PERSONAL PENSION PLANClick to expandClick to expand
A personal pension plan is a private pension structure available to the self-employed individual or to those in non-pensionable employment. The traditional personal pension plan is managed for the holder by a life assurance company or investment firm in order to provide benefits for the holder in retirement. The value of the pension fund at retirement will depend on the level of contributions made to the plan, the investment growth of the pension fund and the level of pension charges paid throughout the term of the plan. A portion of the fund may be taken as a tax free lump sum at retirement.
Tax Relief/Net Relevant Earnings:
Holders of a personal pension plan are entitled to receive full income tax relief at their marginal tax rate on their pension contributions based on current legislation. However, there are limits on the amount of tax relief that can be claimed. As highlighted below, these limits are influenced by the person’s age and is a percentage of their net relevant earnings, up to an “earnings ceiling” of €115,000. Holders of these plans are entitled to pay their pension contributions monthly or annually by direct debit or can pay a “once-off” contribution e.g. at the end of the tax year depending on their taxable earnings.
|Age||% of relevant earnings eligible for tax relief|
|Under 30 years||15%|
|30 – 39 years||20%|
|40 – 49 years||25%|
|50 – 54 years||30%|
|55 – 59 years||35%|
|60 years and over||40%|
THE INSURED EXECUTIVE RETIREMENT PLANClick to expandClick to expand
The Insured Executive Retirement Plan is a pension structure held with a life assurance company and is available to company owners and employees. The main benefits of this type of retirement plan is as follows:
- It facilitates funding for retirement
- It can reduce both corporate and personal tax rates
- It enables the holder to extract funds from a company without any income tax liability
- It allows for significantly greater levels of pension contributions than personal pension structures
- A portion of the fund may be taken as a tax-free lump sum at retirement
SMALL SELF ADMINISTERED SCHEME (SSAS)Click to expandClick to expand
A Small Self Administered Scheme (SSAS) is a flexible arrangement which allows the holder a significant level of control over their retirement fund. There are a number of benefits to holding a SSAS:
- They facilitate funding for retirement
- They can significantly reduce both corporate and personal tax rates
- They allow the holder greater flexibility with regard to making investments in a tax-free environment. Almost any investment can be made within these tax efficient structures subject to Revenue guidelines
- They enable the holder to extract funds from a company without any income tax liability
- They allow for significantly greater levels of pension contributions than personal pension structures as they can facilitate both personal and company contributions
A SSAS has a number of tax benefits. Contributions made to the SSAS enjoy personal and/or corporation tax relief. Returns from the investments held within the trust are exempt from income tax, capital gains tax and DIRT. Also, a portion of the fund may be taken as a tax free lump sum at retirement.
There is no set amount that a holder has to contribute to a SSAS annually and few rules with regard to the frequency of these contributions. There are, however, some limitations on the amount that the holder can contribute personally or their employer can contribute on their behalf. These limitations vary depending on the individual’s age, number of year’s service, salary and whether the holder has any existing pension benefits.
In many cases, the SSAS is the best way for proprietary directors to fund for their future as it is the most tax efficient way to transfer company profits into personal capital. A SSAS can be set up for key employees and is an extremely tax efficient way to reward valued staff. It should be noted that some SSAS products are not regulated by the Central Bank of Ireland.
Investing with a SSAS:
Once a SSAS has been set up and has received Revenue Approval, the holder can then begin investing. There is a wide variety of investment options available to a SSAS and borrowing can also be facilitated within the fund. There are some restrictions on the investments that the fund can make, specifically the following:
- Self-investing is not allowed. Investments have to be at arm’s length, so, for example, the holder cannot use the pension fund to purchase a property for their own use. However, the fund can purchase an investment property which can be rented (free from tax) to an unrelated party
- Investing in pride in possession articles is prohibited such as vintage cars or fine wines
APPROVED RETIREMENT FUND (ARF)Click to expandClick to expand
An ARF is a post-retirement investment fund. It is an alternative to buying an annuity, i.e. an annual income with your pension fund at retirement. All members of defined contribution pension arrangements can now avail of the ARF option at retirement.
Tax treatment of an ARF:
An ARF is a tax-free investment structure and investments held within the ARF are allowed to grow free of tax. Only when funds are drawn from an ARF will a tax liability arise for the ARF investor. Funds drawn from an ARF will be liable to income tax in the same way a salary is liable to income tax and the ARF provider is under an obligation to deduct income tax under the PAYE rules; effectively the ARF investor becomes an employee of the ARF provider in respect of the income taken from the ARF. It is compulsory to draw down a minimum of 4% per annum from the ARF. The obligatory drawdown in respect of ARF investments will only apply where an ARF investor is aged 60 years or over in the tax year.
Options at retirement:
At retirement the pension fund holder is entitled to a tax free lump sum. With the remaining balance of the pension fund the holder can invest in an ARF.
If the pension fund holder elects to invest in an ARF at retirement there is a requirement that they must be in receipt of a guaranteed income for life of at least €12,700 per annum (this income basically has to be from a pension). Where an individual does not have this guaranteed income amount in retirement, the minimum amount after the lump sum that must be invested in an Approved Minimum Retirement Fund (see below for definition) or an annuity or a combination of both is the lesser of the fund value and €63,500.
AN APPROVED MINIMUM RETIREMENT FUND (AMRF)Click to expandClick to expand
An Approved Minimum Retirement Fund (AMRF) is very similar in nature to an ARF, i.e. the funds can be invested in any number of ways. It is possible to withdraw a maximum of 4% per annum from an AMRF until age 75, however, there are exceptions, as outlined below, where access can be granted beforehand.
Timing of Minimum Income Limit:
An AMRF set up since the 6th February 2011 can at any time become an ARF when the client has the minimum annual income requirement of €12,700 per annum. An AMRF will automatically become an ARF when person reaches age 75.
Tax treatment of ARF on death:
The tax treatment of an ARF on death will depend on to whom the ARF/AMRF assets are being passed to. A spouse can ‘step into the shoes’ of a deceased ARF investor and take over the ARF in their name without any income tax or capital acquisitions tax liability arising. Any draw down of income from the ARF by the surviving spouse will be liable to income tax in the normal manner. The tax liability of an ARF passing from the original ARF investor to a child or from a surviving spouse’s ARF to a child will depend on the age of the child receiving the ARF assets:
- Where the ARF assets pass to a child under the age of 21 the proceeds will be liable to Capital Acquisitions Tax in the normal manner
- Where the ARF assets pass to a child aged 21 or over the proceeds will be liable to income tax at a flat rate of 30%
- Where the ARF assets pass to anyone other than to a surviving spouse or child, an income tax liability will arise for the ARF investor in the year of death, and the net proceeds passing to the beneficiary will be liable to Capital Acquisition Tax
WHAT IS A PENSION AND IS IT IMPORTANT TO PUT MONEY AWAY INTO ONE?Click to expandClick to expand
Given that most people will spend up to a quarter of their lives in retirement (over 20 years) and that the contributory state pension is currently €12,956 per annum, saving for retirement is an essential part of financial planning.
Many people can be put off by the word “pension”, particularly younger people who think it is far removed for them and not very relevant. Many find pensions complex and confusing. The simple truth is, a pension is very similar to a long-term savings policy.
The idea of a pension is to encourage people to save money which they can draw on in the future when they no longer have a job which pays them a wage.
One of the main advantages of saving using a pension is the massive tax relief that is given to encourage individuals and companies to invest in one:
Individuals currently get either 20% or 40% tax relief on premiums they pay into a pension plan. Therefore for every €100 you put into your pension, the real cost to you is *€60! There are no other schemes which offer this type of incentive to encourage participation
Companies currently receive 12.5% tax relief on premiums paid into a pension on behalf on an employee.
There are many different types of pension products that can be used to save in:
- Personal Pensions
- Executive (Directors) Pensions
- Personal Retirement Savings Accounts (PRSAs)
- Company Pensions
- Self -Directed Pensions
- Small Self-Administered Pensions (SSAPs)
The main thing that individuals need to know is that all of these different types of pensions do exactly the same thing which is to try build up a pot of money for them to use while in retirement.
We at Summit Financial Planning have the expertise and experience in the area of retirement planning to help our clients put in place the most suitable pension product to match their individual needs. Once the client has started the pension we can take care of the rest!
*Assumed individual is a top rate tax payer of 40%