Our comprehensive guide to tax-saving, low-cost self-employed pensions will not only compare your plan options but help you in seeking the best value Pension Plan to suit you and your business now and into the future.
Without a private pension plan, any self-employed Irish person will have to rely on just the State Pension. This is currently only €265.30 a week (2023) commencing at age 66 but is due to rise to 67 in by 2028.
A private self-employed pension offers substantial PAYE tax breaks and can provide a retirement income in addition to the State Pension.
Self-employed Pension Types
You have two main choices of a private pension plan when a self-employed sole trader, either a Personal Pension Plan or a PRSA (personal retirement savings account) and below we compare them, in terms of benefits, charges, investment fund choice, flexibility, and suitability.
Note:
If you are a self-employed professional with a limited company, please visit Executive Pensions.
Self-employed Pensions Comparison
Suitability Comparison
PRSA’s are most suitable for self-employed individuals who want to pay into a pension – but who are not completely certain about their income stream, or cash flow or if they may become an employee or even a limited company in the short to medium term.
Personal Pension Plans, are most suitable for self-employed individuals who want to pay into a pension and want broad-ranging investment options, with no contribution charges, but are also most likely to continue on a sole trader into the future.
Benefits Comparison
Come retirement they both offer the same minimum drawdown age of 60 and benefits options i.e. a 25% tax-free lump sum, with the option to then purchase an annuity (pension for life) or to reinvest in an ARF.
Charges Comparison
Individual pension plans can carry 2 important charges, the first being the Annual Management Charge (AMC) on the accumulating fund and the second a Contribution Charge on the monies going in, also known as the allocation rate.
• A PRSA will carry a minimum AMC of 1% PA, and a typical maximum contribution charge of 5%.
• A Personal Pension Plan that has an AMC of 1% PA and will typically have no contribution charge, but will have a monthly policy fee.
Fund Choice Comparison
Standard PRSA
– There are certain investment restrictions on standard PRSA’s, but the fund choice available is broad enough to meet most people’s needs.
Non-standard PRSA
– These offer a wider choice of funds than a standard PRSA. These plans generally have higher AMC charges than standard PRSAs and there is no set limit on these charges.
Personal Pension Plan
– These also offer a wider choice of funds than a standard PRSA and typically without any allocation charge.
Flexibility Comparison
PRSA’s can be started and stopped at any time and easily allow for once-off or regular contributions.
They can also be transferred into another pension arrangement should you join an employer’s occupational scheme or set up a limited company yourself. This is a very important long-term consideration if come retirement you want to have already combined all your pension plans in one.
With a Personal Pension, you can take a payment holiday but this is usually limited to 12 months. Also, if you were to join a company as an employee or incorporate your own business, you would have to make your Personal Pension Plan paid up, meaning contributions would stop, but it would continue to accrue investment returns.
Self-employed Pensions – Contributions Limits
All self-employed pension contributions are granted tax relief at your higher PAYE tax rate, which means you can claim up to 40% tax relief on all your pension contributions. There is also no tax on any gains your investments make and come retirement, you can draw down 25% of your total accumulated pension fund tax-free!
As all self-employed people make their tax returns by the 31st of October each year, it makes the most sense to make regular monthly contributions that sit very comfortably with your cash flow and then to make a lump sum payment before the 31st October deadline to reduce your tax bill for that particular year. (This tax deadline normally extends to the 17th of November, if you both file and pay using ROS).
Maximum Limits:
There are certain limits to the amount you can contribute to your self-employed pension, depending on your age and earnings in order to obtain full tax relief. Also, the maximum amount of earnings allowable for calculating tax relief is €115,000 per year.
Age-related percentage limit for tax relief on pension contributions
Under 30 = 15%
30-39 = 20%
40-49 = 25%
50-54 = 30%
55-59 = 35%
60 or over = 40%
For example, an employee who is aged 42 and earns €40,000 can get 40% tax relief on annual pension contributions up to €10,000.
It makes sense not to exceed those limits – but where possible increase your contributions once you reach an age that entitles you to a greater amount of tax relief.
Minimum Limits:
The minimum level of pension contribution with full tax relief granted at your marginal personal income tax rate is €500.00 PM to allow you to avail of our low-cost Personal Pension options or a standard PRSA.
Self-employed Pensions – Investment & Risk Monitoring
When it comes to choosing the investment assets held within your pension fund, your Financial Advisor or Broker will carry out an investment risk profile to ensure that your choices match up, to the level of risk that you are comfortable with, and of course, this is reviewable in line with increased age and changing market conditions.
Key Takeaways
- If you are likely to remain self-employed in the long term a Personal Pension can offer better value than a PRSA.
- Personal Pension Plans offer the same investment choices as a non-standard PRSA, but with lower AMCs.
- Both PRSA’s and Personal Pension Plans offer 3 separate tax breaks i.e. contribution relief, tax-free growth, and a tax-free lump sum.
- Regular investment reviews are essential as is ongoing inclusive support.
- Only PRSA’s can be transferred straight into an employer occupation scheme.
- Personal Pension plans can only be transferred into a PRSA if the company operating the personal pension plan is agreeable, after which it could be transferred into an occupational scheme.
What does One Quote Financial Brokers Offer?
1. PERSONAL PENSION – No Direct Fee
• Unlimited Fund Choice.
• 1.00% Base AMC
• 100% investment allocation
• Free fund switches.
• Long-term broker support.
3. STANDARD PRSA – No Direct Fee
• Choice of 20 investment funds
• 1.00% Base AMC
• 98% – 100% allocation
• Free Fund Switches
• Long-term broker support
Pension Tax Deadline
ROS Extension – 31st of October deadline is only extended where to file and pay using ROS.
For more information
Arrange a free discovery 15-minute phone call.
Contact: Ken O’Gorman – Director – QFA – Pensions & Investment Specialist – One Quote Financial Brokers on: 01 845 0049
Or enquire online and give us a quick outline of how we can help. Remember there is no charge for initial advice or any obligation to proceed!
