In simple terms, a Director’s (or Executive) pension allows the transfer of profits from your company’s bank account into your own long term savings account. This allows you to build up your personal wealth without having to personally pay towards it.
Who can set up a Directors/Executive Pension?
If you are a director of a limited company and you have at least 5% shareholding, then you can set up a director’s pension plan.
Is a Directors Pension tax efficient?
Yes a directors pension is highly tax efficient because there‘s no personal tax liability or BIK for the individual, and the company gets tax relief on the contributions made. Your pension fund also grows tax-free for the entire term.
How does a Director’s (Executive) Pension work?
A director’s pension will ring fence company profits in the name of their director (s). This means that the business will not be required to pay the 12.5% corporation tax on these specific profits. The Director also does not have a BIK liability on the pension pot they receive from the business.
As well as the company making contributions to the pension, the individual director can also make contributions and receive tax relief of either 20% or 40% on them.
What are the retirement options with a Directors (Executive) Pension Plan?
The company director can retire from the age of 50. They can drawdown their pension anytime from the age of 50 and remain working in the business. Once the director has retired the company will no longer fund the pension with regular contributions, however the individual can continue to make personal contributions themselves.
How do you drawdown a Director’s Pension Plan?
As with other pension plans there are numerous ways to use a pension fund, however there is a broader scope for your tax free cash. When it comes to retirement you can either take 25% of the fund as a tax free lump sum or 1.5 times your final salary tax free if it’s more beneficial and you have at least 10 years company service. Then there are the usual options such as an Annuity and ARF.
Conclusion
Smart business owners structure their companies in a way that benefits them. It’s easy to forget that your business is there to ultimately serve you.
As Company Director, you are in the unique position of being able to combine your current income needs and future income needs into one coherent plan. Once you’ve set up this plan, you can be confident that your business is building your net worth each month.
If you’d like to schedule an appointment to go through your options with one of our pension advisors, get in touch today.
(01) 513 8710
info@citywidefinancial.ie