Proprietary Director: Pension vs Retirement Relief

T

time to plan

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Just scratching my head a bit on whether I'm doing the correct thing as a 52 year old.

I have various pension entitlements (Irish and UK state pension and small NHS pension of £125 per week which starts when I am 60). But like lots of small business owners I was concentrating on building the business rather than pensions.

So a2.75 years ago, my company started putting 3.5k per month / 42k per year into a private pension (SSAP - all in Vanguard Global Stock Index). There is now €130k in the fund. All well and good. I can carry on like this until I retire and would in fact increase my company's contributions because the business is growing.

But an alternative is to keep the money in the company, paying 12.5% Corporation Tax and invest it in funds with Retirement Relied in mind. The company holds the funds in the Vanguard Global Stock Index. As I understand it, tax on income generated from Ltd Company investment income is 25%, this will rise to 40% should the profit remain in company for more than 18 months. Between the ages of 55 and 65, I can liquidate (or sell) the company and not pay CGT on the money I personally receive, up to a lifetime limit of 750k. I have the capital tax free and can reinvest it but have all the tax considerations of a personal investment.

Alternatively, I can put money into the Pension tax free and get my tax free lump sum, the funds will continue to grow tax free, but I will need to pay tax on withdrawing funds from the pension.

I will put together a spreadsheet to work through some scenarios. There may be a sweet spot where you get your pension fund to 800k to max out your tax free lump sum, and the Retirement Relief to 750k, but frankly I don't want to work that long, so I think I'm looking at scenarios where the sums involve will not exceed 750k.

My question is: has anyone been through this process of weighing up these options before?
 
time to plan said:
But an alternative is to keep the money in the company, paying 12.5% Corporation Tax and invest it in funds with Retirement Relief in mind. The company holds the funds in the Vanguard Global Stock Index. As I understand it, tax on income generated from Ltd Company investment income is 25%, this will rise to 40% should the profit remain in company for more than 18 months. Between the ages of 55 and 65, I can liquidate (or sell) the company and not pay CGT on the money I personally receive, up to a lifetime limit of 750k. I have the capital tax free and can reinvest it but have all the tax considerations of a personal investment.
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This won't work.

“Chargeable business asset” includes goodwill but does not include shares or securities or other assets held as investments.
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T McGibney said:
Not cash held as investments, or otherwise unless held as working capital.
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Let's break it down. If the cash is just built up in a business bank account and never invested in stocks, does it work? The prevailing view in the Irish contractor accountant world is that it does. Maybe I was trying to finesse it a bit too much by then trying to invest the cash in a fund.
 
time to plan said:
Let's break it down. If the cash is just built up in a business bank account and never invested in stocks, does it work? The prevailing view in the Irish contractor accountant world is that it does. Maybe I was trying to finesse it a bit too much by then trying to invest the cash in a fund.
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I think you'll need specialist tax advice if you wish to test the limits of that.
 
T McGibney said:
I think you'll need specialist tax advice if you wish to test the limits of that.
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Agreed - the investment might be stretching it, but are you aware of a reason why building up the cash might not work. The Retirement Relief may still stack up against Pensions, just on the basis of tax treatment.
 
Cash extraction from a business is a bread and butter question for a tax advisor. Have a word with your accountant. They'll either be able to do it for you, or will pass you on to a suitable tax advisor.
 
T McGibney said:
Tax specialists have been warning for years that Revenue will challenge claims for retirement relief in respect of cash holdings over and above a company's ongoing working capital requirements.
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Thanks for that. This is one of the things I was looking at: https://www.berkley-group.com/entrepreneurial-retirement-relief-for-contractors/ People presenting the webinar are Icon Accounting: https://www.iconaccounting.ie/blog/... you are 55 or,to someone outside your family

Maybe they are a pulling a fast one.
 
time to plan said:
Maybe they are a pulling a fast one.
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Not intentionally, but there is a lot more depth to these reliefs than that surface presentation.

Be careful extrapolating from those materials to your situation.

T Mc highlighted a key aspect of Retirement Relief - Chargeable Business Assets.

Retirement Relief is by reference to a formula.

The amount of the gain relieved = Gain x Chargeable Business Assets (CBA) / Chargeable Assets (CA).

Cash is neither a CBA nor a CA and so retirement relief here is strictly nil.

However, most companies will have chargeable business assets of some kind or the shareholder will structure it so that the ratio above can be maximised.

Just to say also that the two reliefs differ in some respects.

A company can meet the wholly and mainly trading test for both Retirement Relief and Entrepreneur Relief. If there are investment assets on the balance sheet, a disposing shareholder can still avail of the full extent of Entrepreneur Relief i.e. 10% CGT on up to €1m of gains.

This would not be the case with Retirement Relief - the same scenario will dilute the relief available.
 
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