Occupational Pension Scheme
What is an occupational pension scheme?
This is a pension plan where both the employer and employee can make contributions. These schemes are a tax efficient way of saving for retirement.
Employers must make a contribution into the scheme, even if the contribution is small. This is where it varies from a Personal Retirement Savings Account, where the employer does not have to make a contribution.
There are two main types of occupational pension schemes: Defined Benefit and Defined Contribution.
What is a Defined Benefit Scheme?
Under a Defined Benefit Scheme, a specific benefit will be paid out to an employee upon retirement. This calculation includes factors such as the number of years an employee has worked and their final salary. Typically, the higher the salary and the longer the service you have with the employer, the higher the annual pension you will receive in retirement.
A lump sum on retirement will also be paid out in some circumstances. This again will be based on salary and service. These types of pensions are expensive to operate for employers and are not common anymore.
What is a Defined Contribution Scheme?
Under a Defined Contribution Scheme, an employee and/or the employee contribute a portion of their salary into a pension pot. These funds are then invested in a fund or various funds to achieve long term investment growth.
The funds remain invested until the employee’s retirement date at which point, they will then take a portion of the funds as a tax-free lump sum.
The employee then has a choice with what they do with the balance of funds. They have two options:
- Purchase a guaranteed income for life
- Purchase an Approved Retirement Fund.
This should be discussed with a financial advisor in order to determine which option is appropriate for your individual circumstances.
Are there any Tax Incentives when paying into a company pension?
Paying into a pension is one of the most tax efficient things a person can do with their money. There are tax incentives for both the employee and the employer.
Employees are entitled to full income tax relief (40% for higher rate and 20% for lower rate) on any contributions they make into a company pension once they are within the age-related limits the Revenue has set.
Contributions made by the company into an executive pension can usually be offset against corporation tax as these are deemed a legitimate business expense.
This can be an especially effective way of company directors extracting profit out of a company.
It is also possible to make large single special contributions for back service, for key employees or directors that have been employed within the company for a number of years but have not had a pension in place during their employment period.
What are AVCs?
Additional Voluntary Contributions (AVCs) are personal contributions an employee can make to build up an additional retirement fund which will help bridge any shortfall of the maximum benefits an employee can get at retirement.
The level of AVC’s you pay must be within the revenue limits. These funds will then be invested in the company pension, or alternatively, there is the option to keep AVC’s separate and invest these privately in another pension which you can control. There may be more investment options available in a private arrangement.
How much should I pay into my pension?
There is no right or wrong answer and it will come down to the employee’s affordability and the level of income the client wants in retirement.
All other pensions and income streams should be taken into account and a financial plan should be established with the help of your financial advisor. Cash flow modelling will give an idea of what sort of lifestyle you can expect to have in retirement given your current funding levels and assumed growth rates. Your financial advisor can then show you the impact if you were to increase / decrease your monthly pension contributions.
Want to find out more?
We are conveniently located on the Southern Cross Road between Bray and Greystones which can be accessed via junction 7 of the N11.
This is ideal for servicing clients from the surrounding South Dublin, Wicklow and greater Leinster areas.
Our office is situated 20kms south of Dublin, just beyond Bray in Co. Wicklow. Take the M50 southbound onto the N11 then take Exit 7, the Bray/Greystones exit and follow signs to Greystones. We are on the right near the end of the Southern Cross road leading from the N11 to the Greystones Rd.
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