The system is biased in its preferential treatment for directors but that's all the more reason to try and take advantage of it if one can.
That said, everyone should have the ability to max-out as close to the €2M limit as possible and have the capacity to make up for any previous allowances that weren’t used. As it stands this is a unique privilege for executives and company directors and it’s likely to remain that way.
Directors can buy back up to 40 years of service in one go which means that they're not disadvantaged or penalised for not consistently making contributions throughout their career (apart from the long-term compounding argument).
The same is not true for sole traders or employees because there will always be a ceiling to their contribution capacity regardless of their earning power. They will always be limited by the age-related funding limits and a maximum pensionable salary figure of €115,000.
If they miss out on making contributions throughout their career, for whatever reason, then they’ll have to live with the consequences of that since they don’t have the capacity to make up for it later on.
This is the main reason why, in my opinion, anyone in their 50's should seriously weigh-up their options in terms of how they're going to work for the 10 years prior to their intended retirement date. These 10 years are critical because they will greatly determine the retirement income that can be generated so it's wise to make an informed decision.
Of course, it's not an easy thing to become self-employed in your 50's but if you sit down and look at the figures it might make the decision easier. There is a substantial opportunity cost if you're a high-earner because everyone in Ireland has the right to be a director of their own limited company.
This is especially relevant for those who are already self-employed but who operate as sole traders in the belief that it’s too much hassle, too expensive or that there’s too much reporting involved for not much benefit as a director.
These things might be a consideration in the short-term but it’s your end-game position that’s really important and your trading setup will go a long way in determining what this looks like.
You can run your own figures as an employee, sole trader or director with this
calculator and see the difference for yourself.
Kevin
www.thepensionstore.ie