Entrepreneurship can bring significant rewards, but it also comes with its fair share of risks. While business owners focus on building and growing their companies, it’s essential to remember that one day you will want to retire or pass your business on to someone else. This is where converting the value accumulated in a business into personal wealth becomes crucial. By planning ahead, entrepreneurs can protect themselves and their families from potential financial disasters.
One strategy to consider is using an employer sponsored PRSA. An employer PRSA is a retirement plan that the company contributes to. As an employee, you can also contribute to the pension fund.
There are several benefits to using a PRSA as part of an entrepreneur’s wealth conversion strategy. The first is tax efficiency. Employer PRSAs provide tax benefits for both the employer and the employee. The company will receive tax deductions for contributions it makes to the Director’s PRSA, while you as the PRSA owner can also make personal contributions with pre-tax income. Additionally, investments within the PRSA grow tax-free until benefits are withdrawn.
The second benefit is the potential for higher returns. Certain PRSAs will offer access to investment options that may not be available to individual investors. These options can include alternative investments, such as renewable energy and property, which can provide higher returns. Additionally, pension plans such as PRSAs typically have a longer investment horizon, which allows clients to take on more risk and offers more growth potential.
Another benefit that can sometimes be relevant is in the area of estate planning. On death, unlike other pension structures the full value of a PRSA is paid to the estate in cash – outside of any pension plan. Inheritance tax due will depend on the beneficiary, but in some circumstances (for example ill health), a PRSA can be a useful planning mechanism. PRSA benefits can be left in a pre-retirement structure until age 75.
Finally, a PRSA will also provide you with an additional retirement income stream. An individual can accumulate a PRSA of €2 million, which is the current maximum pension fund allowable. Recent changes to PRSA legislation have simplified this funding process. Under current pension rules a PRSA of €2m will provide you with a net cash lump sum at retirement of €440,000 and a post-retirement fund of €1.5m.
Converting the value you have accumulated in a business into personal wealth is crucial for entrepreneurs – by planning ahead, you can protect both yourself and your dependents. A PRSA could offer a number of benefits in helping to do so.
Contact Harvest at justask@harvestfinancial.ie and we will be happy to explain how you can utilise these benefits and incorporate them into your wealth conversion strategy.
