to one of our Qualified Financial Advisors first to discuss your situation, leave your response and details below and we will get back to you shortly.

 

Need some assistance?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

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