# Max employer and employee pension contribution



## quick question (15 Jun 2004)

Hello,

For a PAYE worker (35 last birthday), what's the max % of salary that an employer can contribute to a pension fund?

What's the max % that the employee can contribute to a pension fund?

Would it make a difference if the PAYE employee was also a director in the company?

Thanks


----------



## Guest (16 Jun 2004)

The Pensions Board website should answer your questions:

www.pensionsboard.ie


----------



## any answer (18 Jun 2004)

*Empoyee numbers easy, what about employer?*

I don't see any information about the contribution limits from employers as a percentage of salary ...

Also, the pensions board literature seems to indicated that employees pay benefit-in-kind on employer contributions to their PRSA

this seems rather different to a company pension plan where there's no benefit in kind


----------



## Guest (18 Jun 2004)

*Empoyee numbers easy, what about employer?*

The tax free limits (e.g. 20% of gross earnings for somebody in their 30s) mentioned on the PB site apply to the cumulative amount contributed by the employee and employee. Above these limits the employee pays tax and PRSI/health levy as normal and is liable for BIK on any employer contributions. Below these limits contributions are tax free (i.e. exempt from tax/PRSI/health-levy/BIK). There are also some other limits on pension contributions to prevent over funding of the scheme but which (I think) would not be relevant except to very high earners.


----------



## director (18 Jun 2004)

*director's pensions*

following on from the employer max contributions question:

what about company directors?  does the 20% total contribution limit appy to them?

thanks in advance


----------



## Barry (18 Jun 2004)

*Max Funding*

A company director may invest an amount that does not result in a pension fund that buys more than 2/3rds final salary at retirement age. 

It's a complex sum and requires the facts of the case t be calculated accurately. 

Company directors have huge scope to divert company monies into a pension scheme.  The sum will be defined as a % of the current salary. 

Guide for someone with no existing pension fund:

Age 35 112%
Age 40 123%
Age 45 142%
Age 50 178%   

Regards,

Barry


----------



## future director (18 Jun 2004)

*big tax break!*

it looks like there's a big advantage for self-employed and contractors work through a company rather than be a sole trader.

Especially if your pension is underfunded or you have lots of surplus income to divert into a pension fund.

Are there any downsides?


----------



## Barry (22 Jun 2004)

*Downsides*

? Costs of setting up a company; risk of pension fund losing money.

If there is surpus cash around and a pension is underfunded, it makes a lot of sense for sole traders to form a company and shift resources into pension. 

Barry


----------



## Moneybags (22 Jun 2004)

*Re: Downsides*

I think we're getting our wires crossed here. 

A 35-year-old can contribute 20% of his/her salary to a pension each year, subject to a €254k cap on earnings (i.e. the maximum employee contribution is €50,800 in any one year). The 20% is the employee's limit and has no bearing on employer contributions. 

Apart from a basic requirement that they make a "meaningful" contribution, employers are free to pay in as much or as little as they like on top of this. The only restriction is that the ultimate pension cannot exceed two-thirds of final salary.


----------



## question (23 Jun 2004)

*restriction*

The only restriction is that the ultimate pension cannot exceed two-thirds of final salary. 

I assume this applies to PAYE works...

How does this restriction work?  People change their jobs all the time now so there's no way of predicting final salary adjusted for inflation.

Also, investment performance is a huge factor.

Could a young person with a large PAYE salary could ask an employer to pay maybe 20 or 30% of his or her gross package as a PRSA pension contribution?


----------



## Barry (23 Jun 2004)

*Funding tests*

Funding tests need to be done regularly if there's a chance of over-funding - which is very rare. 

One could be in higher than 30% into a Company pension scheme, or 30% (if over 50) into a PRSA.

Revenue will not allow salary forfeiture however - so you'd need to be careful with the figures. 

Barry


----------



## Summer (23 Jun 2004)

*Two Thirds Rule*

Does the 2/3 rule include social welfare payments? Also has anyone ever heard of a subsidy payable in lieu of social welfare when someone takes early retirement?
Thanks


----------



## Barry (23 Jun 2004)

*Summer*

Summer,

No - not for the purposes of a funding test on monies going in - but many schemes do use the State pension when calculating the 2/3rds rule at retirement. 

No idea on your second point.

Barry


----------



## Another question (29 Jun 2004)

*Salary Forfeiture?*

Sorry: what does this mean:

Revenue will not allow salary forfeiture however - so you'd need to be careful with the figures.


----------



## follow up (1 Jul 2004)

*overfunding*

From Barry's posting:

Apart from a basic requirement that they make a "meaningful" contribution, employers are free to pay in as much or as little as they like on top of this. The only restriction is that the ultimate pension cannot exceed two-thirds of final salary. 


If someone is 30 or 40, how can the restriction on final salary be calculated?  

Any projection 25 or 35 years into to the future based on inflation and investment performance is just a guess!

Does this mean that a company could contribute say 30% of salary if the employee prefers taking pension contributions than salary?


----------



## Moneybags (2 Jul 2004)

*Re: overfunding*

That's the problem with over funding - you don't know it's happened until you retire. That's why it's vital to keep a close eye on AVCs, especially if you've been hitting them hard.


----------



## skeptical (2 Jul 2004)

*re: big tax breaks*

(delete previous post!)

A pension as such is not a tax break and should only be viewed as a way to save for retirement. 

From a tax perspective, pensions can be viewed as a mechanism for postponing tax. Tax is paid on the pension eventually, though possibly at a lower rate. 

There are no major tax advantages for large earners putting very large sums towards very well-funded pensions as the top rate will eventually have to be paid on these pensions anyway.


----------



## Guest (2 Jul 2004)

> A pension as such is not a tax break and should only be viewed as a way to save for retirement.

I totally agree! Too often people seem to be dazzled by the opportunity to avoid/defer/offset tax through pensions and other mechanisms and forget what the primary purpose of such investments are ...


----------



## Capall (2 Jul 2004)

*Re: re: big tax breaks*

I think the new pension environment is especially suitable for big earners.
As well as the tax break on putting the money in the fact that within the fund the income and gains can accumulate tax free is very valuable.
Also for someone who is wealthy enough not to have to draw down all their pension fund within their life time their adult children will get the funds net of 20% income tax. This means they will still have their Parent/child CAT threshold.

In fact it would make sense to even invest in your pension beyond the tax relief limits if you are looking at it as a means of passing wealth onto the next generation. I am not sure what the implications are of overfunding ie beyond not getting the tax relief on contributions does it affect the exempt status of the fund ?


----------

