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The Directors Pension for Business Owners and Why You Should Have One.

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Jan 26

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 it happens frequently to those who don’t plan the exit from their 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.

If you’re a company director looking to build wealth then book a complimentary consultation directly into my calendar here.

Can’t I Just Sell My Business When I Retire?

Selling the business might be your end goal.

It can be the most lucrative exit if you have the option but it’s reliant on both attracting a buyer and your willingness to sell it. And sell at a price that delivers sufficient value to you.

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, ‘sellable’ companies tend to be;

  • Scalable
  • Independent of the owner
  • Capable of producing a reliable income stream in the future

If your company fits this bill then it may be a viable option for you at some stage in the future. But relying on this can be risky 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 you can’t control
  • It may not sell for the amount you need it to.

A cornerstone of financial planning is being in control of your choices and your assets.

I would always contend that an uncontrollable event isn’t worth risking your retirement on.

Especially when there are other options.

Director Pensions

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 if you want to maintain the ownership of your business asset. You can opt to take your benefits from 50 but you would need to dispose of your shareholding to do so.

Click here to book an introductory 30 minute call to see if this is for you.

Building Yourself Into The Business Plan

Smart business owners structure their companies in a way that serves them.

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 accumulate by the time you step away from your business.

Once you’re set up you can be confident that your business is actively building your net worth each month.

Click here to book a 30 minute call.

How Are Director Pension Entitlements Calculated?

Revenue Commissioners will allow you to build a retirement asset up to a limit of €2,000,000 as a company director.

However, the actual amount you can target under revenue rules is determined by a formula which is determined by your;

  • Age
  • Gender
  • 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 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 your business.

The legal trust is established via 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.

If you want to discuss your options then feel free to call me on 01 442 3929 or book a complimentary consultation directly into my calendar here.

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