Executive Pensions for company directors are still one of the most tax efficient ways to extract wealth from your business into Personal wealth. Often it is the overwhelming nature of Pensions that puts many people off from beginning in the first place. It’s important to note that Executive Pensions can be set up for Company Directors or key employees.
Quick Recap on Pensions
Pensions make sense for the following reasons:
- Tax relief – higher earners get 40% tax relief. So, a €100 contribution will only cost you €60.
- Tax Free Growth – There is no tax on Investment gains. (No CGT or exit tax applicable)
Why are Company Director Pensions so attractive?
When compared to a PRSA/Personal Pension you’re not limited to age related limits for your Pension Contribution.
Tax Relief on Pension Contributions for Personal Pension/PRSA
|60 and over||40%|
Note* These limits don’t apply to Employer Contributions into a Director’s Pension
For Company Director Pension contribution levels are governed by different revenue rules. If you have 10 years of service, the rules allow you to fund for a Pension of 2/3rds of your salary in retirement. So, if your salary is currently €50,000. You can target a Pension of €33,000 per annum. This would allow for total funding of €928,531. For Company Director Pensions it’s important to be aware of the ordinary calculation and the special contribution calculation.
Bob is married and is 40 years old. He earns €50,000 per annum and he started his company in 2010. He has never paid into a Pension. The maximum ordinary contribution he can pay in is €3,264 per month. He can back fund and pay in €293,016 as a Special Contribution. Clearly there is more scope in an Executive Pension, than the €12,500 per annum maximum allowable through a Personal Pension or Personal Retirement Savings Account.
But I’ll be taxed when I claim my Pension?
This is a valid concern. When you come to retirement, Income tax is liable on the extraction of your Pension. However, remember that 25% of your overall fund is tax-free up to €200,000 limit. You can also earn €18,000 at 65 without incurring any tax. The State Pension is currently €12,911 per annum. It makes sense even at a minimum level to target €5,089 per annum
Example: To target a Pension of €5,089 per annum, you will need a fund of €143,757 (Irish Life annuity rate at 65 of 3.54%)
Taking out 100% out of a Pension Tax Free
For company directors who have a lot of service and no Pension. This is an ideal time to start planning for your Pension and to allow for efficient wealth extraction from your business.
Example: Chris has 20 years service and is earning €75,000. He can put in €112,500 into a Pension from his business and take 100% out tax free.
(Revenue rule 1.5 times salary can be taken out tax-free)
Employing your Spouse
Many business owners employ their wife/husband on a part-time basis. It can often make a lot of sense to set them up with a Pension. The purpose would be to take it all out tax-free.
Example: You employ your wife in your business. She works part-time in your business and earns €30,000 per annum. She’s worked there for 20 years. She is 58 and will hopefully stop working at 60. You can pay in €45,000 into a Pension before 60 and take it all out tax free.
Company Director Pensions aren’t for everyone. However, they can often play an important part in the overall wealth extraction strategy for many business owners.
Please note this blog does not constitute financial advice and is subject to change without notice. For guidance on your Pension always seek professional advice. Pure Finance Ltd is regulated by the Central Bank of Ireland