Retirement Planning Update Are you thinking of retiring?
Pensions and Retirement planning are always very topical items. In this series of Pension updates, Bank of Ireland Private Banking provides you with an update on the key items that you need to consider when putting your financial plans for retirement together. If you are about to retire, then this edition is for you.
Approaching retirement If you are on the glide path to retirement it is important to review your pension plans and your planning. It is critical in the final few years before you actually draw down your pension benefits to have a thorough check-up of your plans and to make any adjustments necessary. Amongst the issues to be considered are: How can I maximise my contributions in the remaining period to retirement? If I operate through a Company, what contributions can the Company make to my pension fund? How should I structure the investment strategy of the funds? What is my target fund likely to be on eventual drawdown? What is my plan for the business when I do retire? Do I need to review my Life Cover options, in the event that I don t make it to retirement? THREE
1. Company director One of the main issues facing Company directors is that the majority of their wealth can be tied up in their Company, resulting in a significant tax exposure when they draw cash down from it, and the risk involved in the majority of wealth being housed within a single structure. If you are approaching retirement but planning to continue working for some years yet, it presents an opportunity to maximise the transfer of Company funds into your personal Director s Pension Scheme in advance of actual retirement. Under current Revenue rules, the maximum pension fund is capped at a capital value of 2m, with any excess being potentially subject to additional taxation. Directors Pension Scheme Extracting surplus cash via a Director s Pension Scheme can reduce risk exposure and is a tax effective way of extracting cash The company contribution is treated as a normal trading expense The Director is not subject to any BIK. It also secures pension assets from any potential creditors in the event of company failure The need for an effective pensions plan Apart from providing a source of income in retirement, the Pension Plan also better enables the business owner to pass on the business to the next generation when the time arrives People are living much longer in retirement (on average 20 years) therefore setting funds aside for retirement years is more important than ever FOUR
Planning for those left behind Adding a simple Life Assurance element to the company funded pension structure can help deal with the financial impact caused by the premature death of the breadwinner Ongoing management of a Revenue approved structure Our Private Banking pensions specialists can help advise and guide you through the complexities of Revenue and Tax regulations. In particular they can help you: Manage your Revenue approved structure Determine the level of annual contribution required Decide on an investment strategy for the fund Ensure that Revenue regulations are adhered to. FIVE
2. Self employed If retirement is on the horizon but you are planning to continue working for some years, it presents an opportunity to maximise the level of personal contributions which you can invest into your Personal Pension Plan. Recent tax and regulatory changes have not made it any easier to build up a retirement portfolio. The maximum contribution which any individual can invest and get tax relief upon has been reduced in recent Budgets. So in effect it is even more critical that professionals take maximum advantage of the reliefs available each year. The maximum tax deductible contribution you can make is as follows: Age attained in tax year Contribution as % of Net Relevant Earnings 55-59 35% of NRE 60 and over 40% of NRE Note: The maximum Net Relevant Earnings figure on which tax relief is allowed is currently 115,000. SEVEN
Case study Client scenario 1 Background Questions Outcomes Professional Aged 59 Income circa 200,000 p.a. Plans to continue working for a few years yet Current Pension Fund value circa 500,000. But a large portion has been invested in a low yielding Cash Fund for the past two years Has some Life Cover in place which covers a commercial mortgage. Also has personal Life Cover of 300,000 due to expire in 6 months. This latter policy has a Conversion Option (facility to convert to another policy without medical evidence) 1. When do you plan to retire? 2. What happens to the practice at that stage? 3. What other assets do you have that will support you in retirement? 4. Are you planning to maximise your pension contributions until you retire? 5. Should we review the current investment strategy in the run up to retirement? 6. Do you want to examine extending the Life Cover under the Conversion Option? At this stage he plans to continue working until age 65. The practice is still going well At retirement, it might be possible to sell on the practice, but putting a value on it is difficult He has rental income from two rented properties of circa 40,000 p.a. The mortgages are almost repaid Now that he is approaching age 60, he intends to increase his pension contribution to the maximum of 40% of 115,000, i.e. 46,000 p.a. At this stage he is undecided as to whether he will invest the 75% residual fund in an ARF or an Annuity when he retires With the Mortgage Protection cover almost expired, he wants to examine what his Life Cover options are under the Continuation Option Possible recommendations With a possible 5 further contributions of circa 46,000 p.a., the target fund at age 65 will be circa 900,000 This will give a retirement lump sum of circa 225,000 (gross) or 220,000 (net) and leaves circa 675,000 for investment into an ARF or an Annuity With deposit rates falling, the Cash Fund is now delivering less than 1% p.a. We should consider adjusting the investment strategy in the run up to age 65. There are other secure/low risk options which can deliver higher returns We will obtain quotations for continuing the Life Cover. We will look at a variety of cover terms. EIGHT
Case study Client scenario 2 Background Questions Outcomes Company Director Aged 65 Easing out of the business and passing it over to the next generation. Pension Fund of 2m Not sure what his options are in relation to Pension Fund 1. What are your plans in retirement? 2. Will you continue to draw an income from the business? 3. When do you plan to ease yourself out of the business? 4. Do you need to draw down an income from the Pension Fund immediately? 5. What other assets do you have that might support you in retirement? 6. Is your wife drawing a salary from the business? 7. Is the Company funding a Pension Plan for her? 8. If the Company has ceased contributing to your Pension Plan, is it now contributing to Plans for your two children? He plans to remain as Chairman of the Company (and retain a small shareholding) and will draw a modest income as such He will have some other income (rental income, dividends etc) With the retirement lump sum of 500,000, he has no immediate need for a drawdown from the remaining Fund His wife (aged 61) is Company Secretary and draws a modest salary. The Company has not pensioned her income The two children have not yet established a Pension Plan for themselves Possible recommendations 1. From his retirement lump sum, there will be a small tax liability (20% on excess over 200,000). The net figure will be 440,000 2. In relation to the balance of 1,500,000 the client can either: Invest in an ARF from which he will have to drawdown at least 4% p.a. and/or Buy an annuity (an income for life) 3. In relation to his wife, the Company can establish a Pension Plan for her based on her salary (possibly review the salary) 4. Suggest that we meet with the two children to start a wealth extraction plan for each of them. NINE
What are your retirement options? Having accumulated a pension fund and reached an age where you decide to retire or simply work less, you now have to figure out how you will use the accumulated pension fund. For Company Directors and Self Employed there are now three main options: 1. Part of the accumulated pension fund (typically 25%) can be taken as a retirement lump sum 2. With the remaining 75% you can either buy an annuity (a guaranteed income for life) from a Life Assurance Company, or 3. You can invest the 75% into an Approved Retirement Fund (ARF) from which you can subsequently draw down an income. TEN
Lump sum 25% of your pension fund can be taken as a lump sum Up to 200,000 can be taken tax-free The next 300,000 is taxable at Standard Rate Income Tax (currently 20%) With the remaining 75% you can either buy an Annuity or invest in an ARF (or a combination of both). Annuity An annuity is a guaranteed income for life However, increased longevity has meant that the rate at which cash is converted into an annuity has fallen in recent years There are numerous annuity products available; we can help you decide on the most appropriate product for your retirement For many, the real downside of buying an annuity is that you have to give away the full capital to the Life Company, so that if you die prematurely the capital may be lost Bank of Ireland Private Banking can help you navigate the complexities of these decisions and advise on the different annuity options available to you. ELEVEN
Approved retirement funds (ARFs) An ARF is a flexible way for you to control your retirement income You retain control of the capital. On your eventual death in retirement, any capital remaining in the ARF passes to your spouse (as an ARF in their name) and on their subsequent death any capital remaining passes to your estate Careful consideration needs to be given to the likely level of income you intend to draw down each year. A minimum of 4% of the ongoing value must be drawn down each year In determining the ARF investment strategy, consideration should also be given as to how other (non pension) assets might be invested Bank of Ireland Private Banking can help you decide on the most appropriate ARF strategy and advise on any investment decisions. TWELVE
Key considerations when deciding between an annuity or an ARF: Your state of health at retirement Your spouse s state of health What other assets you have that will provide an income in retirement Whether this will be the only source of income in retirement Your attitude to risk Whether you wish to draw a regular income immediately. THIRTEEN
How can Bank of Ireland Private Banking help? Investment Expertise With all the recent tax and regulatory changes, good advice is invaluable. Private Banking s team of pension and investment specialists can ensure that all clients receive the very best of advice. Financial Advisor Whilst part of the Bank of Ireland Group, Private Banking can access products and services from a wide variety of providers in the local market. Access to Global Investment Managers In addition, we also have partnerships with a panel of specialist global investment managers. This enables us to offer clients a unique multi-manager, multi-asset and multistrategy investment platform with a focus on diversification and managing investment risk. Tailored Pensions Options The advantage to our clients is that we can offer a wide range of pension and investment options, tailored to suit each client s particular needs. We can also advise in relation to any existing arrangements which clients may have in place. Private Banking Expertise For the typical Private Banking client Company Directors and Professional Self-Employed our independence, depth of resources, range of product offerings and our reporting capabilities ensures that we have the resources and expertise to advise on any of the complexities of a pension plan. FOURTEEN
Bank of Ireland Private Banking Limited 40 Mespil Road, Dublin 4 +353 1 637 8600 Fax: +353 1 637 8631 Dockgate House, Dockgate, Galway +353 91 566 301 Fax: +353 91 565 437 32 South Mall, Cork +353 21 425 1527 Fax: +353 21 425 1539 www.privatebanking.ie Risk Warnings & Disclaimers While great care has been taken in its preparation, this document is of a general nature and should not be relied on in relation to a specific issue without taking financial, insurance or other professional advice. If any conflict arises between this document and the policy conditions, the policy conditions will prevail. Bank of Ireland Private Banking Limited (BOIPBL) believes any information contained in this document to be accurate, but BOIPBL does not warrant its accuracy and accepts no responsibility whatsoever for any loss or damage caused by any act or omission made as a result of the information contained in this document. Any investment, trading or hedging decision of a party will be based on their own judgment and not upon any views expressed by BOIPBL. You should obtain independent professional advice before making any investment decision. Any expression of opinion reflects current opinions of BOIPBL as at September 2015. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. This publication is based on information available as at September 2015. For private circulation only. Not to be reproduced in whole or in part without prior permission. Contact your Private Banking Manager for further information. Bank of Ireland Private Banking Limited is regulated by the Central Bank of Ireland. Bank of Ireland Private Banking Limited is a member of Bank of Ireland Group. Registered Information: Incorporated in Ireland; registered number 41029 Registered Office: Bank of Ireland, Head Office, 40 Mespil Road, Dublin 4