FORSYTHE FINANCIAL PLANNING

Contractor pensions

If you're a contractor, then starting a pension is an important step to take. The type of pension plan 

you go for will depend on your choice of Limited Company structure.

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A Contractors guide to pensions & financial protection

Personal Retirement Savings Account (PRSA)

If you are using an umbrella company to trade as a contractor, then a PRSA is an ideal way to set aside funds for your retirement.

What is A PRSA?

A PRSA is a way of helping people provide for their retirement by saving now. It is a long-term investment product sold by financial institutions and intermediaries. It allows you to create a pension fund for yourself when you retire; you can vary the amount you pay into it over time and, if you change employment, you can continue to use the same PRSA. You can switch from one PRSA to another at any time free of charge.


What type of PRSA is best for you?

Standard PRSA is likely to meet the requirements of most people. You cannot be charged more than the maximum level of charges allowed (5% of contributions paid and 1% per year of the PRSA assets). 


The level of charges is very important. Charges reduce the fund you can build up. The size of your fund on retirement will depend on your contributions and the investment performance less the charges deducted. 


Investment performance cannot be predicted, but higher charges are just like a weight handicap in a horse race – creating a need to produce a better investment performance just to remain level with products carrying lower charges. 


Charges on Non-Standard PRSAs are not capped and, in most cases, may be higher than on Standard PRSAs. A second difference between Standard and Non-Standard PRSAs is in the way in which your money is invested. A Standard PRSA invests only in pooled funds, where the risk is spread across a large number and type of investments. A Non-Standard PRSA can offer you a wider investment choice. 


If a Non-Standard PRSA is offered to you on the basis of the investment choice it gives you, you need to be sure that you understand the investment choices, and that you understand why you need them. This is your pension, your income in your retirement years. If you do not understand how your pension will be invested then perhaps you should consider again if this particular product is the one for you. 


You should keep the level of your contributions and the investment performance of your PRSA under regular review, so you can see if your PRSA will provide you with the pension you need.


Tax Relief on PRSAs
You may contribute as much as you like but Revenue have applied caps on allowable tax relief based on your age and salary. Tax Relief allowed on PRSA’s is allowed on income up to €115,000 and on a sliding age related scale.
Tax-Free Growth
Pensions are allowed to grow tax free. This means that all of your money is working for you all of the time.

Executive Pensions

Executive pensions are a suitable option for career contractors who use a Personal Limited Company structure. Using Executive Pensions to extract wealth for business owners
Executive Pensions

Employer contributions can be written off fully as a tax deductible expense in the company’s profit & loss account. Ordinary Annual Contributions may be written off against Corporation Tax & Income Tax/USC/PRSI  at source each year. Special Contributions may be made by the company to fund for service before the EPP was set up. 

Depending on your personal circumstances your company could pay in much higher levels of pension contributions into an EPP than through a Personal Pension or a PRSA.Executive Pension arrangements are not restricted by the age related limits resulting in very generous scope for employer contributions. Employer contributions can be written off fully as a tax deductible expense in the company’s profit & loss account. Ordinary Annual Contributions may be written off against Corporation Tax & Income Tax/USC/PRSI  at source each year.


Special Contributions may be made by the company to fund for service before the EPP was set up.


Depending on your personal circumstances your company could pay in much higher levels of pension contributions into an EPP than through a Personal Pension or a PRSA.

Benefits of an Executive Pensions
  • Corporation Tax Relief for the employer @ 12.5% (Subject to Contribution Limits)
  • Generous Limits for the employer to contribute.
  • No Income Tax, PRSI or USC liability for the employee following the contribution.
  • No PRSI Liability for the employer as a result of remunerating the employee in this way.
  • Company profits invested in a pension fund which allows tax free growth until retirement.
  • An opportunity to plan for business exit strategy with access to funds available as early as age 50 if all links with the business are severed or anytime between age 60 – 70 without having to sever any links with the business.
  • A pension lump sum at retirement which is tax free up to the first €200,000 and subject to favourable rate of 20% for the next €300,000.
  • An income in retirement via Pension Annuity or Approved Retirement Fund/Approved Minimum Retirement Fund
  • The possibility to pass wealth to a spouse and children via Approved Retirement Fund/Approved Minimum Retirement Fund
Wealth Extraction Options

Extracting profits from a business – the options available 

There are 3 main options for a business owner to extract profits from their Company: 
a) Leave profits in the company and extract proceeds through sale of the company at some future date. 
b) Withdraw profits as salary or dividends or, 
c) Withdraw profits via Employer contribution to Executive Pension Plan. We have looked at the tax consequences of each option below.

Wealth Extraction Options from a Business 

a) Retain within company with Profits subject to Corporation Tax @ 12.5% with potential for further surcharge of 20% if undistributed within 18 months and Capital Gains Tax @ 33% on Sale of Shares. 
b) Withdraw as salary or dividends which will result in Income Tax, PRSI & USC potentially as high as 52% for the employee. 
c) Withdraw as Employer Pension Contribution to Executive Pension with Tax Relief for the Company & no Income Tax, PRSI or USC for employee. 

a) Leave profits within the business 

Profits retained in the company will be subject to Corporation Tax @ 12.5% and for close companies a further surcharge of 20% if they are not distributed within 18 months. In addition, on the sale of the company Capital Gains Tax (CGT) of 33% will apply unless a CGT Relief can be obtained. 

b) Withdraw profits as salary

Profits withdrawn in this manner will be subject to Income Tax, PRSI and USC which would be as high as 52% (Income Tax 40%, PRSI 4%, USC 8%). 

c) Withdraw profits via an Executive Pension Plan 

Extraction of company profits via an employer contribution to an executive pension is very popular with business owners. Profits withdrawn via an Employer contribution to an Executive Pension Plan result in tax relief for the Employer (subject to Revenue limits) and no immediate tax liability for the employee. 
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Income Protection For Contractors

A contractor may protect up to 75% of earnings by contributing to an Income Protection Policy. The type of Income Protection policy will be determined by the contractors trading status. 

PAYE Umbrella | Personal Income Protection
Personal Income Protection provides you with an income if you are unable to work due to illness or injury. It can help protect your lifestyle by limiting the financial consequences of suffering an illness or injury which prevents you from working. 
 
Payments continue either until you are well enough to return to work or your policy ends. There is no restriction on what you use the Income Protection benefit for. It’s there to support you financially, however you need it. 
 
Under current tax law (June 2020) the premiums you pay may be eligible for Tax Relief. This can reduce the cost of your cover by up to 40% if you pay income tax at the higher rate. The maximum amount on which tax relief can be claimed is limited to 10% of your total income for the year of assessment. Revenue limits, terms and conditions apply.
Personal Limited Company | Executive Income Protection
Executive Income Protection is owned by the employer and taken out on behalf of an employee or a director, who must work more than 16 hours a week. The premiums are paid by the employer and these premiums should qualify as a tax deductible expense for the business.
 
If the employee is unable to work due to illness or injury, then, after an agreed amount of time, an Income Protection benefit will be paid to the employer, who could use it to continue to pay the employee a salary. Payments continue either until the employee is well enough to return to work, or their policy ends.

Tax-Efficient Life Cover

By taking out a Pension Term Assurance policy you will reduce the cost by getting up to 40% tax relief on the premiums.

Pension Term Assurance is a tax deductible life assurance policy. Because it is written under Revenue Section 785 premiums qualify for tax relief at an individual's marginal  income tax rate - currently 40%. 

To be eligible for Pension Term Assurance an individual must have a relevant source of income. 
  
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Pension Term in Real Terms

Depending on your employment status you may be eligible to take out either Personal Pension Term or Executive Pension Term.

 

  • Personal Pension Term Assurance Available to clients who are self-employed or in a non-pensionable employment

 

  • Executive Pension Term Assurance Available to clients who are member of their employers pension scheme, however there are Revenue restrictions on the level of cover provided.

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Talk us about your pension & financial protection

Call us at +353 (0)87 250 6365. Alternatively, you can fill in our contact form

and we will be in touch shortly.

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3 Laurel Mount Close, 

The Rock, 

Carrigaline, 

Cork. 


Email: ffp@live.ie