Imagine taking the risk of setting up a business and then walking away from it empty-handed when you leave.
This is not the outcome you want when the day comes for you to walk away because it would mean all your effort, struggle and sacrifice going unrewarded.
Financial freedom is the driving goal for most business owners so it seems ridiculous to think that anyone would let a situation like this happen on purpose.
But the reality is that it can happen very easily to those who don’t plan their exit from the business in advance.
A directors pension is perhaps the single greatest benefit you can have as a business owner because it allows you to consistently build your personal wealth without you having to pay a penny towards it.
In simple terms, a directors pension facilitates the transfer of cash from your company’s bank account into your own long term savings account.
It’s the single most tax efficient way of taking cash from your company and having one ensures that your retirement won’t depend on future events that may or may not happen.
Can’t I Just Sell My Business When I Retire?
Selling your company is an ideal exit if you have the option but it’s reliant on both attracting a buyer and your willingness to let it go.
Buyer’s look for very specific things when acquiring a business so your company would need to be aligned with what they’re looking for. Amongst other things, ‘acquirable’ companies tend to be;
- Independent of the owner
- Capable of producing a reliable income stream
If your company fits this bill then it may be a viable option for you at some stage in the future. That said, it’s dangerous to rely on this happening because;
- Lots of things need to go right for a business to get sold and the market can change very quickly
- It’s an unreliable future event that you can’t control
- It may not sell for the amount you need it to.
A cornerstone of financial planning is putting yourself in control of your choices and control of your assets so I would always contend that relying on an uncontrollable event isn’t worth risking your retirement on.
The good news is that there’s an easier way.
A directors pension allows your company to consistently build your net worth for retirement.
It’s a financial vehicle that facilitates the tax efficient transfer of cash from your company’s balance sheet into an investment account in your own name.
Tax efficient because there‘s no personal tax liability or BIK for you and the company gets corporation tax relief on the contributions being made. And that’s not to mention the fact that your investment gets to grow tax-free for the entire term.
As the guru’s say “It’s not how much money you make, it’s how much you keep”.
So, by way of comparison, here’s how the pension option stacks up against the other ways of taking cash from your business.
- Salary: (PAYE, PRSI & USC): 52%+
- Dividends: 25% – 40%
- Capital Gains: 33%
- Benefit in Kind: 30%
- Pension contribution 0%
The trade off for this 0% rate is that the earliest you can access it is 60 under normal circumstances but you can opt to take your benefits from 50 if you wish.
Building Yourself Into The Business Plan
Successful business owners structure their companies in a way that serves their interests.
It can be easy to forget that your business is ultimately there to serve you.
As a director, you are in the unique position of being able to combine your current income needs and future income needs into one coherent plan.
And that plan is the amount of money you can accumulate by the time you step away from the business.
As soon as your goals are included as an operating expense you can be confident that your business is building your personal net worth each month.
How Are Director Pension Entitlements Calculated?
As a company director, The Revenue Commissioners will allow you to build a retirement asset up to a limit of €2,000,000 but you can push it up to €2,150,000 if you’re really aiming for the top.
However, the actual amount you can target under revenue rules is determined by a formula which is determined by your;
- Marital Status
- Retirement Age
- Annual Income
- Potential Service
- Existing pension values
If you want to see exactly what your business can build for you, and the associated costs, then simply click here and take 30 seconds to see 5 fully personalised options with our pension calculator.
The Tax-Free Cash Option For Company Directors.
Even if pensions aren’t your thing, you should still have a director scheme because you can opt for the tax-free cash option.
This allows you to build up a liquid cash fund that can be paid out in full from age 60.
You can read more about that here.
How is a Directors Pension Set Up?
Director pensions are set up under trust which means they’re legally separate from the business and you i.e. you’re building wealth independently from the business.
The legal trust is established via a letter of exchange which is signed by all parties prior to going live.
Once in place, the company can make regular monthly payments on your behalf until your nominated retirement age.
It’s important to note that a directors pension in no way inhibits you from selling the business.
Nor does it affect any of your entitlements under the retirement relief provisions if you should sell the business in the future.
If you want to discuss your options then feel free to call me on 01 442 3929 or send me an email and we can have an informal chat.
Pensions Are Complicated. We’ve Made Them Simple.