Executive Pension Plan
What is an Executive Pension?
An Executive Pension is a pension set up by employers for executives or key employees of the company. The pension is set up under a trust and typically the employer will act as the trustee. With an Executive Pension, both employees and employers can make contributions. The ultimate value of your pension plan will depend on the contributions you and your employer have made over the years and the investment return the funds have achieved in your Executive Pension.
Not only does an Executive Pension provide you with a long-term plan for your retirement, it is also a tax-efficient way for you to set aside money for when you retire as well as being a tax-efficient way for your employer to provide you with employee benefits. In addition to employer contributions, you may be able to contribute up to 40% of your income (depending on your age) into your Executive Pension and claim tax relief.
What are the tax benefits of an Executive Pension?
An Executive Pension is an extremely tax efficient way to provide for your future retirement for a number of reasons:
- Your company’s contributions to the plan are deductible for Corporation Tax as a business expense. Corporation Tax relief on large once-off contributions may be required by Revenue to be spread over a number of years (max. five years).
- Your company’s contributions to the plan are not subject to a benefit-in-kind charge in your hands for income tax purposes. This means you will not have to pay income tax, PRSI or the Universal Social Charge (USC) on your company’s contributions to your plan.
- Your plan enjoys tax free investment growth, which means that any growth achieved on your investment is yours to enjoy in retirement. However for 2014, a pension levy of 0.75% of the value of the plan’s assets at June 30th 2014 and a levy of 0.15% of the plan’s assets at June 30th 2015 applies.
- At retirement you can take part of the accumulated fund as a lump sum which may be partially or fully tax free, depending on the value of your fund at that time and how many other lump sums you have taken from other pension arrangements since December 7th 2005. Your Financial Broker can outline the tax benefits of an Executive Pension and can also help you to meet any Revenue obligations in the setting up of an Executive Pension.
How do I decide where to invest my Executive Pension Plan?
You may be relying on your Executive Pension to provide an important source of income in retirement, so it’s vital that you invest it wisely. There are many options available to you, from low and high-risk funds investing in particular types of assets to managed or mixed funds investing in a spread of assets and self-directed funds where you choose the funds or assets in which you invest.
Your Executive Pension should offer you a diversified range of investment options that can meet your changing circumstances over time. Any choice you make should be based on the level of investment risk you are comfortable with and should take into account your financial circumstances and goals. It is important to understand that the value of your Executive Pension can fall as well as rise, depending on which funds or assets you invest in. If you don’t make a decision on how to invest your money, your Executive Pension may be automatically invested in a default fund, which may or may not be suitable for your circumstances.
When can I take benefits from my Executive Pension?
You can access your Executive Pension at Normal Retirement Age, which can be set at any age between 60 and 70. You can draw on the plan and continue to work at the company if you choose. You can also access your Executive Pension on ill-health retirement at any age.
In addition, from age 50 onwards, you can access your Executive Pension on early retirement from your company. However, you should note that Revenue usually requires directors who own and control more than 20% of the voting rights in a company to dispose of their shares in the company and to cease all involvement with the company in order to draw on their Executive Pension benefits before Normal Retirement Age.
How can I take benefits from my Executive Pension?
You will have a number of options when it comes to taking your retirement benefits from your Executive Pension. With the accumulated fund, you have two options: you can take a lump sum of up to 25% of your fund or you can take a lump sum amounting to 1.5 times your final salary at the company (provided you have worked for the company for over 20 years).
Lump-sum amount (25% of the fund) Rate of tax Up to €200,000 Tax-free Next €300,000 Standard rate (currently 20%)
€500,001 and over Marginal rate (currently 40%) plus PRSI and USC
If you take a lump sum of 25% of your fund, you can either buy an annuity with the remaining balance or invest it in an Approved Retirement Fund (ARF). If you take a lump sum of up to 1.5 times your salary, you must purchase an annuity with the remaining balance.
What happens if I die before I draw on my Plan?
If you die before drawing on your Executive Pension, the value of your plan is payable in full to your estate, up to a limit of four times the level of your final salary from the company at that time. Any balance is currently required to be used to buy an annuity for your surviving spouse or partner and/or other dependants. Remember: You can add additional life cover to your Executive Pension; your company’s contributions for this cover are also deductible for Corporation Tax as a business expense.
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