Pension funds are one of those things forever being put on the long finger, and none are guiltier of this than business owners. This is understandable, considering that you have the option of selling your business in your later years. However, it is not unreasonable to suggest that your business may not sell for the number you were hoping for.
What if your business does not sell for what it is worth?
As with the selling of anything, product, service, property or business, the market value at the specific time of sale needs to be taken into consideration. Realistic expectations need to be formulated, and this requires considering the buyer’s perspective. How will the buyer build up the funds to buy your business at your decided price? Is it a realistic expectation? These are difficult questions to answer today, let alone estimating the answer for 10 or 20 years into the future. This is why we still trust in the old saying to not put all your eggs in the one basket!
The state pension is not sustainable
Currently, the Irish government contributory state pension amounts to €12,132 a year, which is just €233 per week. Unfortunately, that is not where the bad news ends. It is believed that this will be reduced within 20 years’ time. The government made it clear that they are no longer able to provide full support to pensioners when they extended the retirement age. Gone are the days of retirement at 65. If you are born before 1955 you can expect to receive your pension at 67 years of age. If you are born after 1961 you will receive it at 68 years of age. This means that if you were planning on leaving employment at 65, there is now a 3-year period in which you will have to depend on your own savings – assuming you have savings.
Do you have €518,000+ to spare?
Ideally, when you retire you will have a pension fund of €518,000 if you want to secure a retirement reflecting full time work at roughly €36,000 per annum including the state pension. Saving this amount (or more) of money is something not advisably done with disposable income, due to the sheer difficulty of this challenge. In this situation, you are saving after taxes have already been deducted. This would include Capital Gains Tax and DIRT tax, for example. Therefore, a savings account is not viable, when considering not only taxes but the fluctuation of rates of interest. There are more sustainable ways to build your pension fund, while making the most of your investments.
Managed Pension funds
The return on managed pension funds in the last 5 years has been on average over 7%, with no tax leakage. How? Pension schemes are where you receive the best support from the government. The government do not want to be taking care of a poor elderly generation. They combat this by offering generous tax breaks. As an individual, you can pay up to 40% of your salary toward a personal contribution to your pension fund, and the government will ensure that this is not taxed. This tax relief is also available to your employer’s contribution to your pension fund. This contribution is not treated as a benefit in kind either. The environment in which you choose to invest your pension fund will be one which is tax free. The benefits continue even as you begin to take withdrawals from your fund. At the tail end of a pension fund, most people can mature their pension and take out a lump sum, amounting to one quarter of their fund (or up to the first €200,000). This is delivered in a tax-free format. The next lump sum can be up to 300,000 and is taxed at only 20%. In excess of this, withdrawals are subject to normal tax. It is also possible to earn up to €18,000 per annum singly (€36,000 when married) tax free while withdrawing from your pension fund.
Timing is key
As with most set goals in life, the earlier you start chipping away at them the better. Returning to our pension fund number of €518,000, what kind of instalments would you have to make to raise this level of funding? Over a 15-year period, you would have to consider contributing €2,035 a month to hit this target successfully. However, over a 20-year period, the amount is significantly reduced. This would amount to €1,355 per month. Don’t forget, you are going to receive tax relief from this contribution going into your fund, so it will only be about 50% of this gross figure. In summary, having access to a pension pot of €518,000 at your time of retirement would mean that you would receive:
- A lump sum of €129,500
- €12,132 p/a contributory pension
- €10,808 p/a adult dependent pension
- €13,000 p/a income from pension assets
All of which are tax free. As a business owner, you hope that your business is worth the highest amount possible when you choose to retire and will have a buyer. But businesses fold, lose value or simply cannot get sold. A smart strategy for a business owner is to have a pension fund building up before that day arrives. Get in contact with us today and you can start taking legitimate profits out from your business in a tax-efficient way.
*The figures used in this article are based on certain assumptions and current legislation, which is subject to change.