More reasons to incorporate your business

If you're a sole trader, or thinking about starting up a business, new legislation should make it easier for you to incorporate the business as a limited company. For example, you'll be able to have just one director, just one document in the company constitution and you'll be able to have an AGM by correspondence. See this article.

At present, there are benefits to being a company director as distinct from a sole trader, when it comes to making pension provision. Here's a brief summary: -

Sole Traders

• Pension contributions limited to a fixed percentage of Net Relevant Earnings, dependant on age.



• Earnings cap of €115,000.



• No PRSI or USC relief.



• Earliest retirement age (except in ill-health) is 60.

Company Directors

• Companies can write off significant pension contributions against Corporation Tax, up to generous Maximum Funding limits.



• Funding not restricted by the earnings cap.



• Company contributions offer effective relief against tax, PRSI and the USC.



• Early retirement permitted from age 50, once director severs ties with company and disposes of shares.

Image: jscreationzs / FreeDigitalPhotos.net

No PRSI on Employer PRSA

I know - snappy title. The Department of Social Protection have confirmed that contributions by an employer to a PRSA do not generate a PRSI liability for the employee. Such contributions do, however, generate a USC liability.


In clarifying this, the powers that be have gone less than half-way to rectifying a known anomaly between PRSAs and Occupational Pension Schemes. Employer contributions to Occupational Pension Schemes are not a Benefit in Kind and therefore do not generate a liability for the employee in respect of tax, PRSI or the USC. Employer contributions to a PRSA are a Benefit in Kind and, while tax relief offsets the tax and now the PRSI liability has been removed, the liability to the USC remains.

When PRSAs were launched, less than eight years ago, they were designed to be low-cost, transparent, portable pension savings vehicles that would encourage more people to save for their retirement. Why the Government is now discriminating against them in favour of the older type Occupational Pension Schemes is beyond me.

Image: graur codrin / FreeDigitalPhotos.net

Personal Fund Thresholds - Revenue deadline looming...

In accordance with Section 787P(2), Taxes Consolidation Act 1997, anyone with pension benefits with a capital value of over €2.3 million at 7/12/2010 has until 7/6/2011 to apply for a Personal Fund Threshold (PFT) Certificate. Anyone who misses this deadline faces substantial additional taxation when they retire. Bearing in mind that an application for a PFT Certificate involves gathering details of all pension arrangements, often from a variety of sources, anyone who needs a PFT Certificate should be taking action now.

Worryingly, in this Irish Times piece, Dominic Coyle tells us that by April 8th, only 144 enquiries had been received by Revenue on this topic, out of an estimated 6,000 affected people.

Who does this affect?

While the figure of €2.3 million might seem enormous, don't forget that this is the capital value of a pension fund. So you don't have to be a multi-millionaire to fall into this category. Here's a few examples: -

• Anyone in a Defined Benefit pension scheme with an expectation of a pension of €115,000 per year or more, before lump sum entitlements.

• Any Public Servants with an expectation of a pension of €100,000 per year or more.

• Anyone in either of the above categories with a lower pension entitlement but with additional pension funds from other sources, e.g. AVCs, RACs, pensions from previous employments etc.

• Anyone with Defined Contribution pension funds totalling more than €2.3 million at 7/12/2010.

What happens if the June deadline is missed?

After 7/6/2011, anyone who retires with pension benefits with a capital value of greater than €2.3 million, who does not have a PFT Certificate, will be taxed on the excess over €2.3 million at 41%. This is an additional tax, over and above the normal taxes that will apply to drawdown of pension funds. So an individual who retires with a pension fund of €3 million and no PFT Certificate will pay €287,000 in tax before drawing their pension benefits in the normal way.

How can we help?

We can gather the required information from the various pension schemes, calculate the capital value of pension benefits in Defined Benefit and Public Sector schemes, calculate the Personal Fund Threshold and prepare the application for submission.

Don't forget to tell the taxman

If you're a PAYE employee and have a private pension policy that's paid through your bank account by Direct Debit (and NOT through your salary) you presumably have applied for and received your tax relief by way of extra Tax Credits. (You have got around to applying for your tax relief, haven't you? If not, do it NOW!)

Two things to remember: -

(1) You can also apply for a refund of Employee PRSI on the contribution at the end of each tax year, provided that you've already been granted the tax relief. Use this form.

(2) If you increase, reduce or stop your contribution, don't forget to let Revenue know. Revenue usually grant extra tax credits on pension contributions on the assumption that the contribution will remain the same until further notice. So if, for example, you stop your contributions altogether, you must notify Revenue or else you'll continue to get tax relief on a contribution you're no longer making and will have to give it back eventually. On the other hand, if you increase your contributions, you won't get your extra tax relief until you let Revenue know.

This applies to PAYE employees with Personal Pensions, PRSAs or AVC PRSAs who are paying their contributions gross and NOT via a salary deduction arrangement.

Public Servants should consider retiring now

I recently looked at a pension projection for a 61 year old hospital consultant, working for a HSE hospital. The projection gave him details of his pension and lump sum from the superannuation scheme should he retire now, as well as the projected figures if he stays to age 65.

The twist, however, is the fact that the projections take no account of the 15% salary reduction to which he will be subjected, as a result of Budget 2010. Because public service pensions are based on a percantage of final salary, if your salary is reduced by 15%, your pension will be also.

But in the Budget, a window of opportunity was provided. "To ensure that any increase in the number of retirements can be managed, the legislation on pay reductions in the public service will provide that any retirements in 2010 would be on existing, pre-cut pay terms." So any Public Servant retiring in 2010 will have their pension based on 2009 salary level.

Given that Public Service pensions accrue at a rate of 1/80 or 1.25% of final salary for each year of service, a higher earner facing a pay cut of 15% would take 12 years to build up the lost pension entitlement, unless pay increases come back into fashion during that period. Someone facing a pay cut of 8% would take over 6 years to build up the lost pension entitlement.

So if you're a Public Servant and within sight of pension age, you might do well to consider retiring now. Which is presumably a deliberate move by the Minister.

Deadline approaches for pension contributions

If you're filing your 2008 tax return and paying your tax online using Revenue's online service www.ros.ie you have until November 16th to do so. You can reduce your tax bill by making a pension contribution before you make your tax return and backdating the tax relief on the pension contribution against your 2008 tax liability.

For high earners, this is the final opportunity to claim tax relief on pension contributions up to the 2008 income ceiling of €275,239. The income ceiling has been reduced for the 2009 tax year to €150,000.

Pensions - you can go your own way

I was at a Standard Life presentation today and one of the speakers noted that since Standard Life launched their Synergy platform in 2006, they now have over 1,200 Stocktade accounts containing an average of €45,000 each.

Stocktrade is Standard Life's chosen stockbroker for their self-directed pension contract. Using the Standard Life / Stocktrade platform, we can set up pension plans for clients allowing them to mix their fund between managed funds, cash deposits, direct property (which they choose) or shares, ETFs and bonds of their own choosing.

Interesting that Irish pension clients have chosen to entrust €54 million via Stocktrade into shares, ETFs and bonds of their own choosing. Far from being a niche product for the High Net Worth customer, self-directed pension funds are now coming into their own as something open to everyone - Personal Pensions and Buy Out Bonds included.

New style of pension tax relief

Credit where it's due to the Commission on Taxation for taking a long-term view on reform of pensions legislation, rather than concentrating on how money could be saved in the short term. Many of their proposals on pensions are largely focused on making pension planning more attractive, rather than cutting costs. Given the changing demographics of our country, this is very welcome, especially since short-term cost-cutting might have been an easier sell to the Government in the current climate.

One of their more interesting proposals is that the idea of "tax relief" on pensions should be replaced with a more transparent system, whereby for every €1.60 an individual contributes to a pension plan, the Government adds €1.00. For the first five years, the Government would match contributions €1.00 for €1.00.

This system would deal with the age-old perceived inequality that our current system offers more benefit to higher-rate taxpayers than to those on the lower rate. It is the equivalent of offering 50% tax relief for five years, then 38% relief thereafter. To take an example of a pension plan that exists for 25 years, that's the equivalent of an average rate of tax relief of over 40%. This is lower than what many high rate taxpayers currently enjoy but higher than what low rate taxpayers are currently offered.

Perhaps more importantly, it's simple. The idea of the Government putting money into your pension plan directly somehow sounds more appealing than the current tax relief system, even though tax relief is also the Government adding money to your pension plan - just expressed in a different way.

Let's hope Brian Lenihan pushes this one through. Radical pensions reform can tend to take an age to implement, as I've said before, even though Charlie McCreevy proved that it doesn't have to.

The pensions section of the Commission's report can be read here.

Pensions Apartheid: Public vs Private Sector pensions

Well-known independent actuary Tony Gilhawley recently wrote a report for the Professional Insurance Brokers Association on the differences between Public Sector and Private Sector pensions. It makes for fascinating reading.

You can download it in MSWord format from here.

What to do with your pension when you leave a job

As I've been getting an increasing number of queries on this topic recently, which I suppose is a sign of the times, I wrote the following article for the Sunday Business Post as a sort of FAQ.

http://archives.tcm.ie/businesspost/2009/06/28/story42723.asp

Make your pension contribution early

There has been some confusion over the Supplementary Budget's 1% levy on life assurance policy premiums, which takes effect on 1/6/2009. It's not 100% clear whether or not this applies to pension contributions as well as life assurance premiums. We are awaiting clarification on this.

Got a note from Hibernian Aviva today - "Hibernian Aviva Life & Pensions Ltd is working with the Irish Insurance Federation and other life assurance companies to clarify the impact of the proposed levy and we are seeking to mitigate its effect on customers.

We want to assure you that we will be doing everything we can to lobby the Department of Finance to re-think the imposition of this proposed levy and to convey to them the potential damage that it will have on the Life & Pensions industry."

I fully support their efforts, as adding a levy like this to a pension product is simply a reduction in the tax relief by another name.

However, if this is going to be the case, there's a strong argument in favour of making pension contributions prior to 1/6/2009 and thus avoiding the 1% levy. This would be especially relevant to the self-employed who would normally pay their annual pension contributions in October or November.

What will this Budget achieve?

I'm struggling to find too many positives about yesterday's Budget.

I do accept the need for tax increases and spending cuts in the current climate.

But the overall strategy of this budget baffles me. He reduces incentive to save money, by increasing DIRT tax, CGT and Exit Tax on investments. This at a time when interest rates are very low anyway and most other investments are going through a very volatile period.

So if he doesn't want us to save, maybe he wants us to go out and spend instead, thus putting much-needed money back into the economy, right?

Wrong - he increases levies and reduces reliefs so that people will have less money to spend.

So what does he really hope to achieve?

Fear of Budget good for business

Although the r-word hasn't exactly been good for business, there have been two noticeable trends of recent days and weeks: -

(1) Self-employed people deciding to invest money in Personal Pension arrangements this week, in case the April 7th Budget changes rules on tax relief.

(2) Older people deciding to draw their pension benefits this week, in case the April 7th Budget imposes tax on lump sums with immediate effect.

It seems reasonable to assume that there will be some changes to pension legislation in next week's Budget, though only Brian Lenihan and a select few know what form they will take. But if the fear factor causes a bit of a rush, who am I to complain?

Pension tax cuts in the Budget?

Everyone has their predictions about what will happen in next month's Mini-Budget, which is likely to be more juggernaut than Mini. Some possibilities are discussed in today's Irish Independent here.

The Minister needs to tread very carefully if considering reductions in tax relief available to those seeking to fund their pensions. Confidence in pension funds is at a low point at the moment, given the recent downward trend in fund values. This confidence will inevitably return when values start rising again. But if the Minister picks this point in time to announce cuts in tax reliefs, it could cause many people to simply scrap their pension plans altogether. This, of course, would be a bad thing for people's long-term futures and would render wasted all the millions spent on pensions awareness campaigns of recent times.

That said, tax savings are inevitably required. Here's one for the Government to consider - introduce a low rate of Capital Gains Tax and/or tax on dividend or rental income on pensions. Currently, neither tax exists within pension funds. At a rough estimate, funds under management in Ireland total over €55 billion and that's after all the recent falls. Even if there is a recovery of 5%, that would add €2.75 billion. A tax of 10% on gains alone would add €275 million to the Exchequer coffers, while still leaving pensions an attractive form of investment.

I'll only take 1% commission on tax savings for this idea.

Standard Life rating upgrade

Standard Life has had its credit rating upgraded from A to A+ by rating agency Standard & Poors this week.

Such ratings are not infallible guides. For example, Enron's rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company's problems for months.

But nonetheless an upgrade is a positive endorsement and is welcome news.

Public Service Pension Levy - some sense prevails

I blogged last week here about the possibility that the levy could cause some people to reduce their pension contributions. Thankfully, my fears in this regard have turned out to be unfounded.

The following is the latest information available about the levy, with thanks to Eagle Star / Zurich: -

We (Eagle Star / Zurich) have been asked a number of questions in relation to the levy and its impact on pension contributions. We contacted the Revenue and have just received the following answers:

Q1. Are these levies regarded as pension contributions or as a separate levy / taxation?

A. The levy will be regarded as pension contributions.

Q2. Do the levies form part of an employee's age related contribution limits?

A. No, they do not form part of the employee's age related contribution limits.

Q3. Will the levies be applied to an employee's gross salary or net salary after the deduction of any employee / AVC contributions?

A. They will be deducted from the employee's gross salary, net pay arrangement to be operated.

Q4. Do the levies qualify for tax relief & what happens to anyone earning over the 2009 earnings cap of €150K?

A. Yes, tax relief is available, see 3 above. No restriction with reference to €150K earnings cap.

Q5. Is this proposal contingent on Union agreement & what timeframe are we looking at?

A. This proposal comes into effect on 1st March 2009.

Eagle Star Zurich - a good news story

In the current climate, I'm almost relieved to read some good news stories from time to time. Eagle Star / Zurich's new business in 2008 was actually up by 1% on 2007, despite the difficult year. This was largely driven by pension & PRSA sales which pulled the overall average up - other areas like Mortgage Protection life assurance were understandably down.

Credit where it's due - we've enjoyed a good working relationship with Eagle Star for many years and I'd suggest that their trend-bucking performance is largely attributable to consistently above-average fund performance, excellent online platform and a strong PRSA contract.

With hindsight, they have done themselves favours by steering clear of exotic and over-complex investments (e.g. ISTC) in favour of good old-fashioned stock picking.

More details can be read here.

Public Service pension levy

I've been following the reporting of the Public Service Pension Levy announced this week.

I can't see any clear explanation as to whether this new levy will be included in your usual limits for tax relief on pension contributions (e.g. 20% of income while in your 30s, 25% of income while in your 40s etc.) As the levy qualifies for tax relief, it seems reasonable to assume that it will be included as a pension contribution for the calculation of these limits.

If it is, a rather bizarre situation may arise where an individual has been voluntarily making additional pension contributions - Additional Voluntary Contributions (AVCs) and/or Notional Service Purchase (NSP - "buying back years"). The additional levy could put them over the limit for tax relief for their age. So the logical thing to do would be to reduce their voluntary pension contributions.

Given that the Government has spent an awful lot of time, effort & money trying to encourage people to contribute to their own pension, it seems counter-productive to then introduce a levy which may have the effect of encouraging people to reduce their contributions.

Brian - make sure the levy doesn't count towards the age-related limits for tax relief!

Thinking of reducing your pension contributions?

I know of some people who have reduced and in some cases stopped their pension contributions recently. Some did so due to external circumstances - job loss, slowdown in business etc. Others did it because the value of the fund had dropped recently. For those in the latter category, have a read of the following article from the Motley Fool / Yahoo! Finance - The Move You're Going to Regret

It's a US-centred article, but the principles apply to Ireland and anywhere else.

Report Published on the Pensions Green Paper

We made a submission to the Government last June on the future of Irish pensions, as part of the Green Paper submissions process. See here.

All the submissions have now been received and examined. The Consultation Report has now been published and can be viewed here. Warning - it's a 3.2MB download, so only recommended for those with faster internet connections unless you want to nip off to have a cup of tea while it downloads.

Nice to see some of our suggestions featured in the report.