Planning for your retirement is important for everyone, but especially so if you’re self-employed, or a business owner, where the provision of an adequate retirement fund falls firmly on your shoulders.
In this guide, we’ll explain everything you need to know about pensions for both small business owners and the self-employed in Ireland. Here we will cover the pension tax breaks, the difference between, PRSA’s, Personal and Executive Pension Plans, together with outlining the benefit options at retirement, and how to achieve the best value in terms of charges.
Understanding Self-Employed Pensions in Ireland
Irish Self-employed business owners are entitled to a state pension, either contributory or non-contributory, with the contributory pension being slightly higher and subject to an adequate PRSI contribution record. But as the Irish state pension levels are paltry, a privately funded pension plan is hugely necessary, especially these days as we are all living longer.
Personal Pension V PRSA – Sole-trader Options
Different types of individual pension plans exist and the right one for you is dependent on your business structure. Both sole traders and partnerships can choose between two options, a Personal Pension or a PRSA.
- Personal Pensions also called Retirement Annuity Contracts (RACs)
- Personal Retirement Savings Accounts (PRSAs)
Contribution Tax-relief
Both PRSAs and Personal Pensions have the same contribution tax-relief limits (based on age and salary level). The older you get the more you can contribute whilst still receiving full PAYE tax relief on every contribution.
Retirement Benefits
Both options offer the same retirement benefit options i.e. 25% of the fund is paid out tax-free and with the remainder you can invest in an ARF or purchase an Annuity. A limit of €500,000 applies to the tax-free lump, with the first €200,000 paid out tax-free and the balance being taxed at 20%.
Death in Service
If you are signed up to a personal pension plan or a PRSA, you can expect the full gross value of your plan to go to your estate.
Plan Charges
A Personal Pension may offer a lower AMC (less than 1% PA) than a PRSA, but it will have a monthly policy fee and also unlike a PRSA, it will carry early surrender penalties in the first 5 years of the contract (you may wish to switch provider).
Where a Personal Pension may prove a better choice, is where you are likely to remain self-employed for the long term and don’t need the flexibility that a PRSA provides in terms of stopping and starting contributions, introducing employer contributions, or extending out the plan to vest at age 75, were you take a 25% tax-free lump sum and leave the balance invested for income drawdown, come retirement.
A PRSA has been the preferred option of a huge majority of sole traders since its first introduction way back in 2002, due to its added flexibility, but it’s important to understand that you need to choose the right broker to achieve the best value.
There are two types of PRSAs, a standard and non-standard version, the difference is that a non-standard PRSA will offer greater investment options, but may as a result carry a higher annual management charge (AMC) than a standard version which is fixed at 1.00% PA.
PRSAs do not carry early encashment charges, nor policy fees, but they can include contribution charges which will reduce your investment allocation, with some plans charging up to 5% on every contribution meaning only 95% allocation is granted.
Key Takeaways
If choosing a PRSA, opt for a non-standard version, but then insist on 100% allocation, and seek to negotiate a base AMC of 1.00%, with a broker support charge of 0.25% PA.
A Personal Pension is only suited to a long-term sole trader who is confident of staying in that same role until retirement.
Executive Pension V PRSA – Company Director Options
If you are a proprietary director with your own limited company, or if you’re operating as a contractor under an umbrella firm, you are currently presented with two options:
- Master Trust – Executive Pension Plans (EPPs)
- Executive – Personal Retirement Savings Accounts (Executive PRSAs)
Executive Pension Plans had been the only go-to solution for proprietary directors and umbrella company contractors for many years, all up until the change in PRSA regulations, introduced into Irish law as recently as January 2023.
Contribution Tax-relief
Executive Pensions and PRSAs operate differently in terms of the treatment of contributions for tax-relief purposes, remembering here, that the plan is being totally or predominantly funded through the company bank account as opposed to personally.
Under the PRSA option, a company director can contribute away to their heart’s content provided they don’t exceed the revenues maximum standard fund threshold (SFT) come retirement, currently amounting to 2M.
However, under an Executive Pension Plan, at set up and each time you increase contributions, or inject a lump sum, a revenue maximum funding check must be performed that relates not only to the 2M SFT but to a projected maximum pension annuity of 2/3rds of salary.
Death in Service
Another key difference is what happens if you pass away before retiring and drawing down your plan benefits. Under an Executive Pension, only 4 times your salary is paid to your estate (tax-free between spouses) and the balance must be used to purchase retirement benefits. Under a PRSA however, the full value of your fund is made payable to your estate (tax-free between spouses).
Retirement Benefits
Come retirement, under both options you are to take a 25% tax-free lump sum and buy an Annuity or to reinvest the balance in an ARF and take an income from that.
However, only under an Executive Pension Plan can you draw a tax-free lump sum based on your salary and service to a maximum of 1.5 times final remuneration, where you have 20 years of company service.
This may prove beneficial to some small company owners who can push up their salary in the final years before retirement to achieve a tax-free lump sum that equates to more than 25% of their final pension pot.
Another possible advantage of an Executive Pension Plan over a PRSA is the potential to early retire from age 50, however, the director must sever all links with the employer company.
Plan Charges
PRSA charges have already been outlined above and there is no difference when it comes to a company funded PRSA, which we also term an “Executive PRSA”.
Executive Pensions carry the same base AMC as a PRSA, amounting to 1.00% PA to pay for both the fund management, but also the administration on the life company side. At this base level, there will be no contribution charge, meaning that 100% investment allocation applies.
That said, there are options where you can bring down the AMC to as low as 0.75% PA, based on a 3% contribution charge or 97% investment allocation. Also, like with a Personal Pension, these plans carry monthly policy fees, but there are no early encashment charges on newly arranged Master Trust versions.
Key Takeaways
If choosing an Executive PRSA, opt for a non-standard version, but then insist on 100% allocation, and seek to negotiate a base AMC of 1.00%, with a broker support charge of 0.25% PA.
If choosing a Master Trust Executive Pension, a lower AMC will be more beneficial in the long run to a higher allocation rate. A broker support charge can be up to 0.50% PA, but you can achieve 0.25% PA, through the likes of ourselves.
Summary Conclusion
Most self-employed people understand that any monies that they invest into a private pension plan will be free of income tax at their marginal rate, but don’t immediately appreciate the benefits of tax-free growth. All pension plans are in effect long-term savings plans, but they present the only form of savings or indeed investing that is not taxed in its growth phase.
In achieving this growth, dependent on the term to retirement, attitude to risk as well as ethical investment preference, an individual assessment is required. But be careful of a one size fits all approach (as it sits within your risk space). Consider fund manager diversification, in addition to the asset diversification that multi-asset funds provide. A robust broker investment philosophy is key.
In terms of pension plan type, if you’re considering moving your pension plan to a better broker, or setting up your first private pension plan, regardless of being a director or a sole trader, the chances are that since new pension laws were enacted (The Finance Bill 2022), a PRSA is most likely to prove the best choice for most.
In choosing a PRSA seek:
- a comparison of providers, both charges and performance
- a low-cost non-standard plan for maximum fund choice
- a broker support charge not exceeding 0.25% PA
Speak with a Financial Advisor
To arrange your free no-obligation initial consultation by phone, contact us today. Contact: Ken O’Gorman – Director – CB, QFA, RPA, SIA – One Quote Financial Brokers on: 01 845 0049 or email: ken@onequote.ie
Or enquire online and give us a quick outline of how we can help.
