Your Most Important Business Plan - Your Pension
28th October 2009Research has found that more than half of self-employed people do not have a pension. The pension provision problem is particularly acute among Irish entrepreneurs. There are currently over 345,000 entrepreneurs in Ireland, an increase of 20% in the past 10 years. Even worse, some 81% of people working in a business with less than five employees have no pension provision. This includes most entrepreneurs, as 7 out of 10 start their business with less than 5 employees. A significant number of business owners in Ireland have not done anything about pension planning preferring to count on the success of their business to provide the funding for their lifestyle upon retirement. This approach is extremely risky and most certainly does not take advantage of the tax savings available.
Pensions for different business structures
Business ventures in Ireland will be run through one of the following structures and each structure has different pension products available to it:
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Sole trader
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Personal Pension Plan and PRSA’s
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Partnership
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Personal Pension Plan and PRSA’s
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Limited Company
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Employer Pension Plans and AVC’s
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Personal Pension Plan
Individuals working through the first two structures can avail of maximum tax relief on qualifying premiums on the following limits:
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Age
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% of net relevant earnings
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Up to 30 years
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15%
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30 but less than 40
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20%
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40 but less than 50
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25%
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50 but less than 55
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30%
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55 but less than 60
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35%
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60 years and over
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40%
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A business person may claim relief for contributions made by them to a fund that will provide an annuity when they retire – this is known as retirement annuity relief. The fund must be Revenue-approved before the relief can be claimed. When the contributor retires and begins to receive the pension, it is subject to income tax.
Employer Pension Plan
An employer or occupational pension plan is one that is set up by an employer to provide pension and other benefits for employees. Since a Director may also be an employee of the company, therefore they would be eligible to take advantage of the Employer Pension Plan. The main advantage to this type of plan is that an employer must make a contribution to it, even though the amount may be small.
A great surprise for many taxpayers is the generous contributions allowable by Revenue in respect of proprietary directors under current legislation. They allow for more flexibility and far higher contributions than those for the self-employed, a situation that would appear to create an incentive for self-employed business owners to set up a limited company.
An employer sets up the rules of the pension plan and appoints a ‘trustee’ to look after it. The employer automatically takes contributions from salary before working out income tax and tax relief is received automatically because the employee doesn’t pay tax on the pension contribution.
The income available on retirement depends on whether the employer plan is:
- A defined benefit plan; or
- A defined contribution plan.
Defined Benefit Plan
With a defined benefit plan, the pension income and/or lump sum received on retirement is related to the employees final salary and years of service with that employer.
Defined Contribution Plan
With a defined contribution plan the pension income depends on the value of the pension fund on retirement.
Additional Voluntary Contributions (AVC’s)
It is possible under an Employer Pension Plan to save more than the minimum in order to boost the pension fund. Extra contributions are known as AVC’s, or ‘additional voluntary contributions’.
AVC’s are normally used:
- to boost the value of a pension fund.
- to claw back years of service to achieve the desired pension, for example because of a career break or unpaid parental leave.
- to get more tax relief on contributions subject to age.
An employer may provide AVC facilities by:
- Setting up a AVC fund, either as part of the main employer’s pension plan or as a separate AVC plan or
- Arrange a personal retirement savings account (PRSA) for employees who want to make AVC’s.
If there is no facility within an employer’s pension plan for AVC’s, an independent PRSA can be set up into which an employee can then pay the AVC’s. In this case, contributions will not be automatically deducted from salary before tax. More information from Revenue on how to claim tax relief is available at www.revenue.ie.
Retirement Age Options
At retirement, a self employed person can usually take a part of their pension fund as a tax-free lump sum. Then, if they meet certain conditions, they may be able to choose what they want to do with the rest of their fund. Options are:
- Use it to buy an annuity (that is, a regular income for the rest of their life).
- Re-invest it in an approved minimum retirement fund (AMRF) or approved retirement fund (ARF). There are strict rules governing access to these funds so professional advice is advised.
- Take the rest of the fund as taxable cash.
In the case of a Company Director they will also have the flexibility to withdraw it when needed or to pass it on to dependants.
With a personal pension plan you can decide to take your retirement benefits at any time between the ages of 60 and 75. However in some cases, e.g. if you were permanently unable to work, the Revenue Commissioners may allow you to retire before age 60. People in some specified occupations, including certain sports people, are allowed to retire early without having to be in ill health.
