Self-employed Pensions

Self-employed Pensions

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, inclusive of ongoing advice and investment support! Without a private pension plan, any self-employed Irish person will have to rely on just the State Pension. This is currently only €248.30 a week (2020) and commences at age 66 but will rise to 67 in 2021 and 68 in 2028. Whereas, a private self-employed pension offers substantial PAYE tax breaks and can provide a retirement income in addition to the State provision.

Self-employed Pensions

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). So, let’s compare them, in terms of benefits, charges, investment fund choice, flexibility, and suitability. If you are a self-employed professional with a limited company, please visit Executive Pensions.

Self-employed Pensions Comparison

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 or reinvest in an AMRF/ARF.

Charges Comparison

Individual pension plans can carry 2 possible charges built-in, the first being the Annual Management Charge (AMC) on the accumulating fund and the second a Contribution Charge on the monies going in.

• 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.

Nowadays, like PRSA’s Personal Pension Plans are also available free of any early encashment charges.

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 charges than standard PRSA’s and there is no set limit on these charges.

Personal Pension Plan

– These also offer a wider choice of funds than standard a PRSA but typically without any additional cost.

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.

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.

As an employee, you could then start a PRSA or join your new employers’ pension arrangement, or as the owner of your own limited company, you could start an Executive Pension Plan.

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 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.

Self-employed Pensions – Contributions

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 on tax on any gains your investments make as they grow 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 on 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 deadline extends to the 12th November, if you both file and pay using ROS).

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 to increase your contributions once you reach an age that entitles you to a greater amount of tax relief.

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

  1. If you are likely to remain self-employed in the long term a Personal Pension can offer better value than a PRSA.
  2. Personal Pension Plans offer the same investment choices as a non-standard PRSA, but with lower AMC’s.
  3. 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.
  4. Regular investment reviews are essential as is ongoing inclusive support.
  5. Only PRSA’s can be transferred straight into an employer occupation scheme.
  6. 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

• No set-up Fee.
• Unlimited Fund Choice.
1% AMC
100% investment allocation i.e. no contribution charges.
• 4 Free fund switches PA.
• Added long term advice & support

2. STANDARD PRSA – Direct Fee

• Once off €320.00 Set-up fee (maximum contribution €200.00 PM)
• Default strategy or choice of 20 funds
1% AMC
100% investment allocation i.e. no contribution charges.
• 4 Free fund switches PA

3. ADVICE PRSA – No Direct Fee

• No Set-up fee (minimum contribution €200.00 PM)
• Default strategy or choice of 20 funds
1% AMC
• Up to 98% investment allocation
• 4 Free fund switches PA
• Added long term advice & support

Pension Tax Deadline

ROS Extension – As you’re no doubt aware, for people opting to use the online route, the ROS deadline has been extended to the 10th December as a ‘one-off Covid-19 exemption’. However, to help us manage the busy Pension Season workload, we’d encourage you to get your contributions in early – ideally by the original 12 November date, or if not filing & paying your taxes online, by 31st October.

For more information

Contact: Ken O’Gorman – Director – QFA – Pensions & Investment Specialist – One Quote Financial Brokers on: 01 845 0049 or call me directly on: 087 665 8516.

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!