BY JOHN ELLIS, FINANCIAL ADVISOR
After all the recent upheaval in the pensions market with the embargo being put-on one-man pension schemes by the pensions authority, insurance providers have at last put in place executive pension arrangements under what is called a Master Trust.
Executive pensions continue to be perhaps the most tax efficient method of providing pension benefits for company directors, family members employed in the business and other key employees. In the case of company directors and spouses employed in the business employer pension contributions to an executive pension are an extremely effective mechanism for tax efficiently transferring profits from the business into “personal wealth”.
Where a company has excess profits, which the directors wish to transfer to themselves, it is often more tax efficient for the company to make an “employer pension contribution” to an executive pension. The advantage being no personal tax liability for the recipient which would be the case by way of salary increases, bonuses or dividends.
The company will get tax relief on the contribution at the corporation tax rate, currently 12.5%. Furthermore, the growth on the contributions within the pension will not attract Capital Gains Tax, DIRT, Exit Tax and on retirement the employee/director can take a lump sum which is tax-free up to €200,000.
As you may be aware, the self-employed are restricted to the amount they can invest into a pension arrangement. Not so with Executive pensions — employer contributions are not restricted by age related limits. Instead, they are costed on providing retirement benefits based on two thirds of salary leading to very generous contribution amounts.
Another benefit is contributions are allowable as either “Ordinary Annual Contributions” or “Special Contributions”. This can include all employer, employee and additional voluntary contributions made to the scheme in the company accounting period.
For example, Deirdre is 35 and married and has a salary of €50,000. She has a personal pension valued at €100,000. She wants to maximise her pension contributions now. Revenue limits for her age will allow her to make to a personal pension a contribution of €10,000 (20% x €50,000). However, under an executive pension plan the company could make a far greater contribution on Mary’s behalf — €36,000.
Not only that but a company could fund for previously unfunded service with the company through special contributions. For example, John is 50 and has his own company taking a salary of €40,000. John set up his company fifteen years ago, has yet to make any pension contributions. Revenue limits allow John to contribute and offset against last year’s income tax bill. Again, as with Deirdre he is limited to age and earnings attained in the previous year. Assuming earnings of €40,0000 this would equate to 25% of €40,000 or €10,000.
However, Revenue also allows contributions to be made in respect of previous service by an employer using the executive pension plan. 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 and in this example the company can contribute €518,400 into John’s pension!
The employer could immediately make this very large Special Contribution for John, or they could seek to make a smaller Special Contribution this year and allow for the remainder in future years. They could also look to make Ordinary Annual Contributions within certain limits.
The company, again, will receive tax relief on allowable contributions at the current corporation rate of 12.5%. and no employer PRSI is paid on employer pension contributions to an occupational pension scheme.
With the year-end fast approaching your company may have funds and you are not sure how to proceed. Through a “maximum funding quote” you will quickly see what your tax efficient options are. Give us all call!