Directors Pension - Saving a lot of tax

dewsbury · 18-11-2022 2:40am #1

Hi,

Summary:

I am over 60
FOr the last 3 years I have been a director of my own one-man company and have been earning very good money.
I have a long-standing PRSA (pension) with a value of about 400k.

In the last 3 years I (actually, my own 1-man company) have been making massive contributions to an executive/directors pension (contributions of about 100K per annum). I give myself a average (not high) salary.

Consequently, because of the massive pension contributions my company makes very little profit - and hence the company pays very little tax.

Does this sound correct ? My company and personal tax bill is reduced hugely by making such a large pension contribution. (Directors pension).

I am making the contributions via an established broker with over 20 staff. Pension is with Zurich pensions.

Is it legal to make such massive tax savings with a directors pension scheme?

18-11-2022 3:07am

Roxxers · 18-11-2022 3:45am

piss take

dewsbury · 18-11-2022 3:47am

Thanks for response view78.

Allow me clarify. Yes - I am taking advice from a qualified advisor who studied my finances in detail. (Large wealth management firm)

A few points.

The KEY thing here is that my company is paying a "directors" pension for me. The rules are radically different. The 40% capping is not relevant in this case.
My overall pension situation is not likely to result in me pay higher rates of tax when I am receiving pension. Current total pensions is about 600K.

So why am I posting on boards (at 02:45am!)? I am really just looking for a second opinion. I trust my existing wealth management firm. I am just somewhat astonished by the huge tax savings (courtesy of directors pension).

Time for bed!

Henry Ford III · 18-11-2022 6:51am

https://www.boards.ie/discussion/comment/119888340#Comment_119888340

All directors pensions have to be Revenue approved, and the maximum funding rates are quite generous, more so for short service employments. Rates of 100%+ of salary are commonplace and in the more extreme cases multiples of salary are possible.

The insurer can't and won't accept premiums without the scheme being exempt approved, so your comment about commission is ill informed. We don't know the charging structure used. In short service schemes it's more likely to be fee based as there's not enough time for any commission model to make sense.

In an EPP the employer can pay the entire premium, have it deducted in full against profit and C.T. but it isn't assessed as income in the hands of the Director. It's a proven and very effective way of transferring wealth from employer to Director.

Basically on the basis that the OP has told us they have nothing to worry about on this.

retalivity · 18-11-2022 6:58am

FWIW, I have a directors pension and have been told the same, that the max contribution bands do not apply for employer contributions to them, although i myself still adhere to them as i am under 40 and still take a decent salary rather than pile it all in. Will look to ramp it up in later years.

Happyhouse22 · 18-11-2022 8:58am

Hi Dewsbury

I wouldn’t worry about what Viewer78 says, the Max funding limits for executive pensions are quite generous. Impossible for us to know, without more info, if yours follow the rules exactly - but generally it sounds plausible which is the confirmation I presume you were looking for here.

Happyhouse22 · 18-11-2022 9:00am

https://www.independent-trustee.com/useful-resources/calculators/max-funding-calculator

Max funding calculator for executive pensions.

walterking · 18-11-2022 9:19am

What you are doing is absolutely correct and you are well advised.

Too many people in one person or other small businesses make the error of having excess net profits. You pay 12.5% corporation tax on the profits and then pay your marginal rate on dividends.

Once your business has a sound financial footing you are best to minimise your profits by maximising pension contributions and even maximising your salary as prsi and USC also applies to dividend income.

Another option is to employ family members for some of the work you do - especially admin work. If they are in college this gives them good insight into a company and they earn from the company rather than you having to fork out for their expenses.

and when you retire you can take 25% of your pension tax free (up to max 200k)

dewsbury · 18-11-2022 1:28pm

*** Folks,

Thanks for comments and indeed re-assurance. I think that my circumstances make this exec pension (tax savings) especially beneficial. All good! All above board.

Thanks again.

dewsbury · 18-11-2022 1:37pm

I am OP.

Just an afterthought re:Directors pension.

I started the directors pension with assistance of a major Irish bank (!) .... the advice received from their wealth managment guy was dreadful ... and I moved my business elsewhere. The bank guy simply did not understand the financial calculations and gave bad advice.

Henry Ford III · 18-11-2022 2:46pm

https://www.boards.ie/discussion/comment/119889533#Comment_119889533

Unfortunate but it's no great surprise.

swimming in a sea · 18-11-2022 4:06pm

Hi, I'm a contractor with LTD company and in my 40's, I only got executive pension setup at the start of this year. A broker worked on it for me, but he said there was a restriction on how much i could put into the pension and it was dictated by how big my salary is, so at the moment my pension contribution is 45% of salary and this amount was the biggest that the revenue would approve.

Seems from above i may have wrong information, is there any revenue site that clarifies these rules?

dewsbury · 18-11-2022 4:31pm

https://www.boards.ie/discussion/comment/119890350#Comment_119890350

HI, I am the OP of this thread. Bottom line is that I do not know the answer to your question. However, I think that I am benefitting from being over 60 and also not having a big pension already. So, it is possible that what you are being told is correct ... I may just be lucky that I match the ideal profile for maximising contributions .. dunno...

dewsbury · 18-11-2022 4:34pm

Interestingly, my broker told me that my theoretical limit for contributions in the year 2022 was over 300K!!

(There is nothing like 300K in my company but it's an interesting figure).

swimming in a sea · 18-11-2022 4:45pm

I remember setting it up, the broker did say it was stricter than a year earlier so might have something to do with it

ari101 · 19-11-2022 5:11am

https://www.boards.ie/discussion/comment/119890568#Comment_119890568

This is very relevant. The pension authority adopted new rules around One Member Arrangements since mid 2021, with I believe a cut off of 1 July 2022. Revenue are no longer approving the older style schemes where the amount of money you could put in to the pension was extremely high. This means a lot of pension providers have stopped selling these kind of schemes. There are still possibility to set up some form of scheme (one for the advisors to confirm exactly what) and put decent amounts in, but they are much stricter on the amount and it's relationship to salary.

ThreeGreens · 23-11-2022 2:35pm

https://www.boards.ie/discussion/comment/119890350#Comment_119890350

It depends on the type of pension set up.

Yours is a personal pension. It is limited by limiting your contributions to a fixed percentage of your salary.

The OP has a corporate pension. That's one set up by their employer (their company). That is limited by the size of the fund vs their age. This type usually allows for bigger contributions to be made.

If your self employed an not operating through a company, then the corporate pension isn't an option for you (unless you incorporate).

swimming in a sea · 23-11-2022 3:15pm

https://www.boards.ie/discussion/comment/119911142#Comment_119911142

I think I've the same type of pension as the OP, as I'm a contractor with my own LTD company.

Interestingly though since i last posted i contacted my broker to see what my options were for putting in more funds, they came back and said they did a "funding test" and now they say i can nearly double my contribution if I want.

Supposedly if I contribute the max then in a years' time the max allowable will probably raise again. I've still no idea how this is worked out.

Directors Pension - Saving a lot of tax

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