SSIA to PRSA scheme suitable for a low paid director?

[alastair]

Hi,

I'm late thirties, home owner, director of small company, employee of same company with minimal salary on the 20% bracket. I've a frozen old pension from a previous employer (small amount - no decision made on what to do with it), and I've my SSIA maturing next year at the end of the scheme.

My company is really only becoming modestly profitable after three years, to the point where I can start thinking about pension arrangements. I'd qualify for the Govt SSIA to PRSA scheme, but I'm not sure if a PRSA suits my needs better than a scheme specifically geared towards directors. I'll be shifting the SSIA money into a pension of whatever variety in any case.

I'm ideally looking at shifting lump sums directly from the company into whatever fund I choose a couple of times a year. I'm planning on sticking within the 20% bracket for the forseeable future, so tax efficiency on my salary is less of an issue.

I know I need to talk to an advisor/accountant, but, in preperation for this discussion, has anyone got any thoughts about possible strategies in my circumstances?

 

[Brendan Burgess]

Re: general strategy advice for my circumstances?

I'm planning on sticking within the 20% bracket for the forseeable future, so tax efficiency on my salary is less of an issue.

I don't like the sound of this. Why are you planning to stay on the 20% tax bracket? If you are making profits, unless you needs lots of capital in the company, you should be taking the profits out as salary and paying the top rate of tax. See this Key post for a fuller explanation of the issues involved.

You should not be contributing to a pension scheme while you are on the 20% tax band as the tax relief will be more valuable when you are able to get a 47% tax and PRSI write off against your contributions.

For example, let's say that you were planning to contribute €10,000 of company profits to your pension scheme now. Pay it as salary instead and you will get €7500 into your hand. Put the €7500 into unit linked fund.

In a few years, when you hit the 47% tax band, put €14,150 of your salary into a pension. This will cost you €7,500 of net income. So you end up with 41% more in your pension fund.

(Check my figures, as I didn't think that the advantage was quite so dramatic)

For the same reason, you should not be putting any money into the SSIA to pension scheme. You are better off saving the money until you are on the 47% tax band and contribute it to the pension fund then. I have heard it argued that advising anyone to go for the SSIA to pension scheme could be construed as mis-selling.

Brendan

 

[Westbound]

To add to the previous post:

A PRSA allows you to take 25% of the fund tax free, the balance to be used to buy a pension or invest in an ARF/AMRF.

A directors pension scheme on the other hand allows up to 1.5 times your final salary as a tax free lump sum, the balance to be used to buy a pension or invest in an ARF/AMRF.

With the PRSA you will be limited in what you can invest in total i.e. employee and employer contribution (a percentage limit, depending on your age (15% if under 30, 20 for 30 plus and so on), whereas with a directors pension the company can make it's contribution and the employee can also contribute and calim tax relief up to the relevant limit (15 if under 30 etc.).