Imagine taking the risk of setting up a business and then walking away from it empty-handed when you’re about to retire.
This is not the outcome you want as it would mean all your years spent working, the headaches, the worries and your sacrifices all going unrewarded.
Of course, it seems ridiculous to think that anyone would let something like this happen to them intentionally but it can happen to those who don’t plan ahead.
A directors pension is a great benefit because it allows you to consistently build your personal wealth as your company grows so you can provide an income for your retirement.
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 to take cash out of 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 the ideal exit if you have the option but this is reliant on attracting a buyer.
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
- It’s an unreliable future event that you can’t control
- It may not sell for the amount you need it to.
I would always contend that relying on an uncontrollable event isn’t worth risking your 25 year 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 is 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.
So, as a comparison, here is how the pension option stacks up against the other ways in which you can take cash from your business.
- Marginal rate income tax, PRSI & USC: 52%+
- Dividends: 25% – 40%
- CGT: 33%
- BIK: 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’s 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 you build yourself into the business plan you can be confident that your business is building your personal net worth each month.
How Are Director Pension Entitlements Calculated?
As a shareholding company director, The Revenue Commissioners will allow you to build a retirement asset up to a limit of €2,000,000.
However, the actual amount you can target under revenue rules is determined by a complex, multi-layered formula which is determined by your;
- Marital Status
- Retirement Age
- Annual Income
- Potential Service
- Existing pension values
These pension entitlements are uniquely available to you as a company director so they’re not something you should overlook.
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 are not your thing, you should still have a director scheme.
Failing that, you should, at the very least opt for the tax-free cash option.
This allows you to build up a cash fund that can be cashed 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 are legally separate from the business and you.
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.
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