Retirement Planning for Business Owners
Being a director or the owner of a company can be hectic. Too hectic sometimes, to take the time to plan your retirement. When you’re so busy coping with the next few weeks, it’s hard to think about your needs 20 years from now!
It’s important, however, to have a realistic retirement plan in place for your future, especially if you have a good lifestyle to protect. You’ve worked hard for your benefits, and with a little thought, you can make sure you retain those advantages when you retire.
Checklist for business owners
YOUR APPROACH TO RETIREMENT PLANNING
Perhaps you are hoping to rely on your business as your pension, but ask yourself:
Will you be able to sell at the right time?
• How can you be sure that when you approach retirement, the firm will be doing as well as it is now?
• Will your family members or directors agree to the sale?
• Consider the impact that capital gains tax will have should you decide to sell your business.
• Or will you want to step back a little bit from the business and still use its profits to provide you with an income?
Altogether this may not turn out to be the ideal way to provide for your retirement. You may find that relying on your business to fund your retirement restricts your options for the future.
Did you know?
4 in 5 people don’t think that they are saving enough for a decent quality of retirement (Coyne Research, 2017)- but don’t worry, we’re here to help you every step of the way.
THE RIGHT RETIREMENT PLAN FOR YOUR BUSINESS
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 a company pension plan is not normally viewed as income. That means you do not pay tax on any pension contribution your company pays – and that could add up to a very significant saving.
Then, at retirement you have the option to take a retirement lump sum. The balance of your pension fund can then be used to purchase a guaranteed pension income for life. You may also have the option to invest in an Approved Retirement Fund (ARF).
SOME OF THE RULES AROUND COMPANY PENSIONS
For a company pension to be approved as a tax-exempt 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).
• A company director is only eligible to take out a company pension if they are set up as an employee of the company and are receiving Schedule E income from the company.
• Pension income in retirement is subject to income tax at your highest rate on withdrawal, Universal Social Charge, PRSI (if applicable) and any other taxes or government levies due at that time.
HOW MUCH SHOULD YOU SAVE INTO A PENSION?
If you haven’t started a pension, now is the time to get serious. You can expect to be spending as many years if not more in retirement as you have left in work. By starting your pension plan today, you still have the opportunity to get income tax relief on your pension payments and have the time to build up an adequate pension fund.
For those of you with a pension plan already, it’s very easy to put it away in a drawer and forget about it. But just think your pension plan is an investment that you should keep an eye on.
So if like Patrick you’ve forgotten about your
pension, talk to us today, as we’re here to help you understand your
pension and answer all your questions.
And remember the benefit of regular reviews and adjustments is invaluable.
You could be missing out on tax incentives. Or you could be still making the
same payment into your pension plan as you did when you started, even
though you now earn more. Or if you are a couple with both of you earning,
there are ways to maximise income tax relief for each of you.
Generous Tax Relief
To claim income tax relief, you can apply to your Inspector of Taxes to adjust your tax credits or you can do it yourself on Revenue.ie.
Contributions deducted from salary will receive immediate
income tax relief. If you are self employed, you must include your pension
contributions in your self assessment tax returns in order to get income tax
relief. To be eligible to claim income tax relief, your income must be taxable
under Schedule E or Schedule D (case I or II).