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I hope you found last month’s article beneficial, where I went through the changes made over the last few years and the difference of allowing directors to pay into their PRSA pensions without BIK. Email us if you do not have a copy.

This month we look at the change as a way of allowing directors and business owners to invest once again in property-based pensions. Due to European Company Law, it has been very difficult for several years for directors to directly purchase property and place it into their pension. However, PRSAs are a personal product and the same EU company laws don’t apply.

I will give two examples showing the difference between putting an active income (rent) into a tax-free
environment, and having funds in a normal fund-based PRSA. These are based on a large payment from your company into your pension for eight years, but this does not mean that you need to start your pension at these levels, rather they are there to show how a fully funded pension would work.

Let’s use Joe as a test case. Joe turned 40 in January and is going to pay €10,000 per month into his pension for eight years. We generally like to build a fund of €1 million before purchasing property,
therefore both examples are the same for the first eight years, ie €120,000 paid in per year
for eight years. To keep this comparison simple, we have used growth rates for the fund based PRSA as 4% per year with a total fund management charge of 1% per year. This applies to both examples for the first eight years. We also take an income in retirement of €100,000 increased by 2% per year from
both examples.

In Example 1, the dark blue graph shows the payments made into the fund for the eight years.
The light blue graph is as follows:

1. Property values increase 2% per year
2. Rental yield Gross 6% (We take 80% of the rent to be the net rent going into the pension, allowing for property management, insurances and maintenance.)
3. Rental growth is projected at 2% per year. Dark green is your 25% of the fund taken at retirement – value €660,000 (Tax Efficient Cash) Light green is your fund after retirement, taking income of
   €100,000 per year increasing at 2% per year.

As the illustration shows, the rent is effectively continuing to pay into the pension even though you are no longer paying in directly. As the property value and rent grows over time the fund continues to
grow. When you take your 25% (Approx €660,000) and then €100,000 per year you can see that the income you are taking is being replaced by the rent still coming into the fund. If you pass away as a 90-year-old you will leave approximately €2 million in your fund. When you die, the properties are sold
by the fund and the money distributed to your estate, to your spouse within the fund and later to your children, at a flat tax of 30% but with no inheritance tax. If you pass away before retirement the entire
amount is paid tax free to your spouse.

In Example 2 we apply the same returns as we did to the other fund, with the main exception being that

there is no rent. We continue to apply the 4% growth rate throughout the life of the fund. Again, as above, we pay into this fund for eight years at €120,000 per year and we then stop paying into the
fund. We also take €100,000 per year as income in retirement, increased by 2% a year.

• Dark blue signifies the steep growth where the pension is being paid into.
• Light blues hows growth at 4% per year on the value in the fund.
• Dark green represents 25% from the fund at retirement value of €403,000 (Tax Efficient Cash)
• Light green is your fund after retirement, taking €100,000 per year increasing at 2% per year.

As the graph shows, your pension will run out of funds in your mid-eighties. It is very important to note that this is just an example; it is not a forecast. We have used a few assumptions in making these graphs. Growth in the fund-based PRSA is at 4% per year, but this may be less as the value of funds can fall as well as rise.

In both funds you have paid in the same amount, so the difference is the active income. Rental income is difficult to manage personally (tax at up to 52%) or in a company as you have layers of tax. However, in the pension you have zero tax on the gain in property value, zero tax on the rent and zero tax to put the funds into the pension in the first place.

This article shows how a property-based pension might work, but like all things this is a risk investment. Property in ten years time might not be the investment it seems to be today and may very well be worth less. We assume that the Pension owner stays invested in property for the full term, but this is a high-risk product as the value of property and/or rent can go down as well as up. In the event that a director decides that they want to exit property in their PRSA, there is nothing to stop them from instructing the broker/trustee to put the properties up for sale.

Arm’s length rules apply here. You can’t sell to a connected party and you must use an auctioneer to sell the property on the open market. This is a self-administered product and you are taking the risk that any property you decide to purchase is a good and viable property.

Our recommendation is that a scheme should own 100% of a property, and not a share, or part, of an investment property. A small multi-unit building in a good rental area is usually a viable target for your pension fund.

When you take the fact that you paid no tax on the money you put in to the scheme to get it up and running, and no tax on the rent or the capital gain, it is one of the most effective compounding investments available.

At MoneyTree we have the right agencies and authorisations to help directors take advantage of this pension opportunity, so why not give us a call. We can see where your existing pension planning is now, and if we can combine that with more funding to position you to take advantage of this over the next several years.

Or, if you have no pension planning at all, we can help you to set up and get you started in a normal PRSA fund. This is a great starting point for any director to create their own pension experience.

Warning: These figures are estimates only. They are not a reliable guide to the future performance of your investment.

Warning: The value of your investment may go down as well as up. You may get back less than you invest

Wealth is created in many ways and a pension, when properly used, is the easiest and most productive way to create wealth. Operating in a tax-free environment is what makes the difference. As business owners we are good at creating wealth in the company; however, we are not so clever at transferring that wealth from the company to the family.

Since the change in PRSA (pension) law in 2023, we now have an opportunity for directors to fund pensions more aggressively. When the government removed the BIK (beneft in kind) for contributions into PRSAs, this enabled directors to properly fund their pensions.

The tax-free part of a pension or PRSA is the single most important element. You don’t pay any tax. The company doesn’t pay any corporation tax. You don’t pay any income tax, PRSI or USC, and there’s no tax in any growth on company paid contributions. We have a situation where a director who has a good year can decide whether to pay 12.5% corporation tax or give themselves a pay rise and pay 50% tax; or they could put it into a PRSA and pay no tax at all.

In reality, business owners often leave their pension planning until the latter stage of their career, which is a mistake because even a small amount going into pension will grow tax-free, and over the longer period will be worth more than the capital. As your afordability increases you will be able to see that pensions are legacy and wealth creation tools. Also, with the change in PRSA law, if you pass away before you retire the full amount, regardless of its value, goes tax-free to your spouse.

MoneyTree Finance helps lots of directors to evolve their pension. Over time, small initial amounts grow into larger amounts. While some directors start their pensions with as little as €500 to €1,000 per month, we have several business owners putting €15,000 or more a month into their pensions, viewing it as a legacy and proper wealth creation exercise.

It’s more important that you start the fund so you can start the programme, and start the conversation, allowing it to evolve over time. Doing nothing means that you will not be able to avail of the massive growth opportunities in a pension. As one of the three exit mechanisms for a director, pension planning is one that can be done while in the company. You don’t have to retire, you don’t have to sell the company, you can just fund the pension and you can choose every year to not pay corporation tax on some of your profts, and put that money away.

Here at MoneyTree Finance we are a CFP® (Certifed Financial Planner) led team that will help you understand how your pension can evolve and grow, and in our next article we will discuss what actually happened with the PRSA change in law last year and how you can once again purchase property directly into your pension. We are a fully independent broker with multiple agencies, so we can help you with your planning without bias to any single company.

Give us a call and see how we can help you to get the best value out of your business for you and your family. Have your own fnancial planner on board to enable you to beneft from the exit strategies.

Next month’s article will cover Property Based Self-administered PRSAs. If you want an early copy get in touch. A lot of directors are now looking at front loading their pension so that they can purchase property and put it into a tax-free environment.

Entrepreneur relief is as much as €1,000,000 or €2,000,000 that can be taken from your company at 10% tax, it is one of the three most important tax reliefs available for directors and sole trader
business owners. This relief gives a CGT rate of 10% on gains from the disposal of qualifying business assets. This is reduced from the normal rate of 33%. It is essential that Directors and business owners have knowledge that these reliefs exist and where they might use them.

Entrepreneur relief is really about change and wherever change in a company is happening we need to look to see if we can create an opportunity for relief. The opportunity of a relief should always be on the mind of a director, because the reality is that the opportunity for entrepreneur relief can be signifcantly better than you might think. As part of the three main tax laws that allow you to move funds
from your company to your person tax efciently, it is defnitely something that is underutilised and can be used more efectively if directors are aware of the possibilities.

For example, over a long period of running a successful company, directors will often fnd that their business evolves and sometimes, parts of the company, can actually become a separate viable
company in its own right. Tis can mean that there is new direction possible and when the director is deciding what is actually the best path forward and this is the time you need to ask some questions.

Can these businesses be separate?

• Should I close the original company and focus on the new one?
• Should I run these as 2 separate companies?

If you fnd yourself as a director at a crossroads with your company and need to make decisions on a possible new path forward for the company, then this is a time that you need to speak to us to
see if we can fnd an opportunity in the change for tax relief. Companies do and will continue to evolve and this will be more and more relevant with changes brought about by AI. The reality is that these opportunities will become even greater as diferent parts of your businesses become obsolete and new parts evolve.

This is something that involves tax planning and detailed conversations with your accountants and ourselves. Your job as a director is to realise that the change in your business might create
an opportunity to use entrepreneur relief. Here at MoneyTree Finance, entrepreneur relief is high on our
agenda, and we help directors to avail of it on a regular basis.

There are several conditions to qualify for entrepreneur relief and these are a few of the most important:

1. The business must be at least three years old
2. The director must have spent over 50% of his or her time
   working in the business in a technical or managerial capacity
   for at least three out of the last fve years.
3. The business must be a trading company
4. The director must own at least a 5% share of the company

The relief does not apply to disposals of:

1. Shares (other than shares in your trading company), securities or other assets held as investments
2. Development land
3. Assets on the disposal of which no chargeable gain would arise
4. Assets personally owned outside a company, even where such assets are used by the company
5. Goodwill which is disposed of to a connected company
6. Shares or securities in a company where the individual remains connected with the company following the disposal.

Why not give us a call at MoneyTree Finance to fnd out if you can avail of entrepreneur relief either now or in the future. Having a CFP® Certifed Financial Planner on board will help your business develop and grow and, more importantly, ensure that no reliefs are left as unknowns

Auto Enrolment – what is it?

Auto enrolment will force most employers to add pension into salary discussions, and will lead to more and more people having some sort of pension provision for their retirement. I personally think that this is a time for all of us, employers and employees alike, to change the process of wage negotiations. The wage received is only one part of the equation; pensions also deserve to play a part.

Auto enrolment is a new pension scheme designed to encourage most of the population to put some
sort of pension coverage in place. The new rules mean that people have to opt out of this pension
instead of opting in, as is currently the case. There are almost 70% of people in the private sector who
have no pension coverage whatsoever, and Ireland has less than 36% of GDP in pensions, whereas our nextdoor neighbour the UK has 126%, so this is something that has to be rectified over the medium term.

This is not only an issue for employers. Employees also need to take a different approach to their take home pay/take home pay and pension package. This is particularly true for 2025, and employees looking to get a pay rise of say 3/4% for the year need to allocate most of that for the pension, so 3% into pension and 1% pay rise. After the pain of this year is done, we will settle down to a new normal where all pay discussions contain a pension element. This is what Auto enrolment is designed to do – to force more people into making a decision about funding for their own retirement.

New Pension rules from 2025

Auto enrolment is due to start on 1st Jan 2025, and while this might be delayed for a few months it will
be part of the framework going forward. There will be employees who refuse to go on a pension journey but they will be forced into the auto enrolment. They can withdraw after 6 months and get their contributions back, but the employer or government do not receive a refund and their contributions remain in the employees fund. The employee will need to re-opt-out every 2 years. Auto enrolment starts at 1.5% employer, 1.5% employee and 0.5% government in years 1 to 3. This will increase to 3% and 3% and 1% from year 4, and again from year 7 to 4.5%, 4.5% and 1.5%, and from year 10 to 6%, 6% and 2%.

This means that from 2035, 14% of everyone’s salary will be going into a pension, either an employer-based company pension scheme, employer based PRSA Scheme, or auto enrolment. The entry requirement is from payroll. If no scheme exists on the payroll, then auto enrolment must be applied. This will also affect personal pension plans and personal PRSAs not paid through payroll. The system is being managed by four insurance companies, yet to be identified, and the charges are 0.5% per year.

There will be a form of life-styling (reduction of risk as you get older) and the four insurance companies
will receive 25% of the monies going into the fund. The employee will have discretion regarding the risk
profile but not on the fund investment.

As an employer, what do I need to do?

What is the best way to deal with this for my Company?

That depends on a few issues:

1. Do you have long-term staff who will be with you long into the future? These staff are worth investing in, and the company should view putting in place a company pension scheme/company PRSA scheme.
2. Higher rate tax payers will lose out in auto enrolment as relief is 25% whereas relief can be 50% in a company scheme.
3. Lower tax payers (under €42,000 per year) might be better off in auto enrolment, however this removes the discretion of who pays what. Auto enrolment tax relief is 25% which is higher than 20%
   tax relief. However if the pension is done as part of a pay rise, the employer can pay, and then the effective tax relief is 26%.
4. Employees earning less than €20,000 per year are not affected and no pension is needed. This amount includes all pay, basic, overtime, commission, etc. When the salary exceeds €20,000 the
   full 3% is required by auto enrolment, not just 3% of the amount over €20,000.
5. Minimum wage €12.70 for full and part-time staff (earning over €20,000 and working more than 30 hours per week) and shortterm staff will need to be setup on the auto enrolment as there is no discretion for wages to be reduced to enable the employer to pay the employee’s share.
   The important issues here are:
   a. What are the charging differences?
   b. Where is there discretion to make changes?

So if all, or most, of your employees are in the higher tax band then auto enrolment is NOT for you. You will need to set up either a company pension scheme (Master Trust) or company PRSA Scheme.
And if most of your employees are in the lower tax band, you have a decision to make. Do you and your employees go down the auto enrolment path, or keep the control in-house and set up a company scheme?

The good news is that a company with a broad mix of categories can use all three systems, ie auto enrolment, PRSA and company pension scheme

Employee – What do I need to do? What is best for me?

Again, that depends on a few issues.

1. What age are you?
2. If you are in your 40s or 50s and have no pension, then a company scheme will allow you to take one-and-a-half times your salary as a tax-free lump sum when you retire. The older you are when you start your pension, the more attractive this option becomes as you should be able to take most or all of your fund tax-free.
3. If you are young, just starting off with a career path ahead of you, or maybe become self-employed or move employment in later years, then the flexibility of a PRSA might be the best path for you
   as this is a personal product you can transfer from employment to employment.
4. If you are in the high tax band then auto enrolment is NOT for you. Auto enrolment has 25% effective tax relief, whereas you can have 50% effective tax relief on a company sponsored scheme, ie either a company pension scheme or company PRSA.
5. If you are in the lower tax band, this is where it gets a little complicated. The auto enrolment has an effective tax relief of 25%, whereas you only get 20% tax relief on your contributions.
   However, if you agree with your employer, as part of your pay rise, that they make the contributions for you, then the effective tax rate is 26%, so I would advise you to look at it differently. If you are
   young and have a long career ahead of you then auto enrolment is, as you rise up the pay scales, probably not your best option. The lower tax band does ask questions of what is best, and it is hard to know. The only certainty is that you will definitely benefit from having some pension when you retire.
6. If you are a part time employee on the minimum wage earning over €20,000 then auto enrolment is the answer, and you are the very person the scheme was designed for, to ensure that you have
   some personal funding for your retirement.

Existing company pension schemes

It is most definitely time to review the current pension structures within your company. Pensions have become fundamentally cheaper over the last few years, so it is worth taking a new look at where you
are and what you are doing. When you add the changes in Pension Rules then the old default of company pension scheme is no longer the only show in town. Also, for company directors, it is well worth
looking at the new PRSA model, which has very exciting advantages that are worth knowing about. Auto enrolment will affect all of us and we can either look at it as a problem we wish to get around, or we can
use it for the good of our staff and to create more staff loyalty to our companies.

At Moneytree Finance we are a fully independent broker offering every option that is available on the market. Why not get in touch and we can do a review of where you are, where you need to be for January 2025, and show you how to get there. Alternately, give me a call on my mobile and we can see if I can be of service to you, your company and your employees