If It Looks Like A Duck, Quacks Like A Duck, It’s A Duck!

Self-Administered Pension Schemes are little-understood and often shrouded in mystery for many of us. Ultimately, if it looks like a pension, and sounds like a pension, it’s just a pension!

By Paddy Delaney 

Unlike it’s closest relatives, such as traditional PRSAs or Executive Pension plans, a Self-Administered pension scheme offers total transparency on costs, investment control, and more favourable tax treatment for many senior employees, self-employed company owners and directors.

If It Looks Like A Duck, Quacks Like A Duck, Its A Duck!

To help paint a picture of how it can be useful let’s take a fictitious character, Penny. Penny is a 45 year old director of a small and successful business. She set up the company in 2010, managed to survive the ‘bad old days’ and has enjoyed success in recent years. The company has built reserves of over €500,000 and generating net profits of €100k per year. She is taking a salary of €60,000 Gross per year.

Her company has been contributing to a regular PRSA on her behalf for the past 5 years. On the basis of advice she got at the time, the most the company could put into her pension was €800 per month. Her pension now has a value of €53,000, but she is worried it won’t be enough for her to retire comfortably on! Penny is happily married to Sheldon, who is the same age as her, and is a scientist in a large multi-national.

Under a Self-Administered Scheme (which is a form of Occupational Scheme) the scope for the company to contribute to Penny’s pension pot is very different to the PRSA. The company can opt for one of two main routes to maximise her pension. These limits are set by Revenue limits based on her age, wage, marital status, previous pension planning and her planned retirement age, in this case 60, but she can access from 50 if she decided to do so! In this fictitious scenario, the company can do either Option A or Option B here, into a Self-Administered scheme for Penny:

Option A: Contribute €399,000 as a ‘One-Off Special Contribution’ and €52,000 per year between now and age 60

Option B: Contribute €81,000 per year between now and age 60

If she achieved an average of a modest 4% net return after fees on this type of strategy she could realistically expect to have a pot of €1.7 to €1.8m at 60 years of age in her Self Administered Pension scheme.

Importantly, with both options the company should be eligible to claim full Corporation Tax relief on what it contributes for Penny. If not in the year it is paid, then spread out over a max of 5 years. Money out of her company completely free of tax or Benefit In Kind, and into her OWN scheme, AND the company gets Corporation Tax Relief! Too good to be true surely? No, this is totally legit. Revenue rules allow the company to fund a pot that will likely (based on Actuarial assumptions) generate a pension income of 2/3rds a directors final salary. That is the limit, the maximum, hence the very sizeable potential pension fund for Penny.

When you compare that to her ‘original’ scheme standing to achieve a final pot value of €287k at 60, there is a marked difference in the outcomes.

When it comes to costs, a recent Department of Social Protection study found that the average pension holder is paying in the region of 2% per year in total fees. When you are talking about pots of €1m+ that is the price of a family saloon in fees every year! With a Self-Administered scheme it is possible to get that fee closer to 1%. You will need to pay an Independent Trustee for the prudent running of the scheme.

You will pay for fund management or platform service and unless you want to co-ordinate and navigate this yourself you will pay an independent Financial Advisor to guide you along. I have seen fees of 2%+ within these schemes for sure, and some advisors will say that that is normal, but there is no reason you should pay more than 1.2% to get access to best-in-class solutions.

Within a Self-Administered Penny has control over what and how to invest the funds she is building, she can switch, move or amend the approach at any time. More importantly, I believe, is that she will have the support and guidance of a professional advisor to steer her towards a worry-free and comfortable lifestyle once she packs-up the day job……which is what it is really all about, right!?

Retirement Planning is not just about whacking money aimlessly into Self-Administered Pension schemes, there are complimentary strategies that need exploring. Entrepreneur Relief, Retirement Relief, potential spouse benefits, and other tax efficient options are always worth exploration. Only when all avenues have been determined do I suggest someone pursues this route. Self-Administered schemes don’t have to be complex, they don’t have to be expensive, and thankfully due to some excellent providers in the market, they don’t have to be exclusive either. Availing of one might just help you get your financial ducks in a row!

For almost 15 years Paddy Delaney has been helping individuals and business owners in their financial planning. By his own admission the first 12 years of that time was spent as a ‘sales-guy’ of financial products. 3 years ago he started a non-profit Blog & Podcast to share insights and help people learn the real facts about financial products and services. Over the past three years he has created one of Ireland’s only truly independent financial advice firms. He now specialises in helping a select number of business and personal investors and pension holders who have big decisions to make, and who are within 10 years of their planned retirement. Check out his Award-Winning Finance Blog & Podcast at www.informeddecisions.ie

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