What to do with Cash reserves in Company?

Monte2014

Registered User
Messages
40
Age: 44
Spouse’s/Partner's age: 45

Annual gross income from employment or profession: €30,000. I am an employee of my own company. My wife and I are also Directors of the company. My wife does not take a salary from the company. Annual Turnover of the company is circa €120,000.
Annual gross income of spouse: €50,000 private sector.

Monthly take-home pay: €2,245 + €2,605 + €420 child benefit. Total is €5,270. I also claim a travel and subsistence, which works out at circa €2k/month as I travel quite alot.

Type of employment: e.g. Civil Servant, self-employed: Both in private sector.

In general are you:
(a) spending more than you earn, or
(b) saving? We save circa €1k a month from our PAYE salaries and there is circa €5k a month left in company account after all taxes are paid.

Rough estimate of value of home: €400,000
Amount outstanding on your mortgage: €150,000
What interest rate are you paying? 2.75% variable.

Other borrowings – car loans/personal loans etc: None.

Do you pay off your full credit card balance each month? Yes.
If not, what is the balance on your credit card?

Savings and investments: €123k in shares, €35k in cash, €70k in cash reserves in company.

Do you have a pension scheme? Yes, €240,000 in various Buy Out bonds. My wife has company pension where she is contributing 5% and company contribute 5%.

Do you own any investment or other property? No, but I own agricultural land valued at €130,000.

Ages of children: 13, 11, 9

Life insurance: Yes.


What specific question do you have or what issues are of concern to you?
I have €240,000 in various pension buy out bonds and I want to consolidate them. I also set up an executive pension through a financial advisor last year with Aviva. So far I have contributed €10k. The maximum funding position I have through the company this year is €19,000 based on salary of €30,000. A regular contribution type of funding could commence next year this would be approximately €2,000 per month beginning in 2021.

I have asked two financial advisors for advice on the best way to make my current pension and future pension contributions to work for me returning a yield of circa 4-6%. Also, I want to make the built up reserves work for me in the most tax efficient manner. I have read about passive investing and low cost index funds but my understanding is ETF's can be complicated in Ireland. Based on this, both advisors came back to me with the following:

Financial Advisor 1:
"Existing private pension benefits would be transferred to the Consensus Fund with Irish Life. This is a slightly less volatile fund than the Zurich funds but I feel it will stand you in good stead given your target growth rate of 4-5% per annum. This will allow for the management of these benefits and as discussed we could aim for a staggered drawdown of pension benefits in order to maximize the tax efficiency around your pension income.

Your existing Executive Pension with Aviva would be transferred to the Zurich Life Balanced Fund"

Total fees on the above are 1.35% for Zurich and 1.10% for Irish Life.

Financial Advisor 2:
"80/20 is the agreed long term equity allocation.

Irish Life - Indexed 80/20 portfolio. - Executive Pension
Davyselect - Vanguard Indexed portfolio 80/20 and Foundation portfolio 80/20

All existing pension monies to be migrated over to the Davyselect portfolio.

No upfront commissions just ongoing charges of circa 1.18 (Vanguard) 1.48% The higher charge reflects greater diversification and oversight.

This includes an ongoing .50% deduction to Financial Advisor to cover the work and advice each year."

I am happy to pay a financial advisor for advice but it seems that the majority of financial advisors in Ireland offer clients funds from Zurich, Irish life, Aviva etc. Any thoughts on the above advice and which one I should go with or should I go in a different direction?
 

zephyro

Frequent Poster
Messages
147
Also self-employed company owner with executive pension (Zurich @ 0.75%) here, the first glaring question is what was the thinking and plan behind taking salary of only €30k on turnover of €120k??
 

Monte2014

Registered User
Messages
40
As I am a company director, my accountant advised that it is more tax efficient to take a minimum salary, take dividends, and contribute to a pension.
 

Brendan Burgess

Founder
Messages
42,635
The most important thing for you to look at is the cash strategy.

Has your accountant set out the strategy in writing?

It seems wrong. Unless there is a plan to liquidate the company or avail of retirement relief. I am not a fan of that either as it could backfire badly if tax rules change.

It is usually better to distribute the profits as salary and pension and leave no cash in the company.

When is your year-end? If it is December , you should address this immediately. Pay yourself a big salary and pension deduction this year and create a loss equal to last year's profits. You can set this year's loss back against last year's profits, but you can go back only one year.

So if December is your year-end, you should probably do it now rather than wait for the New Year.

Then you will have less cash to worry about.

You should go to a financial advisor who will charge you a fee. The guys you went to look as if they are getting commission and selling you high price products.

Brendan
 

Monte2014

Registered User
Messages
40
Also self-employed company owner with executive pension (Zurich @ 0.75%) here, the first glaring question is what was the thinking and plan behind taking salary of only €30k on
Zephyro, can I ask how you managed to get Zurich @ 0.75%?
 

Monte2014

Registered User
Messages
40
The most important thing for you to look at is the cash strategy.

Has your accountant set out the strategy in writing?

It seems wrong. Unless there is a plan to liquidate the company or avail of retirement relief. I am not a fan of that either as it could backfire badly if tax rules change.

It is usually better to distribute the profits as salary and pension and leave no cash in the company.

When is your year-end? If it is December , you should address this immediately. Pay yourself a big salary and pension deduction this year and create a loss equal to last year's profits. You can set this year's loss back against last year's profits, but you can go back only one year.

So if December is your year-end, you should probably do it now rather than wait for the New Year.

Then you will have less cash to worry about.

You should go to a financial advisor who will charge you a fee. The guys you went to look as if they are getting commission and selling you high price products.

Brendan
Brendan, I think my accountants strategy was to avail of entrepreneur relief. My year end is December so worse case scenario I could pay myself a high salary and make the max allowable pension deduction into my existing Aviva executive pension before 31 December, and review my finances with a fee based financial advisor in the New Year.
 

zephyro

Frequent Poster
Messages
147
Zephyro, can I ask how you managed to get Zurich @ 0.75%?
You sure can, it was a broker who got this AMC for me.

As Brendan said, you need to accept the risk that tax rules will change if the plan is to avail of entrepreneur or retirement relief in the future. Also you probably know this already but Revenue have detailed rules on allowable travel expenses specified here. If you haven't already, you need to look through them and particularly the examples for company directors from page 23, to ensure you're not exposing yourself to a nasty future liability. Finally your concern about ETFs is irrelevant as regards pension funds.
 

Monte2014

Registered User
Messages
40
I am an employee of the company so any allowable travel expenses are claimed. The office is based in Munster and I need to be in Dublin 3 or 4 days each week.
 

Brendan Burgess

Founder
Messages
42,635
I think my accountants strategy was to avail of entrepreneur relief.
OK. Make sure that you are clear about it. That it is carefully written down.

And it should really be something which you will be availing of in the medium term. Otherwise, it might not be still there, and your plan will have been very bad.

Brendan
 

zephyro

Frequent Poster
Messages
147
I am an employee of the company so any allowable travel expenses are claimed. The office is based in Munster and I need to be in Dublin 3 or 4 days each week.
Does this mean you're required to travel between your own company office in Munster and client office in Dublin, and if so is your company office separate to your home? Otherwise you might clarify the locations you're travelling between.
 

Monte2014

Registered User
Messages
40
Yes, my office and home are separate addresses. I work as a Chartered Surveyor so my work takes me to various clients across various sites in Dublin.
 

Monte2014

Registered User
Messages
40
The most important thing for you to look at is the cash strategy.

Has your accountant set out the strategy in writing?

It seems wrong. Unless there is a plan to liquidate the company or avail of retirement relief. I am not a fan of that either as it could backfire badly if tax rules change.

It is usually better to distribute the profits as salary and pension and leave no cash in the company.

When is your year-end? If it is December , you should address this immediately. Pay yourself a big salary and pension deduction this year and create a loss equal to last year's profits. You can set this year's loss back against last year's profits, but you can go back only one year.

So if December is your year-end, you should probably do it now rather than wait for the New Year.

Then you will have less cash to worry about.

You should go to a financial advisor who will charge you a fee. The guys you went to look as if they are getting commission and selling you high price products.

Brendan
Just an update on this. I spoke with my accountant and he said the only reason that cash is left in the company is there is high tax costs to extraction – 41% Income Tax plus PRSI & USC. If the extraction cost can be sheltered then there is no issue with taking the cash. e.g If I take out 60k as salary in one go then I will net 30k approx. due to tax. If the company can use some funds to contribute to my pension then the company gets a tax deduction and 100% is allocated to my pension. If I fund a private pension I get a maximum of 40% tax relief so a 10k contribution reduces tax bill by up to 4k. I can leave cash in company and trade for 10 years plus and extract €750k plus tax free once over 55. This doubles to 1.5m if my wife is also a full time working director for 5 of the 10 years pre liquidation.
 

Zenith63

Frequent Poster
Messages
725
Zephyro, can I ask how you managed to get Zurich @ 0.75%?
Just FYI I also have a Zurich Exec Pension @ 0.75% AMC, I simply called the Zurich phone number on their site (https://www.zurich.ie/pensions-retirement/choosing-your-pension/executive-pension-plan/) and dealt with somebody in the Zurich Blackrock office who set it up over a week or two. I had quotes for the same pension from a number of brokers who were adding 0.5% to the AMC (for a total of 1.25%). To be honest I've found Zurich guy who deals with my pension really helpful and have not had a need to seek additional advice elsewhere.

Worth looking into whether your company (may need to be Limited) can make employer contributions on your behalf, thus avoiding USC and PRSI also. The yearly limits are many multiples of the usual employee contribution limits.
 

Brendan Burgess

Founder
Messages
42,635
I can leave cash in company and trade for 10 years plus and extract €750k plus tax free once over 55.
Hi Monte

While this is correct at present, it might well be gone by the time you hit 55.

I don't think that this is a sensible strategy for a 44 year old. If you were within three years of retirement, maybe.

But who knows? It might work out.

Ask your accountant to set out the strategy in writing and the risks to it, so that you can keep it under review.

Brendan
 
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