Building a successful business in Ireland is difficult but the rewards are worth it.
Chief amongst them is the ability to determine both your income today and your income in 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.
This is a unique privilege for business owners and it’s one you should to take advantage of while you still can because if you’ve worked hard to secure the future of your business then you’re entitled to benefit from the same security it can provide for yours.
A directors pension is the single most tax efficient and simplest way for you to do this.
Leaving Your Business
There will come a day when you step down from the business you’ve created and this is something that you will want to do on your own terms.
Preparing for it in advance will ensure that you leave yourself with plenty of options and that you’re properly compensated for everything you’ve done.
If you don’t plan ahead then you could end up walking away empty-handed with a lengthy retirement to be paid for.
Can’t I Just Sell It When I Retire?
Selling your company is a great 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 this sounds like the kind of business you have then selling may well be a viable option at some stage in the future.
However, even if you are confident of a trade sale, there are a number of associated risks, in that;
- 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.
Building Yourself Into The Business Plan
Your business is there to serve you and the hallmark of a well managed company is when the gross profit is appropriately allocated to ensure that;
- Adequate cash reserves are maintained at all times,
- The owners income requirements are met,
- The owners retirement plans are consistently nurtured.
As a director, you are in the unique position of being able to combine your personal goals and your business goals into one succinct, coherent plan.
That plan is the amount of money you can accumulate by the time you step away from the business.
As soon as your interests are included in the planning then 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 entirely unique and not available to anyone else in Ireland 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.
Investment Options for Director Pensions.
Recent legislation (IORPS II) has sought to restrict the investment options for company directors.
Up to now, you could invest 100% into property and/or unregulated assets if you so wished. However now, under this legislation, 50% of a newly established director pension must be comprised of regulated assets e.g. insurance company managed funds.
This means that the days of fully investing your pension into a single property asset are now at an end.
That said, there are still a wide range of investment options to choose from so get in touch today if you want to find out more.
You can call me on 01 442 3929 or send me an email at email@example.com
Pensions Are Complicated. We’ve Made Them Simple.