Self Employed? Know your 2 Pension Options
If you work for yourself, it can be tough to plan for retirement or know which Pension option is best for you. This may leave you unsure whether you’re making the best choices for your particular self-employed retirement plan. To ensure that your retirement plan is successful, get expert help from the start!
When you own a business, your life is probably pretty hectic. It’s easy to put retirement planning on the back burner because there are so many other things needing your attention.
However, it’s wise to talk to a financial advisor about managing your pension. That way, you can get peace of mind and focus on running your business successfully.
So where do I start, and which option should I choose?
Self-employed individuals have two main options when it comes to pensions:
– Personal Pension Plan (PPP)
– Personal Retirement Savings Plan (PRSA)
Personal Pension Plan (PPP)
Self Employed Pensions Donegal
The most popular individual retirement plan for self-employed people is a Personal Pension, also known as Retirement Annuity Contracts (RACs) (discuss later), which typically provide a wider range of investment alternatives and potentially lower expenses.
This PPP is a pension that you own personally, which is issued by a life assurance company. You make contributions to it and receive tax relief at your marginal rate of 20% or 40%.
This option would generate a cash sum for you at retirement in exchange for the contributions you make to the plan (these can be either regular or one-time contributions).
Personal Retirement Savings Account
Self Employed Pensions Donegal
With a Personal Retirement Savings Account (PRSA), you have more control over your pension. You get to choose how much and how often you want to contribute. PRSAs are invested in pooled investment funds, which can be found through unit trusts and some life assurance companies.
Let’s Compare the Two Pension options.
Eligibility & Suitability: Comparing Personal Pensions & PRSA’s
Self Employed Pensions Donegal
Personal Pensions:
As specified by Revenue, both self-employed individuals and employees who are not members of an occupational pension scheme (if your employer does offer you a pension scheme) can contribute to a Personal pension. In order to do so, they must have earned taxable “relevant earnings” at some point during the current tax year, or in a previous tax year.
If you are self-employed, a professional, or retiree and want to pay into a pension with plenty of investment options and no contribution fees, then a Personal Pension is likely the best choice for you.
PRSA:
A PRSA is open to anyone who wishes to join, whether you are employed or not (whether you are self-employed or working for a business). You can join if you are self-employed or work for a company.
PRSA’s are most beneficial for self-employed individuals who want to contribute to a pension, but are apprehensive about their cash-flow or income in the future. They may also decide to get employed rather than being self-employed in the near term.
Flexibility:
Self Employed Pensions Donegal
Personal Pensions:
You can increase your contributions or make a one-time contribution at any time, so you have complete control of your payments with a Personal Pension. Payment breaks are also permitted, but they are usually restricted to 12 months.
PRSA:
You can decide to start or stop contributing at any time, and you have the option of making one-time or regular contributions. Plus, PRSAs are portable so that if you switch jobs or take a break from your career, you can bring your PRSA with you.
Fund Choice & Charges:
Self Employed Pensions Donegal
Pension plans may have two types of charges: the Annual Management Charge (AMC) on the accumulating fund, and regular contribution costs.
Personal Pensions:
You may choose a minimum number of investment funds, although there are many different investment fund alternatives to select from.
Although Personal Pensions are said to have lower charges than PRSAs, it is not always guaranteed. This is because a Personal Pension is between only you and the life insurance company- giving the Provider more flexible options that don’t need prior approval from the Pension Authority. Self-employed people can benefit largely from this as life insurance companies often offer higher rates for those who contribute more regularly.
PRSA:
If you’re considering a PRSA, then you must choose between a standard or non-standard model.
Standard PRSA:
The typical PRSA does have investing limitations (as set out in legislation), so you are restricted to funds that are accessible through a PRSA (when comparing Personal Pensions). There is enough variety to appeal to most people’s requirements, even though it is limited by law.
For Standard PRSA’s, the maximum Annual Management Fee (AMC) is 1% and a minimum of 95% allocation rates, the charging systems are translucent. That is, if you put €100 into a pension, €95 is invested and €5 is taken as fees each year, and 1% of the value of the fund is subtracted as a charge annually.
The allocation rate can be higher, so take advice from a trusted financial advisor who will shop around.
Non-standard PRSA:
With non-standard PRSAs, there are no maximum costs and they can be greater or lower than Standard PRSA charges depending on the contract – however you generally have a wider range of investment assets (besides pooled funds) to choose from.
Tax relief on Pension Contributions
Self Employed Pensions Donegal
A private self-employed pension offers substantial tax breaks and incentives, including;
- Tax relief on contributions – You may receive tax relief on payments at a higher rate of income tax, and you may get up to 40% tax relief on your total pension contributions.
- Tax free growth – Any growth on your investment within your pension fund is tax-free.
- Tax free lump sum – When you reach your retirement age, you can take up to 25% of your fund as tax-free cash, with a maximum of €200,000. Retirement age can be from age 60.
Max Contributions Allowable:
Self Employed Pensions Donegal
Your annual income, age, and contributions all influence the amount of tax relief you can receive. You may only make contributions up to a certain amount, depending on your age and financial situation. The limit for receiving full tax relief is €115,000 per year.
For example, if you are 45 years old and make €80,000 per year,
you may receive 40% tax relief on your annual pension contributions up to €20,000.
Retirement Date
Self Employed Pensions Donegal
Both Personal Pensions and PRSA’s offer the same minimum draw-down age of 60, meaning benefits can be taken starting at that age. These include a 25% tax-free lump sum up to €200,000 as well as other smaller benefits. If the lump sum is more than €200,000 however, it will be subject to standard rate income tax.
You can use the remaining money in your fund (75%) to buy an annuity or invest it in an Approved Retirement Fund (ARF) through a life insurance company. You’ll be able to make withdrawals from this account in the future.
Early Retirement
Self Employed Pensions Donegal
Benefits are generally permitted from the ages of 60 to 75. In certain cases, such as severe illness or other restricted reasons, it is feasible to retire early (before the age of 60).
If you die before retiring, the value of your pension would be inherited by your estate and carried out in accordance with the provisions set forth in your will.
Does a Self-Employed person get a state pension?
Self Employed Pensions Donegal
Yes, the State Pension is available to self-employed people. However, without a private pension in place, the State Pension alone may not be sufficient to meet your retirement income requirements.
To show this, the present Irish State Pension is €253.30 per week (personal rate 2022). The typical wage in 2021 was €862 per week according to the CSO (Q4 2021). This leaves a gap / average weekly difference of €608.70.
Depending on your personal circumstances, our Financial Advisors can assist you in creating a pension plan that will enable you to budget for and reach your retirement income goals.
The first step you should take is to get advice from a Qualified Financial Advisor who will assess your current financial situation that will help put together a suitable plan tailored to your specific needs, thereby helping you make an informed decision.
What are the best self-employed pensions in Ireland?
Self Employed Pensions Donegal
Key Considerations:
- Personal Pensions and PRSA’s both offer three primary tax breaks: contribution relief, tax-free growth, and the option for a lump sum payment.
- Personal Pensions give the same fund (investment) alternatives as a non-standard PRSA, but at reduced costs.
- A Personal Pension may be a better financial investment for Self Employed Sole Traders who plan to continue being so in the long run than a PRSA because of the tax advantages.
If you have questions or need advice on Self Employed Pensions, call 074 9103938 or email now
Get Advice
Talk to us now and make an appointment with one of our Letterkenny team of QFAs. We are here to help with your Financial Planning Concerns. Ask us questions on Retirement & Pension, Life Insurance & Protection, Mortgages, and Investment Advice. Get in touch here or give us a call at 074 91 03938.
Financial Services firms in Ireland are regulated by the Central Bank.
For the latest updates and financial news, connect with us on Facebook and LinkedIn.
