Pensions

Personal Pension Plan

A personal pension plan is a private pension policy that is managed for you by a life assurance company or investment firm. Anyone who earns an income but who can't join an employer plan or who is self-employed can start up one of these plans. If you are a member of a work pension but also earn money somewhere else you may be able to contribute to a personal pension plan. 

You have to set up this type of plan yourself, arrange to pay your own contributions and claim tax relief yourself each year. You should contact Revenue for information on how to claim tax relief if you are employed, as your employer cannot usually make contributions to your personal pension plan. 

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Personal Retirement Savings Account (PRSA) 

A personal retirement savings account (PRSA) is a type of personal pension policy that is more flexible than the traditional personal pension plan. Anyone up to the age of 75 can take out a PRSA and you don't have to be earning an income to do so.

If you are employed, by law your employer must offer you a standard PRSA if: 

  • there is no employer pension plan in place through your job 
  • you are not eligible to join your employer pension plan within the first six months of your service 
  • you are eligible to join your personal pension plan but only for death-in-service benefits. 

You can also set up a PRSA if you wish to make AVCs but are not able to do so through your employer's pension plan. If you contribute to a PRSA set up by your employer, you get tax relief automatically and don't have to claim it yourself. Your employer may also contribute to your PRSA but does not have to. 

When you take out a personal pension plan or PRSA, you can change your mind within 30 days. This is called a ‘cooling off' period. 

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Executive Pension Plan

An Executive Pension plan is for Directors and 'Key' People within a company. It is an opportunity to moves funds from the company into personal funds in a tax efficient way.

Benefits of an executive pension 

An executive retirement plan allows a business person to benefit from pension contributions paid by the company on their behalf, into a pension scheme that is set up for their benefit. 

It also allows a business person to provide for their pension fund independent of the company assets, and its future profitability. 

Tax relief on company contributions 

Contributions made by the company to an executive retirement plan can normally be fully offset against corporation tax as a business expense, subject to Revenue limits, and will not be liable for benefit-in-kind tax. There is considerable flexibility in relation to the timing of these contributions so that payments can be tied in with the company's profitability from year to year. 

Tax relief on employee contributions 

Business owners can also benefit from tax relief on their own personal contributions to their executive retirement plan. Tax relief is normally available at the marginal rate of earnings each year, depending on age. 

Retirement options 

When a business person retires, there is considerable flexibility as to how the benefits can be taken. These include: a tax-free lump sum; an income (pension) for life; and the ability to invest the fund in an Approved Retirement Fund (ARF) with the flexibility to withdraw it when needed or to pass it on to dependants. But this option is only available in the case of a 5pc director or in relation to Additional Voluntary Contributions. 

Take an example: A start-up business entrepreneur, who runs his own company. 

Following careful consideration and advice from his accountant he has recently registered as a limited company. While this means that the October 31 self-assessment tax deadline will no longer be a key date for him, he will have to file accounts on an annual basis. 

But from a pension planning perspective his situation has changed dramatically in that he can now pay significantly more money into his pension using current Revenue maximum funding rules. 

He is 30 years old, has annual earnings of €100,000 and plans to retire at 65. If he takes out a personal pension or a PRSA (Personal Retirement Savings Account), the maximum contribution he can make at his age is 20pc of net relevant earnings. This would amount to €20,000 per annum. The tax relief at 41pc would amount to €8,200. 

On the other hand, with an executive pension, the maximum contribution he can make will be sufficient to generate a pension of two-thirds of his final earnings at the age of 65. 

This amounts to a far more significant €182,595 (assuming a 5pc salary rise per year). 

Tax relief at 12.5pc for a company amounts to €22,824.42, almost three times the tax relief for the personal pension or PRSA.

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