In an ideal world, everyone would start saving for retirement on their first day at work and keep it up for the next 40 years. But other calls on our income get in the way – rent, bills, buying a home, college debts, enjoying ourselves – and so pensions are put on the ever-lengthening finger.
That applies to business owners as well. They have probably spent many years putting every spare cent into building up the business, with retirement the last thing on their minds.
The question in both cases is, what can someone do if they reach their 40s or even 50s without having made provision for their income in retirement? The answer, fortunately, is lots.
“It’s never too late to start contributing to a pension,” says Sinead McEvoy, head of retirement solutions with Standard Life. “You’re still entitled to tax relief on the contributions and tax-free growth on the investments. Most people don’t realise that, as you get older, Revenue allows you to save a higher proportion of your salary and avail of income tax relief. This can make a big difference to the final value of your pension pot.
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“For example, when you’re aged 50 to 54 you can save up to 30 per cent of your salary tax efficiently and right up to 40 per cent when you are aged 60 and over.”
McEvoy points out that at 55, assuming you are still working, you have around 11 years until your State pension starts.
“You could even keep working from State pension age and contribute up to age 75,” she notes. “If you’re still paying income tax, this might make sense.
“As you near retirement you’ll want to consider how to rebalance the budget back towards investing in your future. Typical financial commitments decrease, giving the opportunity to start saving or save more for retirement.”
As with all things financial, good advice is essential. A financial adviser will assess your current retirement savings, help you understand how to boost your pot and the choices available to you at retirement.
McEvoy believes it is understandable that business owners can fall behind with pension savings.
“For most, growing and maintaining their business has been a lifelong pursuit,” she notes. “Once the business gains profitability it is time to think about investing in their future self.
“The great news is that the Finance Act 2022 made changes to the personal retirement savings account (PRSA) which has opened it up to much larger tax-efficient company pension contributions than ever before. This makes it one of the most tax-efficient tools for extracting wealth from your company or business.”
PRSAs are a flexible, simple, transparent, self-owned pension product, making them the pension structure of choice for business owners and directors, McEvoy explains.
“They allow business owners direct company funds into their own name in a tax-efficient manner. There has never been a simpler and easier pension vehicle to use as a means of tax planning.”
There are virtually no restrictions on contributions. “Employers are able to pay unlimited BIK-free contributions to a PRSA for an employee or director,” explains Ashling O’Neill, certified financial planner with Clear Financial.
“The contributions are not subject to previous salary, service or Revenue age-related, tax-relief contribution limits, which means there is an opportunity for business owners to boost up their benefits without age-related limits, while still considering the overall standard fund threshold (SFT) of €2 million.”
The SFT is a lifetime limit of €2 million which applies to the aggregate value of all of an individual’s pension funds. If the value exceeds this amount when it is time to crystallise them, a penal excess tax applies.
“Company directors who have not been contributing as much as they should now have a chance to catch up,” adds Bank of Ireland head of pensions and investments Bernard Walsh. “They are potentially missing out on a big opportunity if not looking at this.”
The other consideration is how the payments are made. For a business owner, it is more tax effective for the company to make the pension contribution rather than personally, as that will avoid the PRSI and USC which would be payable by an employee.