Here at Harvest we advise Company Directors on alternative options for private pension funding; to extract company profits tax-efficiently and to fund for income in retirement.
Broadly speaking, a Director can elect to establish one of two types of company pension scheme:
As the Revenue rules relating to allowable levels of company pension funding and the tax treatment of both structures are the same, other considerations come into play when determining which might be the most appropriate pension plan for a Director.
A Self-Administered Pension offers more flexibility and control over the assets within the fund, but it’s primary purpose is still simply to provide a client with private retirement income to supplement any State Pension Entitlements. We should not lose sight of this when discussing investments within the pension plan.
Retirement Income planning, the interaction between the company pension plan and other private pension plans already in place, and a client’s intended retirement age and lump sum entitlements must all be factored in to the decision to fund into a Self-Administered or Life Company pension plan.
An Executive Pension Plan through a Life Company can often be a more efficient method of pension fund accumulation in the early stages of a Director’s retirement funding journey.
While there are some clear benefits to a Self-Administered pension these do come at a cost. In addition to this potentially higher cost, it is important that the basic investment principle of diversification is front and centre of any Director’s pension planning. Concentrating an individual’s entire pension fund into one asset such as a residential property is a risky proposition.
It can be more appropriate to use a diversified Multi Asset Fund available through a Life Company Executive Pension plan in the initial years of funding and then switch to a Self-Administered Executive Pension plan as and when a sufficient fund has been accumulated to justify the potentially higher costs and to facilitate sufficient levels of diversification with the pension plan.
For some Directors, a portfolio focused purely on capital growth is appropriate. For others it is critical they have a portfolio focused on income producing assets. This may be the case if a Director is approaching their intended retirement age and needs to ensure sufficient liquidity in their fund to pay out their pension lump sum entitlement, or where they intend to transfer assets from their Director’s pension plan to their post-retirement pension pot, and they need these assets to produce an income that they can then draw down throughout their retirement.
In these and other scenarios, the flexibility that a Self-Administered pension offers can – with the right planning – be an effective tool in constructing a portfolio tailored to the individual client’s requirements.
Life Company Executive Pension plans generally invest in fully liquid unitised investment funds. These funds are typically priced daily and can be liquidated at any time.
In comparison some assets found within Self-Administered pension plans are illiquid – common examples would be Direct Property assets, Private Equity investments or other off-market investments. A Director should always ensure they hold a suitable level of liquid assets to provide for lump sum entitlements when they are likely to drawdown their Retirement Benefits, or to pay out income when in a post-retirement pension plan.
If a Director is in an Executive Pension plan and is close to retirement age it will sometimes make sense to take their lump sum entitlements from the Life Company pension plan, and then subsequently transfer the balance to a Self-Administered post-retirement plan – known as an Approved (Minimum) Retirement Fund.
One potentially significant upcoming change in pension legislation may be the implementation of the IORP II Directive in Ireland. IORP II is an EU Directive that aims to improve EU pension scheme standards in areas such as risk management, member communication and Trusteeship.
IORP II also introduces a number of rules regarding occupational pension investments that would greatly restrict investment options in Self-Administered schemes if applied to one-member schemes (the vast majority of Self-Administered schemes are one-member schemes). Options such as Direct Property investment and unregulated investments would be either done away with altogether or else severely limited.
It is unclear as to how IORPS II will develop as the Association of Pension Trustees in Ireland have taken a case against the Irish government, challenging the manner in which it is planned to be introduced. If it is introduced as planned it is highly unlikely to apply retrospectively. Therefore, if a Self-Administered pension is appropriate for a client having considered the other criteria outlined above it might be a good time to set up the pension before the potentially adverse impacts of this new legislation.
As always, we are here to offer straightforward advice to provide clarity as to your options and ensure that you are comfortable that your pension structure is the right one for you.
Talk to Harvest on 01-2375500 or email firstname.lastname@example.org and we will be delighted to assist.
This marketing information has been provided for discussion purposes only. It is not advice, it is provided for general information purposes only and does not fully take into account your financial position, investment needs and objectives, attitude to risk, liquidity needs, capital security needs, capacity for loss etc. It should therefore not be relied upon to make investment decisions. Prior to any formal investments taking place you will be provided with a detailed suitability letter taking into account all the above and outlining why the investment(s) are (not) suitable for you.