The Form 11 – Tax Return and Self-Assessment – is due every year around the second week of November, and a well-timed pension contribution could reduce this tax bill, while you simultaneously invest in your future! Pensions funds are something we advise to all business owners, no matter the current value of their business. It is rarely possible to accurately forecast exactly what your company will be worth by the time you reach pensionable age, and if there will be a buyer ready when you are.
Protecting your future and securing a comfortable retirement requires some simple, but effective, planning. Let the tax savings you could make this November stand to you in your mature years with a timely pension contribution. If you are a Company Director owning more than 15% in shareholding, or a sole trader, then this applies to you. If you are earning a non-PAYE gross income in surplus of €50,000 or a quantifiable non-PAYE income of €5,000 or more, you are also required to submit a Form 11. Arranging this kind of paperwork is better done sooner rather than later, so let’s consider the finer details.
How does this work? Very simply! By making a lump sum pension contribution you can keep your taxes below a certain tax margin. This may mean some tightening on your cash flow (depending on the amount) but, by doing so, you will create an asset for your future instead of losing money unnecessarily to tax. In Irish law, this contribution can be made as late as the end of October 2017. This will be reflected as a tax-free cost against last year’s income. There are constraints on how much you can contribute depending on your age and income: The limit varies between 15% – 40%, of your earnings. The government will support you making contributions to your pension scheme, but there is a cap. For example, if you’re earning €500,000, this total amount will not be eligible for the calculating of your maximum pension contribution. Instead, the amount of earnings they allow to be used for this calculation is €115,000. Therefore, the maximum contribution a person can make if they are earning up to €115,000 is €46,000.
Sooner rather than later
The paperwork required to make your pension contribution is very straightforward. However, because Form 11 is due in November, it would be advisable to make your contribution as soon as possible. From our experience, November is too late. The state requires a policy certificate from the insurance company showing the investment date of your pension contribution. To make sure this is received in time for the Form 11 submission, it is recommended that you make your pension contribution by early October. It is not an uncommon practice for insurance companies to give latecomers the deaf ear when the phone is ringing off the hook with people wanting to quickly make pension contributions!
A good financial adviser
The reason an insurance company may do this is because it is a regulated industry, which means various forms and discussions need to be conducted before the contribution can be made. The kind of forms you can expect include the application form itself, an investment questionnaire and money laundering documentation. A good financial advisor will guide you through these documents, while also ensuring that you are making an informed pension contribution that will have the best results for your specific circumstances. For example, a person who is 60+ years old will not want to get into a managed fund, their plan will be to mature that pension investment in the next number of years in a lower-risk fund. Therefore, a few things need to be carefully considered,
- what institution to invest in
- what investment funds are most appropriate
- making sure that you are not duplicating previous investments
Personal or company pensions?
If you are in a position to draw from a personal or company pension scheme, you may be wondering which is best. To reiterate, the personal contribution has a maximum limit of €46,000, and that number is calculated from the capped salary of €115,000. This is a limitation of the personal pension scheme. A company pension, on the other hand, has various factors which influence the amount you can contribute. The calculations are based on your salary, age, and your length of service with the company. This can be calculated by your financial advisor. You can, of course, conduct both pension funds simultaneously and the upper limit will be based on the combined calculations of both the company and personal pension scheme limits. The benefit of the company pension fund approach is that, depending on how many years of service you have with the company, your contribution can be as much as 300% of your salary. However, with regards to personal contributions, they have already been taxed. Therefore, if the company pension scheme is available, this is the obvious choice between the two. It is worth noting that the company pension route is not simply putting your pension costs through your company as an expense; it’s a different contract covered by separate legislation. Therefore, you can move your personal contributions into your company pension scheme in order to keep them all in the one place and continue from this point with company contributions to your pension fund.
Would you benefit from a more comprehensive conversation about your pension fund investments that would result in a tailor-made plan designed with your specific circumstances in mind? Beyond can help! We will guide you through the forms you are required to fill out and make sure that your pension contributions, including the Form 11, work to your benefit. See the range of financial advisory services we provide to business owners.