Small business owners face a lot of responsibility, and often neglect to plan for their own future post-retirement. In fact, 57% of owners view their business as their pension. This can be a risky strategy, as there are no guarantees you will be able to sell your stake, or that company will be performing well enough to finance your retirement. We take a look at the reasons why a pension plan can be very efficient for you and your business.
Company Pension
One of the most attractive, tax efficient ways for business owners to take profits from their company and turn them into personal wealth, is to transfer these profits into a company pension. Unlike other remunerations such as salary increases, bonuses or company cars, an employer contribution to an executive pension plan is not normally viewed as income. That means its tax free – and that could add up to a very significant saving. You have the option at retirement to take 25% of the fund as a retirement lump sum (up to €200,000 can be taken tax free).
For a company pension to be approved as a tax-free arrangement it must be set up in trust. The main advantage of the trust is to make sure that the benefits of the pension plan are kept totally separate from the company and are kept for the member and their beneficiaries (the people who will benefit from the scheme). Clearly, business owners should consider maximising their company contributions to their pension plan.
Case Study
David is 45, married and has been running his own business for five years. So far he’s been ploughing everything he can back into the business to get it off the ground, and he hasn’t taken a holiday for years. But now the business is more mature and he has begun to think about looking after his family after he retires.
David is currently drawing a salary of €50,000 a year. He wishes to retire at age 65. He is contributing €12,000 a year into a director’s pension plan which has a current value of €70,000. The company regularly makes additional profit of €150,000 a year and is considering increasing his pension contribution to increase his retirement fund.
What contribution options are available for David?
There are three options for David depending on whether he wants to use full company profit or not and the tax treatment for each of these options.
- New Single Premium Contribution: €119,000 New Regular Premium Contribution: €37,800 p.a.
- New Single Premium Contribution: €41,000 New Regular Premium Contribution: €41,000 p.a.
- New Single Premium Contribution: €0 New Regular Premium Contribution: €43,000 p.a.
If David chooses option 1 above, then what tax relief would be available assuming the business paid the contributions?
David’s company could offset the €37,800 a year regular contribution in the current trading year and also could offset the €119,000 single premium investment over the next 3 years (€39,667 x 3 years), thereby reducing the company’s corporation tax bill.
If David chooses option 2 or 3 above, then what tax relief would be available assuming the business paid the contributions?
Under both options 2 & 3, David’s company could offset all contributions (Regular & Single if appropriate) in the current trading year and thereby reduce the company’s corporation tax bill.
Investing the contributions detailed in Option 1 will take into full consideration the €150,000 company profits. Option 2 and 3 does not use up the full company profits of €150,000. They use up €82,000 and €43,000 respectively.
Crucially as these company contributions are not viewed as being a Benefit-In-Kind (BIK) for David, he doesn’t have to pay any income tax, PRSI or USC in relation to them.
Checklist For Business Owners:
- Have you taken control of your pension planning?
- Is your company contributing to your pension plan?
- Are you reducing your company’s corporation tax bill to the minimum?
- Are you on track with your expected retirement income?
- Are you reviewing your pension with your financial adviser every year?
For more information on Retirement & Pensions, visit our page, contact us on (042) 9352287, or email info@onefinance.ie