This guest blog comes from our friends at Zurich Life for Pensions Awareness Week 2023.
Today, despite the many challenges faced by customers because of high inflation and the cost-of-living rises,
many SME businesses have shown remarkable resilience and flourished with the result that they have
accumulated cash assets in the company.
Good forward-thinking business planning means that SME owners should look at their options for extracting
profits from their business in the most tax efficient manner. Better known as Wealth Extraction, this is the efficient means of withdrawing profits for the benefit of the business owner in the most tax efficient means possible which if done well, could lead to financial freedom in retirement. A pension is one of the ways to secure your future and ensure the lifestyle you’ve planned for once your working life is over.
Extracting profits from a business – Let’s look at the options available:
Leave profits within the business
Profits retained in the company will be subject to Corporation Tax @ 12.5% and for close companies a further
surcharge of 20% if they are not distributed within 18 months. In addition, on the sale of the company Capital
Gains Tax (CGT) of 33% will apply unless a CGT Relief can be obtained.
Withdraw profits as salary
Profits withdrawn in this manner will be subject to Income Tax, PRSI and USC which would be as high as 52%
(Income Tax 40%, PRSI 4%, USC 8%).
Withdraw profits via an Executive Pension Plan.
Extraction of company profits via an employer contribution to an executive pension (via a Master Trust
arrangement) is very popular with business owners. Profits withdrawn via an Employer contribution to an
Executive Pension Plan result in tax relief for the Employer (subject to Revenue limits) and no immediate tax
liability for the employee.
Withdraw profits via a PRSA (Personal Retirement Savings Account).
At the beginning of 2023 the Finance Act confirmed that the Benefit in Kind for an employee, which was
previously triggered by an employer contribution to a PRSA, has been removed. This now allows for the
extraction of company profits via an employer contribution to a PRSA with no upper limit on those employer
contributions (Lifetime Pension Fund limit applies, currently €2M). For company directors on low salaries with
little or no scope to fund under an occupational pension scheme and those who have large profits which they
want to extract now and obtain tax relief immediately, a PRSA might be an appropriate option.
What are the key advantages of choosing to invest profits in a pension?
Corporation Tax Relief for the Employer @ 12.5% (Subject to Contribution Limits).
Generous Limits for Employer’s to contribute.
No Income Tax, PRSI or USC liability for the employee following the contribution.
No PRSI Liability for the Employer as a result of remunerating the employee in this way.
Profits invested in pension fund which allows tax free growth until retirement.
Opportunity to plan for business exit strategy with access to funds available as early as 50 if all links
with the business are severed or any time after age 60 without having to sever any links with the
business.
Pension lump sum at retirement which is tax free up to the first €200,000 and subject to favourable
rate of 20% for the next €300,000.
Income in retirement via Pension Annuity or Approved Retirement Fund.
Possibility to pass wealth to spouse and children via an Approved Retirement Fund.
Why is a Zurich Pension the right choice?
Market leading investment performance.
At Zurich, our Dublin based investment team have an enviable track record in delivering long term consistent
fund performance. For example, our flagship balanced fund has delivered an average of 9.7% since its launch
in 1989.
Innovative Investment solutions – Prisma Multi-Asset Funds
Equities, bonds, property, money markets, commodities… investing often comes with a bewildering array of
choices. Even when you’ve chosen a route that matches your circumstances, needs and feelings about risk, you
must keep a close eye on your portfolio to ensure your investments continue to meet your financial goals,
particularly as your life can change.
If you don’t have the time or desire to dive into the complex world of investments yourself, the Innovative
Prisma Fund range may be the answer. It brings you five funds targeted to five attitudes to risk. The funds are
designed to reflect a range of risk levels, so whatever your appetite for risk there is likely to be a fund to suit
you.
A trusted pension provider
Zurich is one of Ireland’s most successful life insurance companies. Based in Blackrock, Co. Dublin, we have
been meeting our customers’ needs in Ireland for over 40 years. Pensions form a huge part of what we do,
with thousands of Irish people trusting us to manage their retirement fund. In fact, our investment team is
responsible for pension funds under management of approximately €17 billion (as at 30 June 2023).
End of year tax planning is key for SME’s and maximising wealth extraction is high on the list. At Zurich, we see
significant volumes of Executive Pension and PRSA contributions in the months of November and December as
SME’s close out their accounts.
Taking a small action today and speaking to us or a financial broker could have a great impact on your future.
With a wide range of options, control and flexibility, you can choose a pension plan that’s right for you. If
you’re wondering where to start, you can find a local financial advisor near you with the Zurich Advisor Finder.
The tax and legislative information contained herein is based on Zurich Life’s understanding of current practice
as at August 2023.
Warning: Past performance is not a reliable guide to future performance.
Warning: If you invest in these products you may lose some or all of the money you invest.
Warning: The value of your investment may go down as well as up.
Warning: If you invest in this product you may lose some or all of the money you invest.
Warning: Benefits may be affected by changes in currency exchange rates.
What is Pensions Awareness Week?
Pensions Awareness Week (PAW) is an initiative to raise awareness about the importance of
pensions for all people in Ireland.
Many of us feel that we should be doing more to get to grips with our pension
plans. Pensions Awareness Week is where that conversation starts. It’s the only place where pension savers, pension experts, businesses and financial wellbeing organisations get together to offer help. Join the conversation by registering today!
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