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Retirement planning series. 5 years out and a company director

Joe Moore - Financial Services > Blog > Retirement planning series. 5 years out and a company director

Retirement planning series. 5 years out and a company director

5 Years Out and a Company Director

So, you’re only a few years away from retirement, you’ve worked hard all your life and you’re looking forward to kicking back with a nice cold drink somewhere in the warm sun. Maybe you have already made provisions for this day. Or maybe you have not.

Obviously, the most efficient way to provide for your retirement is regular pension contributions over your working life, but sometimes this is not possible. Perhaps the company needed the funds for a variety of commercial reasons.

The good news is that it’s not too late. if you are a proprietary director in your company, there are tools and levers that are exclusive to you to put in place a substantial retirement fund in a short space of time. The time has come to think about your exit strategy. If you were planning on selling your company shares to fund your retirement you will encounter several issues and face certain risks.

Here’s 3 that spring to mind;

  1. Capital gains tax. You will have to pay 33% tax on the profit made between the buying and selling of your shares. A 1/3rd of your life’s work is about to go to the taxman, despite all the people you have employed and good that you have done in your community.
  2. Will you be able to find a buyer at the right price? Maybe you’re the companies most valuable asset, and so the company’s value is tied in with you working there…Or maybe it’s a very niche industry and there aren’t enough potential buyers to produce a fair price for your shares.
  3. Your retirement is still tied completely to your company’s fortunes. If something were to happen to your company between now and your retirement, you may be left with nothing.

To help tackle some of these obstacles, maybe It’s time to consider reducing the book value of your company by running down a portion of your cash reserves. You can do this by taking out an executive pension. If done correctly, the transfer of cash from your company reserves to your executive pension free from BIK, USC, PRSI and the marginal rate of tax. It’s even deductible against corporation tax.

By reducing the book value of your business, you have lowered its potential sale value and hence you will pay less capital gains on the disposal of your shares. Once the money is in your pension, it’s yours and so you will have a retirement fund irrespective of the future fortunes of the company.

Be careful though. Full consideration would need to be given to the impact it will have on your business. Involve your accountant and a financial advisor- (clears his throat)

Did you know that when you retire you will be faced with a lot of choices of what to do with your pension funds and these choices all have unique consequences?

  • How much of a lump sum can I take?
  • How much is tax free?
  • Will I choose to put my money into an ARF, or will I buy an annuity?
  • What will my income look like after taxes?
  • Are my pension funds inheritable?
  • What investment risks do I face?
  • Could I run out of money?

The list of questions goes on, and the answers to these questions are unique to the personal circumstances that you face. Whatever you do, find a good retirement planner to assist you before you sign anything!!! The tax implications alone, mean you could save yourself a fortune with the right advice.
A good retirement planner (ahem) will be able to show you the choices that are available to you and show you the consequences of each of these choices. And whilst this is EXTREMELY important, it is even more beneficial if you seek advice well in advance of your retirement. Instead of making these choices the day you retire, plan well in advance.

For the purposes of this conversation, let’s assume that you are 5 years away from retiring and that you are a company director and you own at least 20% of the company shares.

Here are 3 things to consider in the run up to your retirement.
1 The maximum retirement fund that revenue will allow you to have is based on your “final” salary.
Revenue will allow you to take the average of any 3 consecutive years in the 10 years running up to retirement to calculate your “final” salary for the purpose of this calculation. The larger your “final” salary, the larger the allowable pension fund.
So, if the company has been retaining earnings and is able to reduce its cash reserves, you should consider giving yourself a pay rise (Wahay!). You should do this in conjunction with a financial advisor (ahem) and your accountant.
-2 The company can make contributions to a pension scheme to provide for your retirement.
This is important. Revenue treat the taxation of your own personal contribution to a pension fund completely differently to that of a company contribution to an executive pension on your behalf. There is scope for the company, assuming it has sufficient resources to do so, to make a large, special once off contribution to a pension fund on your behalf, or a series of ongoing contributions.
These contributions are allowable against corporation tax and can even be spread over several years. It is not treated as a BIK and is therefore free from income tax at the marginal rate, USC and PRSI. Again, this should be done under the advice of a financial advisor (can’t stop coughing!) and the CFO/accountant of the company.
-3 If the company can’t make the max contributions, look at making some personal contributions out of your salary.

The taxation treatment of personal contributions is different to company contributions and not as tax efficient but there are still some very good breaks. Depending on your age and salary, you could potentially make (correct at time of writing in Jan 2020) up to €46,000 per year in personal contributions to a pension fund which would have tax income tax relief at the marginal rate but would not be free from USC or PRSI.
You have worked hard your whole life. In the run up to your retirement, give yourself the benefit of every break out there to maximise your retirement so that you can enjoy the fruits of your labour.
Get ready to have the sun on your face and a nice cold drink in your hand. You’ve earned it.

I hope you found this article informative and helpful. If you are not a company director, there are other articles coming soon that may be more relevant to you, or they may already be up on the site depending on when you read this. Have a look around.

If you would like to know the specifics around your retirement options you can email me at Info@jmoorefinancial.com and I will happily offer you a free consultation.

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