Dual Public Private Pension: Encashment Option?

[DualPublicPriva]

I am 38 and working both in the HSE (salary 100k) and privately in my own new limited company (projected annual profit of 80k). I have been contributing to HSE superannuation pension since 2011, and I am planning on starting employer contributions for myself and my spouse (40k each per annum) next year into a private PRSA, via my limited company. The goal is to maximise employer pension contributions. I have never drawn a salary from the company, so I don't think salary sacrifice is an issue.

I have a few questions:
1. Am I eligible for encashment option of private PRSA at 60 due to dual public/private pension rule, as long as I stay in public service until 60?

2. Is there an unlimited amount of private pension you can encash at 60 to avoid breaching the SFT limit on HSE pension? I can't see any limit in Revenue guidance. Theoretically could you encash say 3-4 million private PRSA, and keep 2 million HSE pension? An unlimited private encashment option seems like a great way of possibly getting around the SFT limit, and putting all private income into a private PRSA.

3. Is the encashment tax rate 42%? Revenue guidance seems to indicate this (40% + 2% USC + 0% PRSI). This seems tax efficient compared to 52% income tax on salary or subsequent pension drawdown.

4. Can I also maximise pension contributions from my HSE salary, and put them into my private PRSA? If so, would this also be eligible for encashment as a private PRSA at 60?

 

[Conan]

Me thinks you are a bit confused. The current SFT limit of €2m is inclusive of all pension benefits - public and private. Based on your current HSE benefits (assuming full service) the capitalised value would be c€1.3m . Based on current numbers that leaves about €700k before exceeding the SFT.
There is no "unlimited private encashment option". All pension benefits fall into the SFT limit. That SFT may well increase over the next 22 years (though SF want to reduce it to c€1m).
As things stand currently, you have some scope to establish a private pension, but you need to manage the numbers carefully.

 

[DualPublicPriva]

Hi Conan,
There is an exception to the 2 million SFT limit, where you can encash your private pension, if you have a dual public and private pension. Once the private pension is encashed, then it is not counted towards the SFT. I've attached the relevant Revenue document here.

 

[Steven Barrett]

I have never drawn a salary from the company, so I don't think salary sacrifice is an issue.

You'd want to start if you want to fund a pension. While there are no annual funding limits, you will be required to draw a salary. A life company will probably not accept your money if you are not drawing a salary from your business and just lumping money into a pension. This is the kind of things that will make the Revenue reverse the no annual funding limits.

1. Am I eligible for encashment option of private PRSA at 60 due to dual public/private pension rule, as long as I stay in public service until 60?

The two pensions have nothing to do with each other. You can access the private PRSA from 60 and the public at 65 or later.

2. Is there an unlimited amount of private pension you can encash at 60 to avoid breaching the SFT limit on HSE pension? I can't see any limit in Revenue guidance. Theoretically could you encash say 3-4 million private PRSA, and keep 2 million HSE pension? An unlimited private encashment option seems like a great way of possibly getting around the SFT limit, and putting all private income into a private PRSA.

This is not correct. You can have a total pension value of €2m. that includes the value of your public and private pension. Your public pension is very valuable and for positions like hospital consultants be valued over €2m alone.

3. Is the encashment tax rate 42%? Revenue guidance seems to indicate this (40% + 2% USC + 0% PRSI). This seems tax efficient compared to 52% income tax on salary or subsequent pension drawdown.

Pensions are taxed under PAYE. No PRSI on annuities, but it is payable on ARFs up to age 65.

4. Can I also maximise pension contributions from my HSE salary, and put them into my private PRSA? If so, would this also be eligible for encashment as a private PRSA at 60?

It has to be kept separate and go into a PRSA AVC. It is to be matured at the same time as the main pension to which this employment is linked with.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[DualPublicPriva]

Would a 1k nominal annual salary each for myself (Company Director) and for my spouse (Company Secretary) suffice in order to begin making 40k employer pension contributions?

I'm aware of the SFT applying to both public and private pensions. However, what I'm referring to here is the Revenue guidance which allows for the option of encashment of a private pension, in order to avoid a crystallisation event for SFT purposes, in situations where somone has dual public/private pensions. Perhaps this is an option that isn't well known. Could someone who has heard of this confirm whether this is an option for me, i.e. encashment of private pension to avoid crystallisation being counted towards SFT?

The Revenue guidance also indicates encashment tax is 42% (it is treated differently to ARFs and pensions, as this specific form of encashment is neither). Again, could anyone confirm this?

 

[Oisin19]

I don’t think you would meet the requirements for the encashment.

Not sure why you would do this regardless. You are looking at an exit tax of 42% when cgt is lower. Also, in 20 years the tax system will be very different and your plans could be completely different.

 

[DualPublicPriva]

Perhaps you could explain why you reckon I don't meet requirements for dual public/private encashment option?

Pension contributions have tax-relief, and allow for gross roll-up. Whereas if you're comparing with CGT, you've already paid income tax before you invest. By my calculations, the pension is far more profitable, even after 42% encashment tax versus CGT.

The next best wealth extraction option I think might be to keep all profit as assets in the company (paying 19.5% corporation tax initially), and then extracting wealth years later through retirement relief (at 0%) or entrepreneur relief (at 10%)?