Executive Pension Plans Advice Donegal

It’s Never too early to start Planning

Why should I plan for my retirement?

Your retirement may seem like a long way off, but it is never too early to start planning. Smart planning for your retirement will ensure that when you do retire you can maintain the standard of living you have become used to. While you may be entitled to a State Pension at retirement, the age at which you can access this pension has been increased: it will not be paid until age 68 for people who were born on or after the 1st of January 1961. And even if you do get the full State Pension, at €230 per week currently, it’s designed to cover the basic necessities of life only and will be a sharp drop from your annual salary. Bearing this in mind you will need a plan to supplement the State Pension payment. There are several options available to you. If you are an executive at a company or are considered a key employee, your employer may set up an Executive Pension for you

Pensions-is-a-young-persons-game-planning earl
An Executive Pension is a pension set up by employers for executives or key employees of the company

What is an Executive Pension?

An Executive Pension is a pension set up by employers for directors or key employees of the company. The pension is set up under a trust, the employer can act as the trustee or more commonly now an independent trustee is engaged. With an Executive Pension both employees and employers can make contributions. The ultimate value of your pension plan will depend on the contributions you and your employer have made over the years and the investment return the funds have achieved in your Executive Pension. Not only does an Executive Pension provide you with a long-term plan for your retirement, it is also a tax efficient way for you to set aside money for when you retire as well as being a tax efficient way for your employer to provide you with employee benefits. In addition to employer contributions, you may be able to contribute up to 40you’re your income (depending on your age) into your Executive Pension and claim tax relief. Your Advisor will talk to you about your expectations for retirement and your personal circumstances. In understanding what you hope to achieve they can offer you helpful advice in deciding if an Executive Pension is a suitable plan for you.

In an Executive Pension Plan, both employees and employers can make contributions.

How much can my company contribute to an Executive Pension for me?

There is a restriction on the maximum level of pension an Executive Plan can provide for a member on retirement. This restriction has a knock-on effect on the maximum level of tax-deductible contributions your company can make to your Executive Pension. The maximum ordinary annual contribution which the Revenue will allow as a deduction for Corporation Tax in the year of payment depends on a number of factors:
• The level of Schedule E remuneration you take and have taken from your company.
• How long you have been drawing Schedule E remuneration from your company.
• The level of retirement funds you have already accumulated or taken.
• The Normal Retirement Age (NRA) at which you expect to take your retirement benefits. (This can be between your 60th and 70th birthday.)
• The multiplier factor Revenue allows for converting retirement fund to pension at the assumed Normal Retirement Age.

Your company can also make special or once-off contributions, but tax relief on these may be required by Revenue to be spread over a period of years (up to a maximum of five years). Remember: It is not generally advisable to accumulate retirement benefits in excess of a limit referred to as the Standard Fund Threshold, which is currently €2 million. Benefits accumulated in excess of this limit are subject to an additional penal tax charge at retirement

Can I make contributions into the company pension arrangement?

Yes. If you make contributions into the company pension plan, you can make Additional Voluntary Contributions (AVCs). If your employer says that you must pay an amount towards the arrangement, these are ‘employee contributions’. The limits below apply to both your AVCs and employee contributions.

The main difference between AVCs and employee contributions is that if you decide to take your retirement lump sum based on your salary and service with the company, your AVCs will give you more options with the rest of the fund.

Sample maximum contribution (percentage of your salary)

Current Age

Percentage of Salary

30

54%

35

63%

40

76%

45

95%

These figures assume:

  • That you will have completed at least 10 years’ service when they retire;
  • You are a married male and retiring at 65;
  • Any existing pension benefits are not included in the above rates; and
  • the rates are worked out using capitalisation factors published by the Revenue Commissioners. (The capitalisation factors are set by the Society of Actuaries and based on sex, age and so on).
    These figures could change over time.

As an employee, you can make contributions up to the following limits. Income tax relief is not available on income of more than €115,000.

Tax relief on Contributions to Executive Pension Plans

This graph shows the maximum contribution you can make, as a percentage of your earnings, for which you can claim income tax relief.
Executive-Pensions-Plans-Graph

Any contributions you make will reduce the limits available to your employer. For example, if you are 35 and don’t have any previous pension benefits, your employer can pay up to 63% of your salary each year into a pension plan for you. If you also decide to pay into it and want to pay the maximum available to you, such as 20% of your salary a year, your employer’s contributions must reduce to 43% (63% less 20%).

It is important that you get advice on the amount you should be paying into your pension. You should also learn about the amount of pension benefits that will be available to you when you retire.

What are the tax benefits of an Executive Pension?

In addition to employer contributions, you may be able to contribute up to 40% of your income (depending on your age*) into your Executive Pension and claim tax relief.

An Executive Pension is an extremely tax efficient way to provide for your future retirement for a number of reasons:
• Your company’s contributions to the plan are deductible for Corporation Tax as a business expense. Corporation Tax relief on large once-off contributions may be required by Revenue to be spread over a number of years (max. five years).
• Your company’s contributions to the plan are not subject to a benefit-in-kind charge in your hands for income tax purposes. This means you will not have to pay income tax, PRSI or the Universal Social Charge (USC) on your company’s contributions to your plan.
• Your plan enjoys tax free investment growth, which means that any growth achieved on your investment is yours to enjoy in retirement.
However for 2014, a pension levy of 0.75% of the value of the plan’s assets at June 30th 2014 and a levy of 0.15% of the plan’s assets at June 30th 2015 applies.
• At retirement you can take part of the accumulated fund as a lump sum which may be partially or fully tax free, depending on the value of your fund at that time and how many other lump sums you have taken from other pension arrangements since December 7th 2005.

Your Advisor can outline the tax benefits of an Executive Pension and can also help you to meet any Revenue obligations in the setting up of an Executive Pension

Your Executive Pension should offer you a diversified range of investment options that can meet your changing circumstances over time

How do I decide where to invest my Executive Pension Plan?

You may be relying on your Executive Pension to provide an important source of income in retirement, so it’s vital that you invest it wisely. There are many options available to you, from low and high-risk funds investing in particular types of assets to managed or mixed funds investing in a spread of assets and self-directed funds where you choose the funds or assets in which you invest.

Your Executive Pension should offer you a diversified range of investment options that can meet your changing circumstances over time. Any choice you make should be based on the level of investment risk you are comfortable with and should take into account your financial circumstances and goals. It is important to understand that the value of your Executive Pension can fall as well as rise, depending on which funds or assets you invest in. If you don’t make a decision on how to invest your money, your Executive Pension may be automatically invested in a default fund, which may or may not be suitable for your circumstances

When can I take benefits from my Executive Pension?

You can access your Executive Pension at Normal Retirement Age, which can be set at any age between 60 and 70. You can draw on the plan and continue to work at the company if you choose. You can also access your Executive Pension on ill health retirement at any age. In addition, from age 50 onwards, you can access your Executive Pension on early retirement from your company. However, you should note that Revenue usually require directors who own and control more than 20% of the voting rights in a company to dispose of their shares in the company and to cease all involvement with the company in order to draw on their Executive Pension benefits before Normal Retirement Age

You will have a number of options when it comes to taking your retirement benefits from your Executive Pension.

How can I take benefits from my Executive Pension?

You will have a number of options when it comes to taking your retirement benefits from your Executive Pension. With the accumulated fund, you have two options: you can take a lump sum of up to 25% of your fund or you can take a lump sum amounting to 1.5 times your final salary at the company (provided you have worked for the company for over 20 years)

 

Lump sum amount (25% of fund)Rate of tax
Up to €200,000Tax free
Next €300,000Standard rate (currently 20%)
€500,001 and overMarginal rate (currently 40%) plus PRSI and USC

If you take a lump sum of 25% of your fund, you can either buy an annuity with the remaining balance or invest it in an Approved Retirement Fund (ARF). If you take a lump sum of up to 1.5 times your salary, you must purchase an annuity with the remaining balance

FACT FILE: If you pass away before drawing on your Executive Pension, the value of your plan is payable in full to your estate. This is up to a limit of four times the level of your final salary from the company at that time.

What happens if I die before I draw on my Plan?

If you die before drawing on your Executive Pension, the value of your plan is payable in full to your estate, up to a limit of four times the level of your final salary from the company at that time. Any balance is currently required to be used to buy an annuity for your surviving spouse or partner and/or other dependants. Remember: You can add additional life cover to your Executive Pension; your company’s contributions for this cover are also deductible for Corporation Tax as a business expense

How Advice First Financial can help with your Executive Pension investment choice.

Your Advice First Advisor will get to know you, your financial needs, attitudes to and capacity for investment risk and ultimate goals. We will guide you through the basic elements of investing – risk and return, diversification, and your own attitude to risk – and ensure you understand what’s at stake. With help from your Advisor, you can create a diversified range of investments within your Executive Pension. This means you can spread your money in a way that suits your needs and is in line with your risk and return expectations and how you expect to take your benefits at retirement.

Why would I need to use Advice First Financial?

Choosing the right option can be a daunting task. We will be able to explain the choices available to you in simple language allowing you to make an informed decision. Your advisor will get to know you, your personal and financial circumstances, retirement plans and your attitude to and capacity for risk – products like Executive Pensions, for example, contain a certain level of risk that you need to be aware of. Your advisor will guide you through the process of setting up your Executive Pension and help you to make sense of charges, tax reliefs and benefit options. They will advise and assist you in developing a well-researched and structured investment strategy for your Executive Pension compatible with your attitude to and capacity for risk and designed to achieve your goals as far as possible.

What some of our happy Personal Pensions customers have to say…

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Executive Pensions Plans FAQ’s

Can I have more than one pension plan?

If you are eligible for company or AVC contributions, you may have more than one plan, but you cannot contribute above a certain limit.

Can my employer take out a company pension for me?

Long answer short: Yes

In a company pension plan, the company must contribute.

As income-tax relief is available on contributions into the plan, up to certain limits, you must meet certain conditions to be eligible to take out any type of pension plan.

Your income must be ‘earned’ – this means that you can’t use money you’ve made from rent, dividends from shares and stocks, or returns you’ve made on investments. Basically, you can only use money you’ve earned from your job. Your income must be assessed for Irish income tax under Schedule E. This income would include salaries, bonuses, benefits-in-kind and directors’ fees.

Can I make contributions into the company pension arrangement?

Yes. If you make contributions into the company pension plan, you can make Additional Voluntary Contributions (AVCs). If your employer says that you must pay an amount towards the arrangement, these are ‘employee contributions’. The limits below apply to both your AVCs and employee contributions.

The main difference between AVCs and employee contributions is that if you decide to take your retirement lump sum based on your salary and service with the company, your AVCs will give you more options with the rest of the fund.

How do I claim income-tax relief?

Your employer gets corporation tax relief on any contributions the company makes towards a pension plan for employees (as long as the contributions are within the agreed limits).

You can claim income tax relief on contributions you make towards the pension plan, up to the limits described earlier. To be eligible to claim income tax relief, your income must be taxable under Schedule E. Your employer will usually agree to take these contributions direct from your salary before tax. In this case, income tax relief is immediate.

If contributions are taken from your net salary, you can apply to your inspector of taxes to adjust your tax credits.

If you or your employer has questions about being eligible for tax relief, we would advise that you get independent tax advice on this

Do I have to pay tax on my pension?

Under current Irish law, when you retire you can take some of the fund as a retirement lump sum. You will have to pay standard rate income tax on any retirement lump sums between €200,000 and €500,000. Any amounts over €500,000 will be taxed as income at your marginal rate.

The USC, PRSI (if this applies) and any other taxes or government levies due at that time will also be taken. You will have a number of options as to how you can use the rest of your pension fund, and how you are taxed will depend on which one you choose.

If you choose to buy a guaranteed pension for life (annuity), your income will be taxed as income in the normal way and will include any tax due at that time.

If you have the option to invest in an ARF, you will have to pay tax on any withdrawals that you make.

Under current Irish law, the maximum pension fund allowed for tax purposes is €2,000,000. This is called the standard fund threshold (SFT). The relevant maximum will apply to the total of all pension funds you may hold. You will pay tax on any amount over this as a one-off income tax charge when you take it when you retire. Tax will be paid at the higher rate of income tax.

What is a personal fund threshold?

If you have a personal fund threshold certificate issued from the Revenue, your maximum pension fund at retirement may be more than €2,000,000.

What is the minimum term?

The minimum investment period for regular contribution plans is two years. There is no minimum investment period for single-contribution plans.

How can I pay?

With an executive plan your employer is making contributions, your contribution would be deducted from your salary and paid directly to the provider along with your employer contributions.

If you are making AVC Contributions

You can choose to make regular contributions. You can pay by direct debit (every month, every three months, every six months or every year), or by cheque every year.

You can also invest a lump sum at any time. You can do this instead of, or as well as, making regular contributions. If you start off with just a one-off contribution, you can’t add regular contributions at a later date.

Can I change my contribution level?

This will depend on the rules of plan, if your employer stipulates a level of contributions you have to make in order for them to contribution, you will need to discuss your proposed change with them, usually there is minimum level put no upper level other than revenue limits

If you are making AVC contributions, Yes. You can increase your contributions at any time. You can also reduce your contributions to the minimum allowed or take a break from making contributions if you want to. However, you need to remember that reducing (or stopping) your contributions will affect the value of your pension fund when you retire.

To help you to decide whether you need to increase your pension contributions, your provider will send you a statement each year showing:

  • the contributions you have made
  • the value of your fund; and
  • an estimate of the pension you will receive when you retire.

We recommend that you review your retirement plan with your adviser each year.

Can I use my pension plan as security for a loan?

No. You cannot transfer the rights to your pension plan to a lending agent because pension plans cannot legally be assigned (in other words, transferred to another person).

Are there any age restrictions on a company pension plan?

You must be between age 18 and 68 to invest in this company pension plan. You can choose a retirement age between 60 and 70. If you want to retire earlier, the maximum benefits you can take may be reduced.

Are there any limits on contribution levels or benefits?

To make sure the Revenue Commissioners approve the plan, certain limits apply to contribution levels and benefits.

Contribution limits

The maximum contribution that you, as an employee, can make that qualifies for personal tax relief in any tax year depends on your age. There are limits which apply to your total contribution to your company pension plans (in other words, your AVCs and employee contribution). In a company pension plan, the company must contribute. The company can contribute as much as is needed to provide the maximum benefits.

Benefit limits

The following limits apply to the combined benefits from your pension plans when you reach normal retirement age.

  • The maximum pension is two-thirds of your salary. If you have less than 10 years’ employment with your company or if you take early retirement, your limits reduce, depending on the length of time you have actually been employed.
  • The maximum retirement lump sum is 1.5 times your final salary. If you take a retirement lump sum, this reduces the pension you are allowed. If you have less than 20 years’ employment with your company or if you take early retirement, the limits for your retirement lump sum reduce, depending on the length of time you have actually been employed. You also have the option instead to take 25% of the fund as a retirement lump sum. The maximum lump sum you can receive tax-free from all sources is €200,000. You will have to pay income tax on any lump sums that are more than €200,000.
  • The maximum dependant’s pension, available when you die, is 100% of your retirement pension. Any children’s pension plus your dependant’s pension must not be more than your own retirement pension.

There are also limits to:

  • the rate at which your pension can increase while in payment
  • early retirement pensions; and
  • pensions payable to directors who directly or indirectly control more than 20% of the voting rights in the company (20% directors).

Under current Irish law, the maximum pension fund allowed for tax purposes is €2,000,000

What happens if I leave the company?

If you leave the company, there are a number of options available. You can:

  • make your pension plan ‘paid-up’ (leave the money in your pension plan);
  • take a refund of your own contributions to the plan; or
  • take a transfer value.

Can I get a refund of my contributions?

You are entitled to a refund of your own (not normally your employer’s) contributions if you have been in the company pension less than two years (depending on certain conditions). This refund is only based on the fund built up by your contributions and is taxed at the standard tax rate which applies on that date. In this case, we return the fund built up by the company’s contributions to the company. They then have to pay corporation tax on this. If you are a 20% director, the option to take a refund of contributions is restricted.

How does a Transfer value work?

You can take a transfer value from the plan. You may be able to transfer the value to another pension scheme (depending on certain restrictions). For example, this could be a transfer to the pension plan of a new employer, a PRSA (depending on certain restrictions) or a personal retirement bond (a pension plan in your own name which gives you control over the fund).

Is my pension protected if my company goes into liquidation?

The assets of your pension plan are totally separate from the assets of the company. In most cases, if a company goes into liquidation, the company pension plan will be ‘wound up’. The trustees of the pension plan are responsible for winding up the pension plan, according to the rules of the plan and current Irish law. You have a number of options that are similar to those available to you if you leave the company, but they do depend on the terms which apply when the company is wound up. We have already described these options in the previous answer.

Do I have to retire to get my pension?

Once you have reached retirement age, you do not need to actually retire to take your pension. If you stay working after your retirement age, you can:

  • delay taking the benefits until you retire.
  • take the benefits at your normal retirement age; or
  • take your retirement lump sum based on your salary and service, and delay the other benefits until you retire.

Can I retire early?

If your employer agrees you can retire at any time after you reach age 50 and take retirement benefits from your pension plan. However, this will reduce your pension benefits.

What happens if I die before I retire?

If you die while employed by the scheme employer before you take your retirement benefits or leave the scheme, a death benefit will be payable.

The value of your fund can be used to pay a lump sum to your spouse, your dependants, your estate, or to someone you have nominated to receive the benefit.

The maximum lump sum is four times your salary (including lump sums from any other company pension or Personal Retirement Bond (PRB) relating to this or any previous employment), or twice your salary (including lump sums from any other company pension or PRB relating to this employment). The value of your employee contributions and AVCs can also be paid as a lump sum.

The balance of the value of your fund can be used to purchase an annuity or invest in an ARF for your spouse and/or someone who is financially dependent upon you such as your children up to the age of 18, or age 21 if in full-time education or vocational training.

The maximum annuity or ARF investment cannot exceed the maximum annuity that could have been provided for you.

The trustees will determine how the benefits are paid in the event of your death according to the scheme rules and based on your particular family and personal circumstances.

If you die after leaving employment having completed at least two years qualifying service as a member of the pension scheme the value of your fund will be paid to your estate as a lump sum.

Your dependants may have to pay inheritance tax depending on who inherits the benefits. Irish tax law changes over time and we would advise that you get independent tax advice on this.

Can I include Pension life insurance?

The value of your pension may not be enough to provide for your dependants when you die, particularly in the early years when the value is low. Pension life insurance is life cover that you can take out and which will pay your dependants a guaranteed lump sum if you die during the term of the plan. The advantage of this type of life insurance is that, if you are eligible, your employer can claim tax relief on its contributions. This is a separate standalone product.

What happens if I have to retire early because of ill health?

If your employer approves you can retire early because of ill health and take your pension benefits immediately. The pension may be low because your contributions are stopping at an earlier age and the pension will have to last longer as you will be retiring early. If you retire early because of ill health, you must provide medical evidence to support this.

Can I take money out of my company pension?

No; In most cases you will only be able to access your company pension at your normal retirement age or due to early retirement.

What happens if I get separated or divorced?

If you are involved in a judicial separation or divorce or dissolution of a civil partnership or your relationship with a qualified cohabitant ends, a pension adjustment order may be granted by the court. There is no option to set up an independent benefit within your plan. A pension adjustment order issued by the court will override the terms and conditions of your pension plan. This will direct the provider to pay all or part of the benefits under this plan when you retire or die, to any person named in the pension adjustment order. If a pension adjustment order has to be granted on your plan, you must let your provider know.

If you have questions or need Executive Pensions Plans Advice, call 074 9103938 or email now