Salary requirements for executive pension

Bit of a hypothetical one but thinking ahead for the future and would love to get my head around how these things work.

Have been researching a bit about executive pensions and see that the company can contribute an amount that would provide 2/3 s of final salary. I’ve also seen information saying that final salary can be calculated using an average of (final) three years of salary .I have also read that 20 years service is needed to get the Max entitlements.

Is it possible to take a small salary for 17 years (say 6,000 per annum as already pay 40% tax on another income) , then raise the salary to 45,000 per year for the final 3 years..and have the company make contributions in offer to provide a lump sum and a pension of 30,000?

If so a few questions..

When can/should the executive pension be set up?

For the first 17 years can the company only make contributions to the EPP in line with salary?

How do special contributions work? Can a special contribution for prior service only be made if there was no exiting pension for those prior years?Is the special contribution amount based on current salary or salary at the time?

I presume the pension of 2/3 of salary is independent of other pensions? I.e I can take a pension of 30,000 from the EPP in Addition to the state pension and a defined benefit pension of 6,000.

Apologies if any of this doesn’t make sense- this is all very new to me and mostly just posting to get an idea of what might be possible in the future, Goes without saying that much financial advice will be needed if this is even a possibility.

Yes, if you are a 20% director then your final calculations are based off your 3 largest consecutive salaries within the final 10 years of your retirement date. If not a 20% director then you can use your final salary.

The maximum 2/3rds of final salary (i.e. maximum funding) only requires 10 years of salaried service before your nominated retirement date.

The 20 years is for those who are just looking to maximise the tax-free lump sum based on salary and service. 20 years gives the maximum multiplier of 1.5 e.g. with a salary of €100,000 an individual can take €150,000 (€100,000 x 1.5) as tax-free cash. If there is anything left in the fund it must be used to buy an annuity.

There are 6 factors that go into working this out. Desired retirement age between 60 & 70, Gender, Marital Status, Salary, Years of Service and value of other Irish benefits (whether defined contribution or defined benefit).

You can see your figures as a director here.

You get a funding allowance each year based on these factors and these carry forward into future years within the same limited company. Special contributions are where you basically use up all of these unused allowances by making larger retrospective contributions.

Your contributory state pension entitlements won’t be affected but your defined benefit pension will need to be factored into a different calculation to work out your maximum funding capacity.

Kevin
www.thepensionstore.ie

Thanks Kevin, that’s a great answer. Lots to think about.

kevhenry said:

There are 6 factors that go into working this out. Age, Gender, Marital Status, Salary, Years of Service and value of other Irish benefits (whether defined contribution or defined benefit).

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Hi Kev,

Just wondering why retirement age doesn't matter and gender does?

Thanks @SGWidow. Sorry I put in ‘age’ rather than ‘retirement age’ there. It’s one of the most influential factors as the earlier age you pick (e.g. 60) the more scope you have.

Kevin
www.thepensionstore.ie

Thanks Kev,

I know I'm being a bit of a pain but wouldn't age also matter - i.e. as it determines the number of years available to fund?

The bit about gender is a genuine question - are annuity rates relevant and, if yes, are annuity rates unisex at this stage?

The retirement age determines the maximum fund size allowed and this is represented by revenue’s capitalisation factors. A person’s current age determines their maximum contribution rate as a function of this.

As an example, let’s look at Tony and his nephew Christopher who both work in the waste management industry.

Tony (50) is married to Carmella. He earns €90,000/yr and wants to retire at 60. Since he will have the required 10 years of service needed by age 60, revenue will allow a maximum fund for him of €1,944,000. This is calculated as 2/3 x 32.4 x €90,000. (32.4 is revenue’s capitalisation factor for a married man retiring at 60)

Being 50 means he’s got 120 months left until he reaches this retirement age. As such, the maximum contribution rate for him is €16,200/month. This is simply calculated as €1,944,000/120 months.

On the other hand, Christopher (30), is married to Adriana. He too earns €90,000/yr and also wants to retire at 60. Now, even though he’ll have much more service then Tony by age 60, the maximum pension fund allowed for him is still the same (€1,944,000) because the calculation is the same.

However, the difference now is that, while Tony is allowed to accumulate €1,944,000 over 10 years at €16,200/mo, Christopher has a lower funding threshold because he has 30 years until retirement rather than 10. As such, his company can contribute the lower figure of €5,400/month because the calculation in his case is €1,944,000/360 months.

So, Yes, age matters big time from that perspective.

Gender matters because allowances are calculated based on a preferential hierarchy as follows;
1. Married man
2. Married woman
3. Single woman
4. Single man

This ranking hasn’t changed since these factors were introduced but, in the environment we live in today, they’re just itching to be challenged.

Annuity rates are also relevant because they can be used to work out maximum benefits too.

Once you’re within three years of your normal retirement age (NRA) you can apply to Revenue to use open market annuity rates instead of the prescribed capitalisation factors. The main reason why someone might look to do this is because it may allow them to target a higher maximum fund without having to increase their salary.

If you’re in that space it’s worth investigating.

Kevin
www.thepensionstore.ie

kevhenry said:

So, Yes, age matters big time from that perspective.

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Agreed.

kevhenry said:

This ranking hasn’t changed since these factors were introduced but, in the environment we live in today, they’re just itching to be challenged.

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Thanks for explaining the Revenue's approach which seems illogical and for all sorts of reasons.

Thank for the great information...

So if I started the executive pension at 40 on a salary of 6,000 per year , I could put in enough for a total pension fund of 129,600. Dividing this by 20 years mean the company could pay 6480 into the pension fund each year.

( I presume I wouldn’t be able to pay in more than this based on expected final salary)

Then if at age 57 if I upped the salary to 45,000 per year I could fund a pension to a total of 972, 400. Which would mean I could up the contributions significantly for the last three years (the exact amount will obviously depend on how much is in the pension already at this point).


Can 25% of this 972,400 then be used to fund a lump sum? This would amount to about 243,000 so some would be tax free and the remainder at 20% I believe.

And the rest in an ARF? Which if 4% was taken annually would provide a yearly amount of about 30,000.

The 25% (of up to 800k) can be given tax free , ie 200k.
The next 300k at 20%.
The 25% is of the money in the fund. So in your example if you have €972,400 in your fund then you could have a max tax free payment of 200k.

Savvy said:

The 25% (of up to 800k) can be given tax free , ie 200k.
The next 300k at 20%.
The 25% is of the money in the fund. So in your example if you have €972,400 in your fund then you could have a max tax free payment of 200k.

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Thanks, ya that’s what I figured.

One more question; Which companies provide cheap executive pensions?

Was thinking Davy, they seem to charge 0.75% plus a charge per trade, which could be a good option with just a single annual contribution to a fund like VWCE.

My EPP setup directly with Zurich -

Contribution Allocation Rate - 100%
Annual Management Charge - 0.75%
€3.50 policy fee per month
Early Encashment Penalties in the first five years: 5% Yr One, 4% Yr Two, 3% Yr Three, 2% Yr Four, 1% Yr Five, 0% Yr Six+
Four free fund switches per policy year
Fund choice from Zurich's full fund range
Zurich Trustee Services are normally €5 per month. However, this charge is currently waived

I've been fairly happy with this, the setup process was very quick and easy. I'd prefer to be able to choose from a range of ETFs with the likes of Davy Select, but the costs seemed to mount up, particularly where I was starting with no pot and making small contributions. I chose 4-5 funds that are virtually 100% equity.

Zenith63 said:

My EPP setup directly with Zurich -

Contribution Allocation Rate - 100%
Annual Management Charge - 0.75%
€3.50 policy fee per month
Early Encashment Penalties in the first five years: 5% Yr One, 4% Yr Two, 3% Yr Three, 2% Yr Four, 1% Yr Five, 0% Yr Six+
Four free fund switches per policy year
Fund choice from Zurich's full fund range
Zurich Trustee Services are normally €5 per month. However, this charge is currently waived

I've been fairly happy with this, the setup process was very quick and easy. I'd prefer to be able to choose from a range of ETFs with the likes of Davy Select, but the costs seemed to mount up, particularly where I was starting with no pot and making small contributions. I chose 4-5 funds that were all virtually 100% equity.

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Looks good, this is a few years off anyway so hopefully the options continue to improve until then anyway. Would love to invest it into a passive ETF as the fees on managed funds seem v high -+but if the cheapest pension products are associated with managed funds I guess it balances out!