BY JOHN ELLIS, FINANCIAL ADVISOR
For company directors, planning for retirement often takes a backseat to the demands of building and running a successful business. Years of reinvesting profits and prioritising growth, retirement planning often only coming into focus when the business is well-established and generating surplus funds. The good news is that Revenue provides attractive options for company directors looking to make up for lost time and build a retirement nest egg in a tax-efficient way.
One of the most effective ways to plan for retirement is through a pension as contributions to a pension are not only beneficial for the director but also offer significant tax advantages for the company. Employer contributions can be offset against corporation tax, reducing the company’s tax liability, and generally do not trigger a Benefit In Kind (BIK) for the employee, provided they remain within certain Revenue limits.
This makes it a highly efficient method of withdrawing profits from the business and there are two main pension arrangements that can be used: an Executive Pension in a Master Trust or a Personal Retirement Savings Account (PRSA).
The rules for employer contributions to PRSAs changed this month. The maximum employer contribution is now 100% of the employee’s total salary. While this is more restrictive than previous years, the funding rules are straightforward and may suit those who have already significantly funded under an Occupational Pension Scheme. It is important to note that employee contributions to a PRSA do not impact the employer limits, allowing employees to maximise their own personal contributions.
However, contributions exceeding 100% of salary will not qualify for tax relief for the employer and will trigger a BIK for the employee, which is then subject to income tax, PRSI and USC.
Executive Pensions are more complex, requiring a calculation that considers the director’s salary, prior service, and existing pension benefits. Contributions can be made for both future service (Ordinary Annual Contributions) and prior service (Special Contributions).
Employers can get immediate tax relief on Ordinary Annual Contributions. Tax relief on Special Contributions is available when they are less than or equal to the employer’s Ordinary Annual Contributions. Otherwise, relief is spread over two to five years. Special contributions are not possible under a PRSA.
Retirement benefits can be accessed from age 50, with some conditions, under an Executive Pension. PRSA access is possible from age 50 once employment has ended. Benefits can be accessed from the scheme’s Normal Retirement Age (NRA), with 60 being the lowest possible, without having to leave service.
For Executive Pensions, the maximum retirement lump sum can be calculated using a formula based on salary and service or 25% of fund, and, in the latter case, the remaining fund can be used to buy an Approved Retirement Fund (ARF), annuity or taken as taxable cash. For PRSA, the maximum retirement lump sum is 25% of the fund and the remaining fund can be held as a Vested PRSA or used to buy an ARF, annuity or taken as taxable cash. It is also possible to split PRSA benefits into multiple PRSAs, allowing access at separate times.
It is important for company directors to seek professional advice to determine the most appropriate pension planning approach for their circumstances. The rules surrounding retirement planning can be complex, and proper advice can ensure that the most tax-efficient plans are put in place.
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