What is an Executive Pension ?
This is a Revenue approved tax-exempt Pensions savings scheme suitable for a business owner/ Director and key employees of a limited company who wants to build a retirement fund from surplus company profits and reserves.
Owner Director
Key Employee / Co-director
How to qualify for an Executive Pension
- Limited Company Status
- Business Owner/ Director/ Employee - Must have Schedule E Income
- Availability of Company Profits
- Must be set up in Trust
Wealth Extraction options for a business owner
(3 main types)
- Leave profits in the business and look to extract proceeds later through a company sale.
- Withdraw profits as a salary and or dividends
- Withdraw profits via am Employer contribution to an Executive Pension plan
Consequences (A-C)
- Company profits subject to 12.5% corp. tax, potential further surcharge 20% if undistributed > 18 months. CGT @ 33% on sale of shares
- With Salary or dividends, the Director/employee is liable to Income tax, PRSI & USC potential to 52%.
- Withdraw and make contribution to an Executive Pension plan, Co. get tax relief on contribution and for the EP owner there us no Income tax, PRSI or USC or BIK
Advantages of Executive Pension
- Tax relief for the Employer on pension contribution
- Employer can make generous contributions which are not related to the Revenue age guidelines {see example Sole Trader V Business Owner Ltd Co}
- Employer has no PRSI bill for the EP contribution
- For Employee – no BIK, Income tax, PRSI or USC as result of an EP contribution
- Any investment growth in the EP plan is tax free until access in retirement.
- The Business owner can plan his exit-strategy, the EP plan can drawdown from aged fifty if all company links are severed.
- If business owner winds-up business and severs links with the company, he can transfer his EP to another Pension arrangement.
- Back-funding: an EP allows the holder to potentially back-fund for years where their salaried service was not previously pensioned, this option is beneficial for a late-pension starter who may be targeting a pension retirement pot
- Flexibility: can decide how much to contribute to an EP as company reserves allow, can stop and re-start without any penalty.
- At Retirement – Access to tax-free cash on EP plan up toa limit of €200k per individual and potentially another €300k taxed at 20%.
- Post retirement Income – via ARF or annuity
- The EP plan can be passed on death to the holder’s spouse and children either pre-retirement, and/or post-retirement (via ARF)
Business Owner 'Executive Pension' Vs. Sole Trader 'Personal Pension'
Business Owner / Director
49 yrs. age, married
€65,000 salary
NRA = 65 years
Sole Trader
49 yrs. age, married
€65,000 salary
NRA = 65 years
Maximum Contribution Formula is two-thirdsÂ
€ 65,000*/28.4, (E1,230,667)/16
Maximum Pension Contribution based on 25% NRE
= € 76,916 p.a.
= € 16,250 p.a.
Executive Pension
Personal Pension
Comments
- Assumptions are that both the Sole Trader and Business Owner are married, same salary with 16 yrs. to retirement.
- The scope for the Company Director to build a material Pension Fund via the EP in a tax efficient way is very compelling compared to the sole trader.
- The Irish Pension Authority are aware of this disparity for pension saving arrangements between the Sole Trader and the Business Owner which is under current review. Over the next 12 months we would expect this to be amended but current legislation is very favourable for an EP holder.
Maximum Funding Quote / Back-Funding
As previously mentioned, some owner directors will have worked for a no. of years in the company without having any pension arrangements in place. An EP pension allows those individuals the potential to receive a special contribution to their EP pension plan for the years of salaried service which
un-pensioned. {subject to availability of profits}
Example of Maximum Funding Quote
Name : John Doe
Age : 49
Salary : €65,000
Service to date : 5 Years & 3 months
Existing Pension – Previous employ : €120,000
Gender : Male
Marital Status : Married
Retirement Age : 65 yrs.
Total Service at NRAÂ : 20 yrs. 9 months
Pension Current Employ : Nil
Maximum Funding Quote Eg. - Results
Future Ordinary Contributions
€69,417 per annum for 16 years to retirement
Special Contribution for Past Service
€281,012 lump sum and an ordinary annual contribution of €51,853 for the remaining 16 years until retirement
Summary
There are a number of moving parts with an Executive Pension but for many it is a very tax efficient method of building a retirement fund using surplus company reserves. If you would like to find out more about Back-Funding and to arrange a Maximum Funding quote, please contact me andrew.cree@imperiuswealth.com
and I would be happy to schedule a time to discuss your goals and how I can help you achieve them
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