Executive Pension Plans

An Executive Pension Plan (EPP) often referred to as a Company Pension is an employer-sponsored arrangement designed to provide retirement benefits for company directors and senior members of staff.

How an Executive Pension Plan works

The employer decides the amount of contributions to be paid into the scheme. This can be increased through tax-deductible Additional Voluntary Contributions (AVCs) by the scheme member.

Employee advantages

Employer contributions made on behalf of an employee are not taxable and unlike other forms of remuneration are not treated as a Benefit-in-Kind. Any employee personal contributions attract tax relief(within Revenue limits).

Maximum Funding

A key benefit of EPPs is known as Max Funding. The Revenue maximum pension an individual can fund is 2/3 of the employee’s final salary. Max Funding is a mechanism that calculates the maximum funding required to fund this level of pension.

Advantages for employers

Employer payments into Executive Pension Plans are treated as expenses, they reduce profit and thereby reduce the corporation tax liability too. In addition, a well-funded EPP is an excellent way to attract, reward, and retain key employees.

A positive change has come into effect as of 1 January 2023 for Employer contributions to a PRSA. The Finance Act has now confirmed the removal of the Benefit-in-kind (BIK) charge on Employer contributions to a PRSA. This means that where contributions were previously treated as a BIK for the purposes of employee income tax, such contributions will now NOT attract a tax charge for an employee.

Retirement planning opens up opportunities for Wealth Extraction

There is now an opportunity for profitable businesses to make generous contributions to a PRSA for the business owner, with the only restriction from a tax effectiveness perspective being to avoid funding past the SFT.

Also, if your spouse and/or your children are actively and demonstrably working in the business, the company can also fund pensions for them up to the SFT. That is a significant wealth extraction opportunity for a family business.

In addition, it’s worth noting that PRSAs differ from company pension plans when taking your benefits. First, you can get access to your benefits from age 50. Also, with a PRSA you can phase in your retirement by dividing your pension funds across multiple PRSAs. This can significantly reduce the level of tax paid on your pension in retirement. This option is unavailable when retiring from an occupational pension scheme.

So the previously unattractive PRSA has now become a fantastic wealth extraction vehicle for business owners of profitable companies.

Take control of your old pensions

If you have an old pension with a previous employer you have a number of options.

Leave the pension with the previous employer. However, as Trustees, the former employer retains investment control over the scheme and is the point of contact for the administrator and fund manager.

Transfer the fund to a Personal Retirement Savings Account (PRSA). This is a simple contract and additional contributions can be made to it. However, the means by which you take your benefits may be restricted.

Transfer the fund to a Personal Retirement Bond. This cuts the tie with your former employer and gives you complete investment control. In addition, there is no change in how you take your benefits at retirement. A key consideration may be that you may access your fund from age 50 with a Personal Retirement Bond.

Transfer to a new employer-sponsored scheme. This simply consolidates the old and the new schemes and does not change how you take your benefits.

Post Retirement

How you take your benefits depends on several factors.

These include:

What structure you have used to accumulate your pension fund

• Your Fund Value
• Your Final Salary (if employed)
• Years of Service
• Your Age
• Your income requirements
• Your Health
• Your Marital Status

Set out below are your Retirement Options

Annuity

This is where you purchase an income for life from an insurance company. You are guaranteed a set income that can be level of index-linked. Once entered into the annuity cannot be altered and you will have no access to your capital. The older you are the better the annuity rate will typically be.

Approved Retirement Fund (ARF)

This is an alternative to an annuity where you can withdraw funds as required. You retain full investment control. However, the main risk here is “bomb out” whereby you use all your funds so that later on in life there is no additional income available.

Tax-Free Lump Sum

This can be taken in two forms.

Salary Dependent: The tax-free lump sum can be a maximum of 1.5 times salary dependent on years of service. This option is available to both employees and company directors.

Fund Dependant: The tax-free lump sum allowable is up to 25% of the value of your fund.

Note: Tax-Free income from all sources including previously received pension lump sums is capped at €200,000

When you retire you will be asked to make several far-reaching decisions. It makes sense to seek out financial advice before making these decisions as it far too easy to make a costly mistake.