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!
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
- Personal Retirement Savings Account (PRSA)
Personal Pensions, or Retirement Annuity 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 (discussed 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 Pensions are most suitable for self-employed individuals or professionals who want a wider range of investment options, with charging structures that offers a potentially better rate for higher 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.
PRSA’s are most suitable for self-employed individuals who are looking for more flexibility on their charges, contributions (not certain about cash-flow or income stream), and who may potentially decide to become an employee rather in the near term (as PRSA’s are portable).
Standard & Non-Standard PRSA’s
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.
PRSA UPDATE FOR EMPLOYERS | As at January 2023
As at 1 January 2023, Employers will now be able to pay unlimited BIK free contributions to a PRSA for an Employee or Company Director. The contributions will not be limited to salary and service, existing scheme funding or retained benefits.
As a Company Director, small employer, or even a Sole Trader, if you are on a higher salary, you now have the option to extract a larger amount of profits in which all contributions paid will receive immediate tax relief in the year that it is paid.
This means PRSA’s may now offer you a more flexible and suitable means to retirement saving and planning according to your particular financial needs.
PRSA VS Personal Pension
Personal Pensions and PRSA’s both have many similarities and both are available for self employed sole traders. However, there are a few differences that set each one apart, where the same product may not suit everyone.
Tax relief on Pension Contributions
A private pension offers substantial tax breaks and incentives, including;
1. 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.
2. Tax free growth – You do not pay tax on investment growth within your pension fund (No CGT, DIRT, or income tax).
3. 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.
At what age can I access my Pension?
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.
With PRSA’s, you have the option to access your pension from age 50 onwards where you have left employed service (Schedule E, PAYE employee).
How can I access my pension benefits?
When it comes to retiring your Personal Pension or PRSA, you are allowed to take a 25% tax-free lump sum up to a maximum of €200,000. Lump sums more than €200,000 are then subject to standard rate of income tax.
The remainder of your accumulated fund (75%) can then be used to purchase an annuity or transferred to an Approved Retirement Fund (ARF) via a life insurance company, that can be used to drawdown retirement income.
What happens to my pension if I die?
For both Personal Pensions & PRSA’s, if you were to die before retiring, the full value of your pension would be paid gross to your estate and will be administered in accordance with the provisions of the owner’s will. If the fund is transferred on death to your spouse or civil partner there will be no tax liability.
Spouse – No tax implications.
Children – Inheritance Tax may be applicable depending on the amount and thresholds.
Cohabiting partner – Liable to tax implications depending on the amount and thresholds.
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. A private pension will give you a better chance of planning for 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.
Which pension is right for me?
1. Both PRSA’s and Personal Pensions offer generous tax breaks i.e., contribution tax relief, tax-free growth, and the tax-free lump sum.
2. PRSA’s will offer you more flexibility on charges, your frequency of contributions, and transferring your PRSA (taking it with you).
3. Personal Pensions offer the wider fund choices, similar to non-standard PRSA’s, but with lower charges (offers a better rate on higher contributions).
4. If you are a self employed and are most likely to remain so in the long run, a Personal Pension may offer better value than a PRSA.
Where to from here?
We would advise first speaking with a Financial Advisor who will assess your current financial situation and put together a suitable plan tailored to your needs, thereby helping you make an informed decision.
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