Directors Pension



Imagine taking the pain of setting up a business and then walking away from it empty-handed when you retire? Not a pleasing scenario – certainly not the outcome you want for you when the day comes for you to walk away. You don’t want to see all your effort, struggle, and sacrifice go all unrewarded. This is why you must plan the exit from your business in advance.

And you can do that by starting a Directors pension. A directors pension (also known as an executive pension) is one of the best financial ways to save money and increase your wealth while you’re still working. This pension plan facilitates the transfer of cash from your company’s bank account into your long-term savings account. An amazing plan to save up for your retirement in a tax-efficient way.

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Directors Pension is a pension retirement plan designed to allow company directors and senior employees to save for retirement. It allows you to extract wealth from a company in the most tax-efficient manner.

The Director’s Pension will allow your company to consistently build your net worth for retirement. It is a financial vehicle that facilitates the tax-efficient transfer of cash from your company’s account into an investment policy into your own name.

Many Irish business owners are now seeing their businesses bounding ahead and their profits growing. Translating that profitability into personal financial success is something everyone is looking towards and for that Directors Pension is the best solution. The income and corporate tax reliefs available in the Directors Pension contributions can help business owners take the value built up in the company to provide for themselves and their families in retirement.

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Extracting profits from your business

If your company has made profits in a particular year, there are 4 ways in which you can extract these profits from the business

  • Pay yourself extra salary/commissions/bonus
  • Pay dividends to the shareholders
  • Make Pension Contributions
  • Make a Corporate investment

 All of the above have tax implications for either the directors or the company. The most tax efficient method of method from all of the above is by far, contribution into a directors pension.

Tax benefits of Directors Pensions

Director Pension contributions are made from the company bank account into this pension vehicle. These contributions can be made monthly or annually. The annual contributions are usually made in a lump sum at year end in order to reduce your corporation tax liability.

The following tax benefits apply to these contributions

  • There is no personal tax liability (PAYE/PRSI/USC) or BIK for the directors
  • the companygets corporation tax relief (12.5%) on the contributions being made.
  • The Pension contributions, when invested, benefits from tax free growth for the entire term of the pension plan. The compounded (tax free) interest effect of making consistent returns over a 10-20 year term can have a hugely positive impact on the overall pension fund value.

All other methods of extracting money from your company has tax implications;

  • Salary: (PAYE, PRSI & USC): 52%+
  • Dividends: 25%– 40%
  • Capital Gains: 33%
  • Benefit in Kind (company cars etc):30%
  • Pension contributions 0%

Building Yourself Into The Business Plan

Smart business owners structure their companies in a way that serves them.

It can be easy to forget that your business is ultimately there to serve you.

As a director, you are in the unique position of being able to combine your current income needs and future income needs into one coherent plan.

And that plan is the amount of money you accumulate by the time you step away from your business.

Once you’re set up you can be confident that your business is actively building your net worth each month.

How Are Director Pension Entitlements Calculated?

Revenue Commissioners will allow you to build a retirement asset up to a limit of €2,000,000 as a company director.

However, the actual amount you can target under revenue rules is determined by a formula which is determined by your;

  • Age
  • Gender
  • Marital Status
  • Retirement Age
  • Annual Income
  • Potential Service
  • Existing pension values

A Standard ‘Max Funding Pensions calculator’ is used to determine how much, each year a director can contribute into his/her pension.

Pensions contributions can be backdated 10 years in order to max out the director pension limits.

Click Here To Calculate Your Pension Max Funding Limit

The Tax-Free Cash Option For Company Directors.

Even if pensions aren’t your thing, you should still have a director scheme because you can opt for the tax-free cash option.

This allows you to build up a cash fund that can be paid out in full from age 60.

How is a Directors Pension Set Up?

Director pensions are set up under trust which means they’re legally separate from the business and you i.e. you’re building wealth independently from your business.

The legal trust is established via letter of exchange which is signed by all parties prior to going live.

Once in place, the company can make regular monthly payments on your behalf until your nominated retirement age.

What age can you access an executive pension?

members of an executive pension plan can access their pension from the age of 50 if they take early retirement. Other than that scenario, the only time you can access your pension before the normal pension age is if you are unfit to work due to an illness or injury. In this scenario you can access your pension immediately, regardless of age. Normal pension age is usually set between 60 and 70 years of age. During these years you can draw on your pension and remain working at the company if you choose to do so.