Archive for category: Retirement Planning

You are here: / / Retirement Planning

How Contractors Can Benefit from Recent Changes to Irish Pension Funding Rules

How Contractors Can Benefit from Recent Changes to Irish Pension Funding Rules 2024

Exciting Developments for Contractors

There’s been a significant update in Irish pension funding rules and legislation that allows for enhanced employer contributions to Personal Retirement Savings Accounts (PRSAs). This change stems from the recent abolition of the benefit-in-kind on employer contributions as enacted in the Finance Act 2022. Such modifications mean PRSAs can now receive larger tax-efficient contributions from companies, more so than was possible with traditional occupational pensions.

Why PRSAs Are Now the Preferred Choice for Contractors and Company Directors

The PRSA has become increasingly attractive for many contractors and company directors due to the potential for increased pension funding. This is especially relevant as:

  1. Expanded Contribution Limits: Company directors can now contribute to a PRSA without the constraints of the previous age-related tax relief limits. Contributions are now only subject to the Lifetime Pension Fund Limit, which is capped at €2 million.
  2. Simplified Funding Rules: Employer contributions to PRSAs are no longer bound by rigid rules related to years of service or age.
  3. Immediate Tax Relief: The removal of the BIK charge on employer contributions allows for full tax relief in the year the payment is made.
  4. Increased Investment Flexibility: PRSAs are not subject to IORP II investment rules or mandatory trustee training, giving members greater control over their pension schemes.
  5. No Salary Constraints: Even with a modest Schedule E salary of €10,000 per annum, there is no limit on the amount a company can contribute to an individual’s PRSA each year.
  6. Estate Benefits: In the event of a director’s premature death, the PRSA value is transferred to the estate as a tax-free payment, though Capital Acquisition Tax may still apply.

Maximising Tax Relief and Pension Contributions

Maximising Tax Relief and Pension Contributions

These legislative changes enable directors and business owners to maximize tax relief and reduce their corporation tax liabilities during financially robust years. Furthermore, the flexibility to contribute to both occupational pensions and PRSAs concurrently—albeit with consideration for maximum funding limits in the occupational scheme—adds a layer of strategic financial planning.

A New Era for Contractor Pension Planning

PDF Of Irish Pension Funding Rules

Click To Download PDF

With the removal of previous contribution limits and the introduction of more flexible funding options, PRSAs now stand out as a compelling alternative to executive pension plans or master trusts. By capitalising on these changes, contractors and company directors can significantly enhance their retirement prospects, paving the way for a secure and prosperous future. For more information about PRSA contributions, please contact us by calling 021-4839350 or book a complimentary chat here.

 

Article by Carol Brick
Managing Director at Contracting PLUS Financial

Are Your Retirement Dreams Affordable?

We can all dream of the day when our time is our own, and paid work is a distant memory.   But, the question, according to finance advisor, Carol Brick of Contracting PLUS Financial, is can we afford the dream? 

Retiring to the sun, with no financial worries, is an appealing prospect; especially in dreary January, when work seems more challenging than ever.

There will come a day when we all quit paid employment.  So, whether we hope to retire in ten years’ time, in 50 years from now, or somewhere in between, pension planning can ensure the goal of a comfortable retirement is not just a pipe dream.

A pension is basically tax-advantaged savings; and, in the realm of personal finance, it is probably the best value for money we will ever enjoy.  Not least for the generous tax relief of up to 40%, the compound growth of the fund interest, and, for some fortunate workers in an employer’s pension scheme, a matched contribution by your employer into the pension pot.

Forget the New Year’s resolutions about going to the gym or learning Spanish!   Make 2024 the year to get to grips with pension planning, and work towards the retirement lifestyle you want.

Savings Shock

Cruising on the Costas may be the pensions carrot; so now, here is the stick!  Retirement doesn’t come cheap!

A quick look at a template we use in Contracting PLUS Financial illustrates the annual income required to fund either a modest lifestyle on retirement or, ideally, something more comfortable, that you may currently be used to.  Frightening figures, aren’t they?

To be fair, a State pension, assuming you are entitled to one at some stage, or other assets or savings, is not factored into the pension pot targets.  But, to retire comfortably, aged 60, with an annual pension income of €71,977, for example, you are looking at pension contributions of around €2,680 a month, from age 35, in order to amass the required €1.7m nest egg the average 60-year-old pensioner will need to live out their life in comfort.

What Sort of Lifestyle will your Pension pay for ?

WHAT SORT OF LIFESTYLE WILL YOUR PENSION PAY FOR?
BASIC NEEDS COMFORTABLE
HOUSE

 

 AVERAGE ANNUAL COST OF OWNING & MAINTAINING A HOUSE: €20,000 AVERAGE ANNUAL MAINTENANCE COST PLUS COST OF PAINTER/ DECORATOR: €22,000
FOOD AVERAGE ANNUAL COST OF GROCERY SPEND: €5,000 GROCERY & DINING OUT ANNUAL AVERAGE SPEND: €7,000
TRANSPORT

 

 AVERAGE ANNUAL COST OF PUBLIC TRANSPORT: €1,200

*FREE OVER AGE 65

 AVERAGE ANNUAL COST OF RUNNING A FAMILY CAR: €10,000
HOLIDAYS AVERAGE ANNUAL COST OF A HOLIDAY: €3,000 TWO HOLIDAYS A YEAR: €6,000
CLOTHING AVERAGE ANNUAL SPEND: €2,000 DOUBLE ANNUAL SPEND: €4,000

Annual Pension Income You Need

AGE BASIC PENSION FUND SAVINGS TARGET MONTHLY CONTRIBUTION
60 €29,857 €713,000 €1,112
65 €36,326 €745,000 € 803

 

AGE COMFORTABLE PENSION FUND SAVINGS TARGET MONTHLY CONTRIBUTION
60 €71,977 €1.7 MILLION €2,680
65 €137,532 €1.7 MILLION €1,936

*Calculation based on male, age 35, premiums remain fixed, inflation at 4%, fund growth at 6%, assumed annuity rates, and no other pension provision or income taken into account.

Even with a more basic lifestyle, the targets for pension fund savings are significant figures, so the sooner we start saving, the easier it is.  These calculations assume pension contributions from age 35, but starting earlier is ideal, and, no matter what age, building a nest egg via private pension contributions can only enhance the timing and comfort level of your retirement years.

Approximately when you can afford to give up work is largely determined by two factors: how much you have saved, and the kind of lifestyle you want.  And, remember, if you retire early, you cannot rely on State pension income until you reach pension age, which is currently 66.

The earlier you plan to retire, the more you need to save to maintain a good standard of living.

Pensions to-do list

  • Find out about employer pension schemes open to you in your workplace; contribute as much as you can from your pay-check, and sit back and dream retirement.
  • Book a free chat with an independent pensions advisor to review current pension funds you may have, or to start contributing to a new personal pension suited to your needs.
  • On existing pensions, you may be able to improve your savings by putting them into a better fund or funds. Low-risk funds are great for avoiding volatility, as you approach retirement, but they are less likely to produce strong returns, if you’re starting out.
  • You can top-up pensions to boost the tax-free savings potential. If you get a pay rise or inheritance, or if some regular expenditure comes to an end, like a car loan or mortgage, pay the extra money into your pension plan.
  • Even if you have given up work, you may still be able to boost your retirement savings by paying into a pension, and benefitting from extra tax relief.
  • Ask your advisor about the tax-free lump sum you can access on retirement, and how your pension savings can be drawn down to provide an income for life, supplementing whatever State pensions or savings are available to you.

More Money

Ultimately, regular automated savings from your income, as with a pension fund, should make for a much better future, without compromising your current lifestyle too much.

Going forward in Ireland, fewer people may be able to afford their own homes, and a home and a pension, ideally both, are important to comfort, as we age.

Traditional financial advice would put retirement saving first, before home-ownership. Because, in the long-term, the stock market tends to outpace real estate.  Plus, the tax advantage of putting money into a pension is the nearest thing to free money!

Easy to say, but the best financial strategy is to increase your income.  The more you can earn or grow your income, the more money can go into a pension, the more you can save, and the more you can borrow against that income.

So then, we just have to answer the question of accumulating more money – and, that is for another day.  But, any book by Warren Buffet is always a good read; and, ideally, before you retire!

Article by Carol Brick
Managing Director at Contracting PLUS Financial