Business Owners / Directors
- Choose your pension
- Eligibility for executive pensions
- Contributing to an executive pension
- Benefits at retirement
- Determinants of level of benefits at retirement
- The things to look out for when setting up any of the above pensions or reviewing your existing contracts
- What funds will I be invested in?
Running your own business can be busy enough without worrying about retirement, it’s very easy to put pension planning to the back of your mind and forget about it. Many business owners and Directors will be in a precarious financial position come retirement because they have not yet set up their own personal or company pension plan.
Without your own or company pension, you will be dependent on the State pension – provided you qualify. (See state pension category for further information) The State pension is less than €250 per week. * correct as march 2018
If you are one of the 350,000 business owners or Directors in Ireland, it’s time to take control when it comes to retirement planning.
So where do you start ?
You have 4 main choices of pensions when a Business Owner / Director :
- A Personal Retirement Savings Account (PRSA)
- A Personal Pension plan. (PPP)
- Self-Administered Pension Schemes (SAPS)
- Executive (company) pension plan. (EPP)
A Personal Retirement Savings Account (PRSA)
PRSAs are an off the shelf ( more simple) pension option suitable for Business owners / Directors who want to pay into a pension – PRSA’s can be started and stopped at any time and allow once-off (lump sums) or regular monthly contributions. There is no minimum amount you have pay into a PRSA so they can be a more suitable pension product for those starting a pension for the first time. The charging structures for PRSA’s are very transparent with a maximum of 1% annual management fees and a minimum of 95% allocation rates. You are limited to what funds for investment are available on a PRSA. There is also a product called a non-standard PRSA.
A Personal Pension or (PPP)
Personal Pension are a popular choice for Sole Traders. This is a policy both you and your business can contribute to and receive tax relief on at your Marginal rate of 20 or 40%. There can be minimum contributions required but you have a wide choice of fund options to choose from. Charges are also deemed to be lower on PPP’s when compared to PRSA’s but that might not always be the case. When investing in a PPP you will be risk assessed to see your attitude to risk in investing with pensions. A portfolio of funds will be available that matches your attitude to risk.
Self-Administered Pension Schemes (SAPS)
Self-directed pensions are another option but they have a tendency to to be only used by experienced investors. With a self-directed pension, you decide what your pension is invested in. The charges on self-directed pensions are typically higher than on regular PPP’s , EPP’s or PRSA’s.
Executive (company) Pension Plan – (EPP)
EPPs are often used and are the most popular choice for Business owners / Directors in preference to a PRSA or a personal pension because of their scope for higher contributions and their potentially wider opportunity for taking tax free lumps sums at retirement.
Despite the name, Executive Pension Plans have a different legislative status to personal pensions. EPPs are best thought of as occupational pension schemes for a single person, or for a small group of individuals.
Strictly, because executive pensions are a type of occupational plan, an employer is required if an EPP is to be set up. In practice, a sole trader or professional can become eligible for an EPP by simply incorporating their activities ie becoming a limited company. Otherwise a sole trader can offer employees a EPP but can only do a PRSA or PPP themselves.
Your contributions to an EPP are restricted by your age and income level. Contributions are eligible for relief from income tax. This relief is normally claimed back from the Revenue. Even if you are at the maximum allowable limit of personal contributions, your employer is able to contribute more. The rules governing total contributions to executive pension plans are intricate. We recommend that you seek advice from Pension advice.ie if you want to maximise the total of your and your employer’s contributions to an EPP. We can do max funding quotations that will allow you to see your funding opportunities. If you are Director of your own limited company you can have the company fund the pension without any personal contributions. This can turn company profits into personal wealth in a tax efficient manner.
At Retirement you will be entitled to:
- A lump sum, based either (i) on your final salary in the relevant employment and your years of service or (ii) 25% of the value of your accumulated fund. The first method will apply if you are taking the balance of your benefits as an annuity; the second will apply if you intend to use the balance of your benefits to purchase an Approved Retirement Fund or Approved Minimum Retirement Fund. In either case, any lump sum entitlement you may have up to €200,000 will be tax free.
- A choice between an annuity, an Approved Retirement Fund or an Approved Minimum Retirement Fund for the balance
- In certain circumstances the balance after your lump sum entitlement can be taken as taxable cash
The following factors will determine the level of benefits you will receive from your EPP at retirement:
- Your level of you and your employers contributions
- Your final salary
- The investment performance of your chosen funds
- The age at which you withdraw your benefits
Find out what charges you will pay ?
Charges have a huge impact on your pension growth. Pensions grow tax free which makes them the most suitable product / option for saving for retirement but any charges or fees can reduce this tax free growth. Annual management charges or AMC is an annual fee taken by the fund manager who invests your pension money or fund. This can be anywhere from 0.5% – 1.5% or more per annum depending on what fund you are invested in or how much you have in your fund. The lower this is the better but you do have to pay higher fund charges for some funds like property or actively managed funds because of the expense of administering these fund choices. Just be aware of the AMC’s you are being charged on your pension.
What allocation rate does you pension have ?
The allocations rate is the % of the investment that goes into the pension. If you have a 100% allocation rate then 100% of the money you are investing / contributing goes into the actual pension and there is no charge. A 95% allocation rate means from a €100 per month contribution, €95 goes into the pension and €5 is a charge so only 95% of the money you are investing is actually going into your pension. Typically an allocation rate would be between 95-100% depending on what type of pensions and how much you are investing. The higher the allocation rate the better for you as the investor.
Policy fees or ongoing management charges ?
Sometimes there can be other fees and charges on a pension such as bid offer spread , policy fees or trail commissions. You can also experience early encashment charges if you try to get out of a product or fund early. Make sure your advisor discusses all charges with you so you know where you stand and you feel comfortable with any and all charges that might be on your pension product. There can be reasons for all of the above charges but you want to make sure you are getting value for money which is why it is good to shop the full Irish market of pension providers and deal with an advisor who has multiple options to get you the best value.
This is one of the most important decisions you will make in regards to your pension. It’s really important that the funds you invest in are suitable for your attitude to risk. Your attitude to risk is how you view the opportunity to get growth or lose money in investing in your pension. If your nervous about the value of your fund losing money and cautious about investing you should be in a low risk fund that doesn’t expose your fund to high risk potential losses. If your adventurous and want to aggressively grow your fund you do need risk and market exposure. This is one of the most important discussions to get right with your advisor. A comprehensive risk assessment questionnaire will outline your attitude to risk and then you can look at funds to match this.
Funds put simply are
- Low risk
- Medium risk
- High risk
Some are very low risk , low or high on the medium scale or very high risk.
The main asset classes are ,
- Equities – Stocks and Markets (High Risk)
- Property – Commercial (Medium / High)
- Commodities – Oil , Gas, Gold etc (Medium)
- Bonds – Government or Corporate (Low / Medium)
- Cash and deposits (Low)
A varied group of funds with diversification and a variety of assets classes is the most efficient fund choices as you will be able to reduce risk , maintain growth potential and keep annual management fees lower.
You also have to get some advice on this and a good advisor is worth his weight in gold. Be prepared to take some investment risk with your pension – particularly if you are young. Understand – and be comfortable with – the degree of investment risk which you may be taking on a remember past performance isn’t a reliable indication of how a fund will perform in the future.