Maximise Retirement Funds While Accessing Your Cash
Sunday, February 26th 2006

This week's expert is Colm Brennan, director of research and development for financial advisers Acumen & Trust.

QUESTION: In December's budget, company directors and owner-managers were restricted to a maximum pension fund of €5 million and a cap of €1.25 million on tax-free withdrawal. I am the owner-manager of a profitable services company, but cannot put the maximum amount into my pension scheme in case the company needs the cash in future. Is there some way to maximise the money for my retirement by using the spare cash on our current account while still having access to it?

ANSWER: This is a typical problem which needs to be resolved if the business owner wants to avoid tying up an excessive amount of wealth in the company.

All businesses suffer from inconsistencies in cash-flow. To obtain tax relief on a pension contribution, the payment must be made by the company before the financial year end.

But if you wait for cash-flow to come good, you may suffer a higher corporation tax liability for the year just ended.

If you are confident that the business is profitable and cash shortages are only temporary, then you should have no fear about using an overdraft facility to finance regular pension payments. The resulting interest charge should pale against the overall financial benefits.

Example
Pension contribution: €100,000
Corporation tax rate: 12.5 per cent
Overdraft rate: 9 per cent per annum
Overdraft period: 2 months
Corporation tax relief on pension payment: €12,500
Interest: €1,500

The manner of pension funding is also relevant. It is important to maintain a minimum level of annual contributions, as tax relief on single contributions may not be allowed fully in the year of payment, but may have to be spread forward over a period of up to five years.

Many regular pension policies allow for breaks or stops in pension contributions without the imposition of penalties, but this should be clarified with your consultant before you enter into any pension policy.

A matter that requires specific advice is the level of overall funding allowed. The maximum funding level is determined by a combination of your earnings and potential service with the company.

However, the limits are quite generous.

In the case of a married man aged 40 with no prior pension benefits and earning €100,000 a year, who intends to work with the company until he is 60, the employer and employee between them could contribute around 60 per cent of his annual income to a pension plan.

Each case is different, so professional advice should be sought.

Original Article: Sunday Business Post