Is a pension worth it in this situation?

[kennyjoede]

A person who already has over 75k per annum in passive income, relatively inflation proofed and indefinite (mix of dividends and rent). Running a business that creates surplus cash.

If they invest the surplus business cash in a pension, basically the upside is;
- premiums can avoid 12.5% corporation tax
- can pull out 20% tax free at the end

So assuming say 500k company cash surplus, comparing (a) leaving it in company and taking as a final dividend and (b) paying it into a pension.

Assuming no fees or returns, and 51k marginal personal tax forever,

(A) you get 214k after tax whenever you want (500k x 0.875 x 0.49)

(B) you get 100k after tax immediately at retirement (20% of fund) and 196k after tax over time during retirement (ie income you drawdown 400k x 0.49)

So all things being equal you get 38% more using a pension as a vehicle.

Is that correct?

 

[rosyy57]

@kennyjoede Pension is a no brainer here. Avoids corporate tax and income tax. But only to the point of 2.1M on the date of retirement. Also your partner if married should be set up with the same.

Sounds like you need a financial wealth manager.

 

[resjudicata]

@kennyjoede Not arsed with doing the sums but lump sum from personal pension, PRSA and occupational pension is 25%, tax free up to €200k

Alternatively up to 1.5 times final salary tax free from occupational pension, limited to €200k

If lump sum is more than €200k, the next €300k is only taxed at 20%, no other deductions apply

If you're paying tax, I'd say a pension is worth it in most cases

By the way, that rent and dividend income is taxable but not pensionable so its the income generated by the company that would be pensioned

 

[kennyjoede]

@resjudicata Thanks for the info. Increasing final salary for the individual (who has very limited salary needs due to the passive income) will incur a lot of additional income tax. So e.g. going from 30k pa salary to say 300k pa final salary will cost 500k in income tax over the three years, so the benefit of the 450k lump sum being tax free/low tax from the occupation pension is really not a net lifetime benefit to the person. It's just a weird case where they have full control of their surplus company cash, will never have any tax free allowance applicable to any pension.

 

[resjudicata]

@kennyjoede They could tweak final salary and fund for lump sum from an occupational plan then.

More detail applies but assume at least 10 years service, three highest consecutive years' salary in the last 12 years is €133k, target fund €200k

1.5 times "final" salary is €200k tax free

Don't forget, growth in the pension is tax free and will pass to his estate in the event of death too

New PRSA rules are probably tailor made for this person. Keep paying themselves €30k but make employer contributions of anything he wants to spare up to €2m into group PRSA (employer contributions entirely decoupled from salary) grow it tax free, pull out 25% tax free and then worry about tax on the rest another day.

No matter what way you skin it, there's no argument against some form of retirement plan. Tax will have to be paid somewhere along the way but there's €200k to be had from a lump sum

 

[kennyjoede]

@resjudicata Yeah but this person doesn’t need to take any salary… having 3 highest consecutive years at 133 costs this person about 150k in income tax. The 200 tax free lump some is not worth that.

 

[resjudicata]

@kennyjoede That's why I referred to the new PRSA rules

 

[kitty80]

@kennyjoede It sounds like the rental income is in a company? Just to note, in non company situations, rental income is not eligible for pension contributions oddly.

 

[kennyjoede]

@kitty80 Rental income and dividend income is personal.

 

[kitty80]

@kennyjoede That might have major implications

 

[kennyjoede]

@kitty80 Yeah that’s why I mentioned it. It means every single dime of the pension fund other than the tax free lump sum gets taxed at the max.

 

[thussaiththelord]

@kennyjoede It would save such a person a good bit in tax that they can then enjoy later on, so yes.