Recent CSO statistics show that less than 50% of self-employed people have private pension plans in place. Many of these plans are underfunded. This means that many of them will not have enough income to enjoy their retirement. This may be why self-employed people often work into their 70’s, long after their own employees may have retired! Too often the business owner puts everything into the business and the thought of retirement planning is continually put on the long finger.
If you are a sole trader, you can contribute to a Personal Retirement Savings Account (PRSA), a Personal Pension Plan or a Self-Directed Pension Plan. You should speak to a Financial Advisor to establish which best suits your specific circumstances.
The maximum that can be contributed will depend on age and net relevant earnings.
Where the business trades through a limited company, the most suitable plan for the owner will usually be an Executive Pension Plan. In many small companies, the owners draw just enough to live comfortably on and any excess profits build up as cash balances in the company. If the owner wishes to extract such balances for their own benefit such withdrawals are treated as income and are subject to tax, PRSI & USC.
One exception is if the company makes a contribution to a pension plan on behalf of the business owner. Such contributions can be offset against the company’s tax liability and there is no cost to the individual. This is the most tax-efficient tool available to business owners, especially where the company is trading profitably.
The limits on what can be paid into an Executive Pension Plan are even more generous than the sole trader limits and give huge scope for the company owner to build up a meaningful pension pot. In doing this, funds that were lying idle in the company have now been placed in a fund for the business owner’s benefit, and any growth achieved will accrue tax-free.
Between now and December 10th any sole trader who has not yet filed their tax returns will need to discharge their tax liability for 2019. Instead of paying the full amount due to Revenue you can, and should, direct at least some if not all of that money into a pension plan.
For example, Tom who is a sole trader, aged 38, made a net profit of €56,000 in 2019. His tax bill is €12,000. He is on the marginal 40% tax rate. His Financial Advisor recommended that he makes a pension contribution of €10,000. His pension fund will therefore have €10,000 added to it, growing tax-free, and his tax bill of €12,000 will be reduced by €4,000 (i.e the 40% tax refund from the pension contribution). Act now as the deadline is fast approaching.
We would be delighted to answer any pension queries you may have. Send us an email or find our contact details here.