Retirement / Personal Pensions & PRSA’s

BUSINESS EXISTING STRATEGIES: PENSIONS & CGT RETIREMENT RELIEF

It could be said that the question of how to convert company money into personal wealth in a tax efficient manner is a pre-occupation of the small business-owner. That said, many business–owners get caught up in the nitty-grittty of running their business to step back and take a look at the broader issues. There is considerable scope to solve the issue of creating personal wealth from our businesses.

Broadly speaking, there are two tax-efficient ways to access the company coffers: executive pension contracts and CGT Retirement Relief. Business-owners should familiarise themselves with the intricacies of each. It could be the most profitable few hours they’ll ever spend. I propose to look at each briefly in turn.

EXECUTIVE PENSIONS

Executive pension schemes receive wide publicity and need little further illumination. Shareholding directors have huge scope to invest company monies into a Revenue- approved pension scheme. The main tax advantages are clear: contributions are tax deductible; no BIK implications; no income/dividend tax; and no CGT on the pension fund itself. 25% of the fund emerges tax-free at retirement with balance into the ARF/AMRF regime (i.e. ownership and control in retirement).

Property has become popular – largely on the back of very poor stockmarket returns from September 2000 to March 2003. Equities and property will continue to dominate the assets-class make-up of pension schemes.

Maximum input levels, for now at least, can far exceed the % of earnings formula that is in place for the self-employed (schedule D taxpayers). For example, a 55 year old business owner with no prior pension scheme can invest up to 400% of salary into an approved pension scheme. This is currently under review.

Moneywise Financial Planning Ltd. is Regulated By The Central Bank of Ireland

The recent Brennan review of pension schemes following an EU directive has allowed one-member Small-Self Administered Schemes to retain the ability to borrow to invest in property. The involvement of a Pensioneer Trustee is required in this area.

CGT RETIREMENT RELIEF

Up to €500,000 can be paid tax-free from company monies to a retiring shareholding director. A husband and wife partnership therefore have a facility to take up to €1m from the company at retirement. This can be used for a company that will fold on the retirement of the shareholding directors. It can equally be applied in a management buy-out, or an external sale. Also in certain circumstances, a company can buy its own shares, thereby releasing monies held in company reserves.
Some conditions, such as the following, must be met (see health warning at end):

  • Shareholding of 25% or more
  • Closed company
  • Age over 55
  • Must have been a working director for at least 10 years and have held shares for 10 years.
  • Family run business, the individual must hold 10% of the company and the family must hold 75%

Two main lessons emerge from this. The shareholdings of the company need to be structured correctly at least 10 years in advance of retirement. Also, the company may need to start setting aside monies well in advance of retirement (as well as, or possibly, rather than paying cash into a pension scheme).

Take for example a 40 year old business-owner whose spouse also has a 25% shareholding in the company. If the company makes an investment of €20,000 per annum (indexing at 4% p.a.) this should build into a fund worth €1m by age 60 (assuming 5% growth p.a.) This can then be accessed tax-free via CGT Retirement Relief.

This suggests that a twin-strategy, taking due account of circumstances on a case by case basis, is optimum.

Of course this company investment will not reduce the corporation tax bill, as would a pension contribution. Nor will this investment achieve tax-exempt status, as would a pension scheme. But as the fund is set to emerge tax-free in its entirety at retirement, many would perceive these as a price worth paying.

This comes with a health warning that you’ll need to employ the services of a tax expert in order to proceed with this strategy. In this regard, Moneywise has set up an alliance a number of accountants and tax experts to help business-owners in both areas.

Alan Morton is a Director of Moneywise Financial Planning Ltd.