Transferring company assets into Personal wealth

Business owners reviewing their Company Pension funding often consider their pension fund as a standalone source of retirement income and can sometimes overlook the opportunity to utilise the features of a company pension plan to extract wealth tax-efficiently from their company into a personal asset.

For a company pension to be approved as a tax-exempt arrangement it must be set up in trust. This ensures that the benefits of the pension plan are kept totally separate from the company and are kept for the scheme member (the Director in many cases) and their beneficiaries.

A company director is only eligible to take out a company pension if they are set up as an employee of the company and are receiving Schedule E income from the company.

Tax Benefits

As per previous blogs there are many tax benefits associated with a Company pension plan, including:

  • No PRSI on any Employer pension contributions to a company pension plan.
  • No USC on any Employer pension contributions to a company pension plan.
  • While there is an earnings cap of €115,000 for personal contributions, there is no cap for Employer pension contributions.
  • The company can claim corporation tax relief on Employer pension contributions, within Revenue limits.
  • There is no tax on income or growth within the pension plan in the Accumulation stage.
  • Death Benefit: Subject to a maximum of 4 x salary the full value of your pension will be payable to your estate.
  • Lump Sum Entitlement: a generous lump sum available at retirement, the first €200,000 of which is
    tax-free.

Funding Allowable for Company Pensions

A key differentiation between a Personal and Company pension plan is the level at which company Directors can fund into a company pension plan.

For personal contributions, the maximum annual earnings that can be included to calculate the level of contributions eligible for tax relief is €115,000. The Revenue allowable company pension funding limits allow significantly more scope to fund into a company pension.

To illustrate this; the below table shows a comparison of two individuals, aged 40 and 50 years of age respectively.

AgeAnnual EarningsPersonal Contributions*Company Contributions**
40€115,000€28,750€130,736
50€115,000€34,500€276,000

*Eligible for tax relief at marginal income tax rate

** Eligible for corporation tax relief, assumes no other pension benefits and a retirement age of 60.

If a company director has sufficient years of service within the company; there may also be scope to pay in a single ‘special’ contribution in respect of previous years’ service.

If the special contribution into the company pension plan is more than the ongoing regular premium, the company spreads forward the relief over a number of trading years. This can have the effect of potentially reducing corporation tax payable in future years also.

While other relief such as Retirement Relief and Entrepreneur’s Relief must also be considered, with proper planning the generous pension reliefs available can also be maximized. In some circumstances Retirement Relief may not be suitable – for example if there is no ready buyer for the company’s assets.

A company owner can access their pension benefits from 50 onwards once they dispose of their shareholding, or from age 60 without this stipulation. 25% of the pension fund will likely be available as a tax-free or tax-efficient lump sum, and the balance of the fund in retirement (an Approved Retirement Fund) becomes part of the individual’s estate.

In these extraordinary times clear, straightforward advice can help 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 justask@harvestfinancial.ie and we will be delighted to assist.

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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.

The particular tax treatment contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at March 2020. Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.