Company Director pension funding potential update

Running a business can be a very busy undertaking and sometimes setting up a pension for your future retirement can be pushed down on the long list of things to do. Without having your own pension provisions, you will be fully dependent on the State pension at retirement, should you qualify for it. Depending on your company status (e.g. Sole Trader, Limited Company), there are a number of pension options that may be available to you which include an Executive (Company) Pension, a Personal Pension, a Self-Administered Pension Scheme or a PRSA.

As a company director, Revenue will allow you to build up a pension fund that will provide you with a pension pot of 2/3rds of your final pensionable salary. The only limit relates to the Lifetime Pension Fund Limit (Standard Fund Threshold) which is currently €2,000,000.

As of 1st January 2023, the Finance Act has now introduced a new update to Personal Retirement Savings Accounts (PRSA) which may make this type of policy a more beneficial and attractive option for company directors.

Employers can now pay substantial contributions to a PRSA for an employee or company director that is no longer subject to Benefit in Kind (BIK). Unlike contributions to an Occupational Pension, the contributions will not be limited to salary and service, existing scheme funding or retained benefits.

As a company director or small employer, you now have the option to extract a larger portion of profits directly into a PRSA, in which all contributions paid will receive immediate corporation tax-relief in the year that it is paid.

For example, theoretically with the current legislation status, if a director is an employee, taking an annual salary from their company, they can make a potential employer contribution of up to €2,000,000 into their PRSA. This is a sizeable figure, but it does show the possibility available, which may perhaps only be for a limited time (Revenue could always close this option at a future date).

This will mean that PRSA’s can offer you a more flexible and suitable means to retirement saving and planning according to your particular financial needs. Some business owners may also see this as an opportunity to fund the pension of a spouse/partner who has been employed in the business but, for whatever reason, never previously set up a pension fund. Another important factor is that in the event of death, the complete PRSA pension fund can be paid in full to the estate of the deceased PRSA member, whereas some other pension plans have restrictions on the maximum allowable lump sum payable.

Women and Pensions: What you should know

It is important for everyone to have a plan in place so that their standard of living doesn’t fall when they retire. While women generally live longer than men, they are less likely to have adequate income in retirement.

Women generally end up with smaller pensions than men.

One of the reasons for this is because women can face challenges during their working lives not necessarily experienced by men. Their career paths are more likely to alter course to allow for temporary or permanent leave to mind children, take care of loved ones or even take a career break. And while this pattern is changing with more men taking on the role of carer, many women still undertake this role.

In 2024 the Government is expected to attempt to bridge the State pension funding gap with the introduction of some measures including enhanced State Pension provision for long-term carers. Another initiative to increase the number of employees in Ireland with access to pension cover is Auto Enrolment, with funding by members, employers, and the state. However, will these measures be enough to adequately fund for your lifestyle in retirement?

Some things to consider…

§  Will your employer still contribute to your pension if you are on maternity leave?

§  If you take extended leave or reduce your working hours, will you have enough contributions to qualify for the full State Pension when you retire?

§  If you have a pension from a previous employer, do you know how much it is worth?

§  If you are married or have a civil partner, do you know how much income their pension will provide in retirement?

§  If you take extended leave or reduce your working hours there could be a knock-on effect of losing out on employer contributions towards your pension.

If you are currently in employment and do not have a pension plan, it is not too late to start one. Any gaps in employment due to extended leave or reduced working hours can be factored into your pension savings forecast.

If you already have a pension plan in place, it is a good idea to review it each year to ensure you are on track for your retirement pot.

If you are approaching retirement, find out how much income your pension is likely to provide you in retirement. If there is a shortfall you still have time to increase the amount you are saving into your pension.

Speaking with a Financial Adviser can help you review where you are today and work with you to develop a plan to meet your future needs and goals.

If you have a Mortgage, you may be able to save a few quid…

Over the last while I have received several queries from people who have purchased new homes in the locality in recent years. When you take out a mortgage to purchase a home, generally the mortgage company requires that a mortgage protection policy be in place when contracts are being signed.

At a time that can be quite stressful, using a bank to set up a mortgage protection policy can be the easiest, straight-forward option. While there is no issue with using a bank to set up your mortgage protection, some people do not realise that they are not obliged to take a policy out directly with the bank. Many people are not aware that you can shop around at any stage to find a more competitive premium for your policy.

Mortgage Protection is a cheaper form of life assurance, as the cover reduces in line with your reducing mortgage balance, unlike more traditional life assurance cover that remains constant (or can even increase) during the life of the policy. The purpose of this cover is simply to repay your mortgage in the event of your death and this gives security knowing that the mortgage balance will be cleared.

When I receive enquiries from people to review their mortgage protection I have access to multiple providers in the market, which allows me to compare premiums to find the most competitive cost available. It is worth enquiring to see if you can reduce your monthly premium cost. At times during the year, the life companies provide brokers with special offers like reduced rates or additional benefits to be included on your policy.

There has been instances where upon reviewing mortgage protection taken out in the last few years, I have been able to save people between 10-30% of the cost for the exact same cover.

Let’s say for example, that your mortgage protection premium is €50 per month and your mortgage term is for 25 years. If it transpired that you could save perhaps 20% in the cost of the cover by moving provider, it could mean a savings of up to €3,000 over the 25-year term.

Even if you took out the policy in the last few months, you are not obliged to maintain it once you have alternative cover set up in its place. Please note, do not ever cancel life assurance until you have replacement cover in place and active.

Life assurance that continues when you stop paying premiums….

I wrote a piece last year about “Whole of Life Assurance”. There are different benefits available, but the maturity of two of my clients’ policies prompted me to write about it this month.

Both sets of clients took the policies out circa 12 years ago, but one client recently phoned me to ask “do we really continue to have life assurance now that we have finished paying the premium?”. It sounded too good to be true to him and I was able to say, “yes you do”.

So, what was the policy? Our clients were aged 54 and 57 when they set up this plan originally (they are now 66 and 69). The cost of the policy was €202 per month at the time with a term of 12 years. The total premiums they have paid during this term is €29,142.

During the 12-year term of the plan, they each had €50,000 life cover. Now that the term is complete, they stop paying the premium, but they both continue to have €25,000 life cover each for the rest of their lives. In short, these policies will now cover any future funeral expenses and they will not have to put other funds aside to cover this situation. They just keep the policy documents somewhere safe until needed.

This is a really popular life assurance plan for people to use, particularly to pay for while in employment and be able to just put it aside at retirement knowing you are covered. Many people wonder how or why would a life company offer such a deal? Premiums of €29,142 for €50,000 guaranteed life cover?

There are two major factors as to why life companies can offer such a deal. One is that there is a significant amount of people who will cancel the policy before the term is up. Once you take out a plan like this you really should try to complete the term on the plan. The second reason is because the company has already factored in that most of us will live to our mid 80s and at that stage inflation will have reduced the actual cost for them to pay out the claim.

I have been receiving more queries about different types of life cover, but these policies maturing gave me great satisfaction to see my clients very happy with the outcome. I know some people say “life cover is dead money” for different reasons, particularly as most life cover policies require you to keep paying premiums until you die. This policy is a good alternative to consider.

Steps in creating a Personal Budget for 2023

When I first started out in the financial services industry, the primary role of a financial broker/adviser was one seen as somebody who basically sells products. One who might help you set up something you need or want like a pension, savings plan or some sort of protection policy. Quite often people would take these products out as they knew on some level they should have them, but they were quite often not completely sure of what the benefits these products would provide them or their family, if needed.

More recently, the role of a Financial Broker/Adviser is migrating to one that’s more about providing information, education and advice on the options for clients and working with the client to come up with a plan to prioritise and make sure they have the correct provisions specific to them and their needs.

Quite often, people approach me to do a financial review because they are in some ways unsure of how much money is coming in and going out, so they are unsure it if there is any room to amend their finances. If there is a combined income of anything greater than €80,000 coming into a household, a full financial review can be extremely enlightening.

One of the worst things in life, is the absence of knowledge on something, so one suggestion I suggest to people is to start the process yourself. Start thinking and discussing your goals in life for the short, medium and long term.

You should then start looking at what’s coming into your household and what’s going out of your household. With the availability of bank apps it is getting easier and easier to track our spending habits so there are less excuses now to keep putting it off. Try and focus on areas you can start to make savings. Simple things like changing utility bills and even reviewing your current mortgage rate can make significant savings.

Set out a plan and try to adjust your habits to fulfil that plan. Review it regularly, at least anytime there are significant changes in your personal and/or financial circumstances. Some people prefer to do it themselves and some prefer to have help with getting this process started, so they come to me for assistance. If you go to https://www.drumgoolebrokerage.ie/planning you can get an idea of the cost of the service and kind of process involved in doing short/medium and long term financial life goals.

Attitude to Risk - not just for investments

"Attitude to risk" is a term often used to describe an investors sentiment to risk/volatility when choosing investments to reach their savings goal. Every person has a different attitude towards risk when it comes to financial gains or losses and there are varied reasons why each person may be uniquely suited to a specific strategy. In general, though, people tend not to associate risk with deciding on life assurance and serious illness cover.

Just as attitude to risk in investments is based on a persons’ individual circumstance, so too is choosing the right amount of life and illness cover. The usual type of questions you get from an investments perspective is “how would you rate the degree of risk you are willing to take in your financial affairs? The optional answers range from “Extremely low risk to “Extremely high risk”. People generally understand that when the value of their investment/pension goes down a lot it may have a significant impact on their lives if it doesn’t recover.

The same question can apply to a person’s health. If you consider your investment value/pot the same thing as your Body/Mind, the financial impact to a loss of either body/mind can be equally damaging. Part of the difference appears to be that most people really do not believe they will ever become unwell or die, the thinking being that this only happens to other people.

I regularly meet with people to do financial reviews with savings into a pension or growing their money as their priority. Quite often they do not consider life, illness or salary protection important, particularly if they are in good health (which ironically is usually the best time to take out these covers). It doesn’t actually matter if you value these covers or not, what matters is what your honest answer is to the question “If I or my partner died or was unable to work for a prolonged period of time, how would our family cope financially?”. If the honest answer is that you would struggle, then the next question has to be “Why would I not review my cover to see if I can protect our family?”.

I was quite shocked recently hearing news of three different people I know, to have suffered either the death of their partners (in their 40s) and one with a terminal illness diagnosis. A sombre but important reminder that we are all vulnerable to illness and death at every stage of our lives.

Head vs. Heart

I recently sat down with a client who was just starting his retirement. He was taking his tax-free lump sum from his pension and the choice he had to make next was to either purchase an Annuity or to re-invest in an ARF (Approved Retirement Fund) with the balance of his pension funds.

• An Annuity is purchased using your pension funds and is a simple retirement payment option that guarantees to pay you a particular amount every month throughout your life in retirement.

• An ARF (Approved Retirement Fund) allows you to remain invested in the market with the ability to control your investment and take a flexible income in retirement.

It was clear after reviewing all his finances, that he did not need to rely on his pension to retain his current lifestyle in retirement (he had other savings separate to the pension). After considering all factors, from a financial perspective it made perfect sense for him to re-invest his funds in an ARF and retain ownership of his pension options, to try grow the pension. He could afford for his pension to effectively go to zero and he would not be significantly impacted. Purely from a financial perspective, the ARF was a more suitable option.

However, my client showed me a folder of all the records he had kept and continued to keep of his pension values. He described how he and his wife felt when their pensions reduced in value. So, I asked him would they continue to feel this anxiety even if there were small fluctuations in their pension values? To which he replied “Yes.”

In the end I advised my client to go with his gut, which was to buy the Annuity. Three months after the transaction, I was speaking with him again and he said he was enjoying his retirement and was really happy he didn’t have to think about the pension anymore. People think they have to re-invest their funds, they have to grow their money but that is not always the case. The right financial decision is not always the right life-balance decision. In this case the choice my client made was the correct one to allow him to enjoy his retired life.