Building and Implementing a Director’s Retirement Plan
At Harvest we offer Company Directors a full Retirement Planning service, quite distinct from the administrative and investment services you might associate with a Self-Administered pension firm.
So, what does a Director’s Retirement Plan consist of?
While the Retirement Planning advice we provide to our clients is as varied and unique as the clients themselves, there will typically be differing degrees of emphasis placed on the following areas:
- Technical Pension Advice including (but not limited to) – the rules governing the structure, the options for fund transfers and future implications of each option, maximising tax benefits, spousal funding, how and when a director can take their retirement benefits..
- Retirement Income Planning – determining your income replacement requirement, Gross v net income implications, longevity risk, cashflow planning…
- Investment Advice – Negative interest rates, income-focused portfolios or growth portfolios, Sequencing Risk, planning for lump sum entitlements…
- Estate Planning – Death in Service implications, comparative benefits of differing pension structures, post-retirement implications, structuring wills…
It is clear from the above summary that a Director’s specific circumstances will determine the nature of the advice received. However, despite the technical aspects of your retirement plan that will be unique to your requirements, at a high level there is a reasonably consistent approach that can be applied in most cases.
So once the appropriate technical structure advice has been provided, the following approach might be taken when building your retirement plan.
1. Determining your Required Income in Retirement
This initial step is key as your required retirement income will underpin the other components of your retirement plan. There are a few things to bear in mind here.
Firstly, inflation should be allowed for when considering future income.
Inflation risk is the reduction in real purchasing power over time, and in a negative interest rate environment (pension bank accounts are currently being charged 0.65% negative interest) it becomes particularly relevant. As an illustration of why we must allow for inflation; a 2% inflation rate combined with a 1% negative interest rate will lead to a 25% reduction in purchasing power over a 10 year’ period. Your Client Advisor will be able to assist in incorporating the impact of inflation into your retirement cashflow plan.
A second consideration is the implication of the reduced level of income tax you might pay on income in retirement.
A married couple over 65 years of age can earn €36,000 a year and pay zero income tax, PRSI or USC. This potential reduction in the overall level of tax you will pay can effectively mean that a replacement of 50% of your pre-retirement income can equate to a 70% net income replacement in retirement. Again, your Client Advisor can illustrate this by incorporating estimated tax into your retirement cashflow plans.
2. Fund Accumulation/Target Funding
The Revenue allowable funding limits for Directors’ pension plans will often offer plenty of scope for pension funding. Factors that will influence your fund accumulation strategy might include your business succession plans and likely timeline to exit; and the capacity of your company to fund a pension on your behalf.
When determining the premiums required to accumulate your target fund, we also need to consider the investment risk within your pension portfolio.
The investment risk you take on will have retirement planning implications far beyond simply protecting your fund from downside risk. Simply put, the lower the risk and likely return, the higher the pension premiums required. If you have time on your side you can take on more risk and potential for growth, thereby lowering the level of funding required.
This is a good example of how the different elements of your Retirement Plan are connected. Our role is to help you understand these interdependencies and how they affect your retirement funding.
3. Post-Retirement Planning/Decumulation
Once you have taken your pension lump sum entitlements and moved to an Approved Retirement Fund (sometimes known as an ARF and the likely post-retirement pension structure for most company Directors); there will still be a need for ongoing retirement planning advice.
There can be very different objectives for each individual client’s ARF. Your main concern might be preserving the capital within the ARF for estate planning purposes. In this scenario a portfolio targeting an investment return equal to the minimum 4% or 5% annual distribution might be appropriate.
Alternatively, you may have a specific annual income requirement that will lead you to take on more or less investment risk. Directors who rely on their ARF for income have some exposure to Longevity risk –essentially the risk that your ARF will not sustain your required level of income for long enough. It is important to note that increasing life expectancies mean an increase in Longevity risk – but also offers Directors the opportunity to take on more investment risk in retirement. Your ARF investment portfolio should reflect a potential investment time horizon of 30 years.
The Final Point – What does a Retirement Plan actually do?
At Harvest we focus on financial planning for our clients’ retirement. However, this is just one aspect of your overall retirement planning.
At its core:
A structured, reviewable Retirement Plan should offer you freedom to make choices about how you spend your retirement.
It should help you manage any anxiety about adequate levels of retirement income.
It should help you identify what you will value in retirement – aspects including your family, socialising, work and travel.
If should contribute to all aspects of your wellbeing – financial, physical, mental and psychological.
We are here to offer Directors straightforward advice, to provide structured Financial Planning and to offer comfort that this aspect of your Retirement Plan is under control.
Retirement Planning for Company Directors – Talk to Harvest on 01-2375500 or email email@example.com and we will be delighted to assist.
This marketing material has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and;or capacity for loss of any particular person. It should not be relied upon to make investment decisions.