- Who is this guide aimed at?
- So why invest in a pension?
- So what does pensions legislation do?
- Why a self administered pension scheme?
- So what is a self-administered pension scheme?
- Why do I need a pensioner trustee?
- So what services do Bespoke Trustees provide me?
- How long does it take for my SAPS to be set up?
- How much can be contributed to my SAPS?
- Do I have to contribute the maximum amount to my SAPS?
- What is the maximum pension fund I can have?
- What age can I access benefits from my SAPS?
- So what investments are allowed in my SAPS?
- Can my SAPS borrowing to invest?
- Are there any restrictions on borrowing?
- Can I have life over in my SAPS?
- How can I take my benefits when I get to retirement?
- So what is an ARF?
- Do I have to take an income from an ARF?
- What happens to my ARF if I die?
- What is the tax treatment of an ARF on death?
- What if I have an annuity instead of an ARF when I die?
- What happens if I die before I get to retirement age?
- What are the set up costs of my SAPS and how much does it cost to run on an on-going basis?
- Can I have a SAPS if I have an existing pension with an insurance company?
- Does the SAPS require annual accounts?
- Is it possible to have too much in my SAPS?
- What happens to the fund if the company ceases?
- How do I go about setting up a SAPS?
- Contributions to my SAPS; Where do they go and what do I do with them from there?
- How do I effect an investment?
This guide is primarily aimed at company owners / directors who own greater than 5% of the shares in their company and have either just set up their self administered pension scheme (SAPS) or are considering setting one up.
Pensions legislation grants extremely generous tax relief’s to companies in providing for the retirement of company owner / directors.
Pensions legislation allows:
- A company to contribute substantial amounts to a pension scheme for the owner / director (within certain Revenue limits).
- Reduce the company’s Corporation Tax bill as the pension contribution is seen as an allowable deduction for Corporation Tax purposes.
- Convert these company funds to personal funds within the pension scheme.
- Create personal wealth for the owner / director without creating an income tax liability.
In essence, a SAPS is the same as a pension scheme established with an insurance company.
However, there are significant differences between pension schemes offered by an insurance company and a SAPS.
- Set Up Fees Typically the set up fees charged by insurance companies are significantly higher than those for SAPS.
- Management Fees The on going management fees charged by insurance companies are also typically significantly higher than those levied in respect of SAPS.
- ControlThe biggest difference between a pension scheme offered by an insurance company and a SAPS is control. Investment control is in your hands from day one.
Unlike a pension offered by an insurance company you do not ‘tick a box’ to chose the investments to be held in your SAPS, you are not handing the investment decisions regarding your pension fund to a faceless investment manager.
You, typically in partnership with your pension /investment advisor, chose the assets that you want to hold in your self administered pension scheme.
A SAPS is a company sponsored pension scheme that does not require the involvement of an insurance company.
SAPS are typically established for owner directors or senior executives in a company.
By contributing to a SAPS rather than an insurance company pension scheme the pension scheme member (you) retains complete control of how the funds in their pension scheme are invested.
The range of investment opportunities available to a SAPS investor is significantly greater than those offered by an insurance company pension scheme.
SAPS are established under a trust, the Revenue Commissioners require that all SAPS have a Pensioneer Trustee appointed to them.
Without a Pensioneer Trustee appointed to your SAPS you can lose the very generous tax reliefs granted to it.
Bespoke Trustees Ltd is approved by the Revenue Commissioners as a Pensioneer Trustees.
Bespoke Trustees will provide you with all the documentation required to establish your SAPS, we will ensure your SAPS is approved by the Revenue Commissioners as ‘Exempt Approved’ and we will administer the SAPS on an on going basis.
Assuming all documentation has been provided to us,
- Completed SAPS Application Form
- Completed Trust Deed
- Most recent P60
- Scheme bank account opening mandate
- Anti Money Laundering Documentation
- Signed terms of engagement
We should be in a position to have your SAPS established and approved by the Revenue Commissioners in less than 4 weeks.
In very simple terms, there are certain rules set down by the Revenue Commissioners that apply to determine the maximum contributions that can be made to your SAPS.
Some of the factors influencing the amount that can be contributed to your SAPS are as follows:
- Your age
- Your sex
- Your marital status
- Your salary
- Your length of service with the company
- Your proposed retirement age
- The amount, if any, of any existing pension benefits you may have
When provided with the above information by you Bespoke Trustees will be able to determine the maximum amount that can be contributed to your SAPS.
The Revenue Commissioners require that we revisit these figures every 3 years to ensure contributions limits are kept up to date relative to any changes in your personal circumstances.
Tell me about the tax breaks in more detail
- Employer Contributions
Contributions made to your SAPS by the company (once within Revenue allowable limits) are allowed as an expense of the company and thus will reduce any potential Corporation Tax liability of the company in the year in which it is paid to the SAPS.
There is no income tax or PRSI arising for the employee on contributions made by the company to the SAPS.
- Employee Contributions
Contributions made by you personally to your SAPS can reduce your income tax liability for a tax year.
The amount that you can contribute to a SAPS for income tax relief purposes is based on your age and salary level.
The following table shows the maximum level of income tax relief that will be allowed on contributions to your SAPS made by you, the SAPS member
|Age in Tax Year||Maximum Contribution *|
|30 – 39||20%|
|40 – 49||25%|
|50 – 54||30%|
|55 – 59||35%|
* The maximum contribution limits are based on a % of your salary in a tax year. The maximum salary limit for the tax year 2008 is €275,239. Where your actual salary in the tax year is less that the limit above your income tax relief will be calculated by reference to your actual salary in the tax year.
Note: You should always seek independent advice when making personal contributions to your SAPS.
- Tax Free Growth The investments in your SAPS will grow free of Irish Income and Capital Gains Tax.
- Tax Free Lump Sum Upon retirement you currently have the option to take a lump sum of up to 150% of your final salary (subject to having 20 years service with the company) orIf you are a director owning or controlling greater than 5% of the shares in the company you are entitled to take the option of up to 150% of your final salary as a lump sum or alternatively you can opt to take a lump sum of 25% of the value of the fund.There can be times where not all of this lump sum may be tax free, you will read more about this shortly.
You will read more later on what can be done with the balance of the SAPS.
No, your company can contribute any amount from zero up to the figure calculated by Bespoke Trustees as the maximum contribution amount available. As there are not any charges on contributions or up front charges levied to your SAPS you are not penalized for not making contributions.
The maximum pension you can typically have is 2/3rd’s of your ‘final pensionable salary’. Therefore the calculations Bespoke Trustees provide you at the outset and every 3 years thereafter will try to calculate the amount required for you to provide for this maximum pension.
However in 2005 the Budget, brought in to law by the Finance Act of that year, introduced (amongst one or two other things you will read about later) the concept of a ‘maximum tax relieved pension fund’.
Originally this maximum tax relieved was set at €5M per person, this limit is indexed every year on this 1st of January.
If your pension scheme is worth more than the maximum limit at the date of drawing your benefits, the excess amount will be liable to income tax.
As you can imagine this maximum tax relied pension fund can have an impact on the maximum tax free lump sum you are entitled to. As it stands the legislation says that the maximum tax free lump sum is capped at 25% of the applicable annual indexed amount at the date of drawing benefits from your SAPS. You may be in a position to take a lump sum in excess of this amount but any excess will be liable to income tax.
You can access benefits from your SAPS at any time from age 50 onwards, however under current Revenue rules you must sever all links with your company, e. leave service and dispose of your shareholding in the company.
You are entitled to access benefits from your SAPS from age 60 without any need to leave the service of the company or dispose of any shareholding in the company.
The Trustees have an extremely wide choice of investment options available to them.
Your SAPS can invest in anything from a bank deposit account (initially all your SAPS contributions are invested in an interest yielding deposit account with Anglo Irish Bank) to individual shares and Government bonds, property syndicates, unit trusts, tracker bonds and individual investment products offered in the market place.
It is probably easier to highlight what type of investment that are not allowed or are not ‘tax efficient’ in a SAPS.
There are very few SAPS investments that are actually prohibited by the Revenue Commissioners.
Typically the following SAPS investments are prohibited by the Revenue Commissioners;
- Land or property development with a view to re-sale – the legislation specifically refers to ‘investments’ of a pension scheme. Development with a view to a re-sale is prohibited. Development with a view to retaining and letting the asset within the SAPS is however acceptable.
- Pride in possession articles – you can’t own a race horse or a vintage car in your SAPS, fine wines or works of art are also prohibited.
- Non – arms length investments – all investments by your SAPS must be made on an arms length basis. Therefore the vendor (the seller of the asset to your SAPS) and the purchaser (your SAPS, the sponsoring company and you) must not be connected. If property, it cannot be let to you, the sponsoring company or any one connected to you, and in the event of a sale of the property it must not be sold to you, anyone connected to you or the sponsoring company.
Tax Inefficient Investments
Certain pensions legislation was introduced in 2006 that made certain investments by a SAPS or other pension schemes tax inefficient.
‘Tax inefficient’ in the case of a pension investments means the investment is no longer seen as an investment of the pension scheme and the value of the particular investment in question, because it is no longer an investment of the pension scheme, is considered by the Revenue Commissioners to be a pension payable to you.
For example; Your company contributes €100,000 to your SAPS and in turn your SAPS lends you €100,000. Under pensions legislation this €100,000 loan is considered a ‘pension in payment’ to you and as such you will be taxed on the €100,000 loaned to you.
Broadly speaking the following investments are considered tax inefficient for pension purposes;
- A loan from the SAPS to you (the scheme member) or anyone connected to you, or the use of any asset in your SAPS used as security for a loan.
- The purchase by the SAPS of any property from you (the scheme member) or anyone connected to you.
- The sale by the SAPS of any property to you (the scheme member) or anyone connected to you.
- The us of any property in the SAPS as a holiday home or a residence by you (the scheme member) or anyone connected to you.
- The purchase, by your SAPS, of shares in a ‘close company’ where you or someone connected to you is a ‘participator’.
Certain SAPS can borrow to invest, the type of SAPS that can borrow to invest is called a ‘single member’ SAPS.
A single member SAPS is a SAPS with only one member, SAPS with more than one member are not in a position to borrow to invest save in exceptional circumstances.
There are a number of rules laid down by Revenue in connection with such borrowing and these are as follows:
- Only the asset purchased by borrowing may be used to provide security to the lender, therefore there can be no cross collaterisation or personal guarantees.
- interest only loans are not permitted.
- The term of the loan cannot be greater than 15 years
- The loan must be paid in full before normal retirement age
- The sale of other scheme assets to clear any residual debt is not allowed
- Life cover on the debt may only be provided outside the scheme
Typically the maximum level of borrowing will be in the region in the region of 70% to 75% of the property value.
Note: Your SAPS is not exempt from Stamp Duty on the purchase of a property therefore this will be an expense of your SAPS.
Life cover can be provided for within your SAPS or via a life policy with an insurance company outside of the SAPS.
Typically life cover is provided for by the company outside of the SAPS.
Permanent Health Insurance Like life cover an insurance policy can be established by the company to protect the income of the member during a period of illness or injury.
How you take your benefits at retirement will be dependant on your ‘status’ and pensions legislation says you can do.
Currently there are 2 ways you can take your benefits at retirement – one way is open to all SAPS members and the other only available to what are called ‘proprietary directors’
Option available to ‘Everyone’
As discussed earlier, you can take a lump sum of up to 1 ½ times your final salary (subject to having 20 years service) and buy an annuity with the remainder of the fund.
An annuity is an annual income and is typically quoted in percentage form, e.g. an annuity rate of 5% means you will get an annual income of €5 per annum for every €100 of pension fund you give an insurance company.
Annuities can be level in payment, i.e. they remain at the same level every year, or the can be indexed linked in payment, e.g. increasing in line with inflation. A spouse’s pension can be provided for, that is a pension payable to a spouse in the event you pre-decease him or her. Children’s pensions may also be provided for.
Where voluntary contributions have been made to the SAPS by a member there is an option to invest that amount in an Approved Retirement Fund (ARF). You will read about these shortly.
Option available to ‘Proprietary Directors’
If you are a proprietary director, i.e. a director of the company who owns or controls greater than 5% of the shares in the company, you are entitled to avail of other options with your SAPS.
Alternatively if you are not a proprietary directors but you have made personal voluntary contributions to the SAPS yourself (referred to as Additional Voluntary Contributions) you can invest the value of these in an ARF. You are not however allowed to take 25% as a lump sum mentioned below.
Proprietary directors are entitled to chose the ‘Option available to Everyone’ mentioned previously or they can chose to take a lump sum of up to 25% of the value of the SAPS (note the maximum tax relieved pension fund mentioned earlier) and investment the remainder in an Approved Retirement Fund.
An ARF is a post retirement investment fund. Similar to the SAPS investments within the ARF grow tax free.
Any income drawn from the ARF will be treated as income for the ARF investor and is liable to income tax as for example salary would be.
There is one condition to investing in an ARF, you must have a separate guaranteed source of income of at least €12,700 per annum (e.g. a guaranteed pension or the State pension benefit – single person only).
If you don’t have this €12,700 guaranteed annual income you must place € 63,500 in an ‘Approved Minimum Retirement Fund’ (AMRF) until age 75 or place the €63,500 with an insurance company to receive an annuity (an annual income).
AN AMRF operates in precisely the same fashion as an ARF, except that you cannot access the capital (the €63,500 originally invested) prior to age 75.
Yes, the legislation was changed recently to force you to take at least some income from the ARF every year.
For the tax year 2008 (1 January 2008 to 31 December 2008) you will be considered to have taken 2% of the value of your ARF as income even if you haven’t taken any income from it.
For the tax year 2009 and subsequent years you will be considered to have taken 3% of the value of your ARF as income even if you haven’t taken any income from it.
Any income you do actually take from your ARF will reduce this ‘deemed’ amount taken from your ARF.
Both your ARF and your AMRF are personal assets, therefore they can be passed-on in the same way as any other personal assets on your death.
What if any tax will arise will be based on a number of factors, particularly the relationship between you and the person receiving the proceeds of your ARF/AMRF.
- To a spouseThere are not automatic tax implications if an ARF / AMRF is transferred to a surviving spouse on death. The spouse is considered to ‘step into the shoes’ of the deceased ARF owner. However any income drawn down from the ARF by the surviving spouse will be liable to income tax in the normal way.
- To a child aged 21 or over There is no inheritance tax payable in this case. The value of the ARF inherited is treated as income in the hands of the recipient in the year of disposal, and PAYE at the standard rate (currently 20%) applies.
- To a child under 21 In this case, the ARF is considered to be part of a normal inheritance. If the combined value of the total inheritance passing (including the value of the ARF / AMRF) is below the normal CAT threshold for the child there should be no inheritance tax payable. If the value of the inheritance is greater than the applicable threshold there will be a potential inheritance tax liability on the amount in excess of the threshold. Inheritance tax is currently 20%.
Well that will depend on what type of annuity you bought, how long was the guaranteed payment on the annuity, did you include a spouses pension when you bought your pension from the insurance company.
In the unfortunate event of your death before you reach retirement an amount of up to four times your salary at the time of death can be paid to your estate.
If the value of your SAPS is less than this 4 times salary figure then the total value of the SAPS can be paid to your estate tax-free. Inheritance tax may arise depending on the value of your estate and how you distribute it to your dependants / beneficiaries.
If the value of your SAPS is greater than this 4 times salary figure then the remainder of the fund must be used to buy an annuity (annual income) for your spouse and/or financial dependants.
Please feel free to contact your financial advisor or Bespoke Trustees on 041 980 6666 or by email at email@example.com to discuss the costs associated with establishing and maintaing a SAPS.
Yes you can. The Revenue Commissioners will nor restrict the number of pensions schemes you have, they will however as mention previously in this document tax any ‘excess’ pension fund that exists when funds become available.
You can also normally transfer benefits from an insurance company pension scheme to your SAPS, however you should always seek professional financial advice to ensure you are aware of the potential impacts of such a transfer.
Accounts must be submitted to the Revenue Commissioners on an annual basis. As part of our ongoing service Bespoke Trustees will prepare the SAPS annual accounts and present them to the trustees for sign off before issuing them to the Revenue Commissioners.
Yes, as mentioned previously the maximum pension allowable is typically 2/3rds of your final pensionable salary, where there is excess funds in your SAPS plus any other pension arrangements you have you will be considered ‘overfunded’. If such a situation does occur the excess amount may have to be returned to the company, in such an event the receipt by the company will be treated as a trading receipt and the company will be taxed accordingly.
As the fund is held within a trust, which is legally separate from the company, its assets cannot be claimed by creditors, even in the case of the company going in to liquidation.
Steps to setting up a SAPS:
- Complete the SAPS application form.
- Provide Bespoke Trustees with a copy of your latest P60 and anti money laundering documentation (passport/driving licence and 2 utility bills less than 3 months old)
- Bespoke Trustees will draft your SAPS trust deed for signing by you and your employer
- A letter of engagement will also need to be signed by the employer
Bespoke Trustees will then prepare all the necessary documentation to present to the Revenue Commissioners to have your SAPS designated as ‘exempt approved’
Please feel free to contact your financial advisor or Bespoke Trustees on 041 980 6666 or by email at firstname.lastname@example.org to discuss the suitability of a SAPS.
Initially your contributions are invested in an interest bearing bank account, this is a joint account of which you and Bespoke Trustees (as trustees) are signatories on.
From there you can pick the investments (generally done in conjunction with advice from your financial advisor) best suited to you.
How you effect an investment really depends on the investment type but broadly speaking the following will be the procedure: You provide Bespoke Trustees with details of the investment, e.g. investment memorandum of a structured product or the name of the stockbroker if setting up a share portfolio.
We will review the investment to ensure it is ‘Revenue compliant’, i.e. it does not breach any of the Revenue’s prohibitions on pension scheme investments.
Assuming the investment is Revenue acceptable, we will complete the required documentation and forward to you for your signature.
We will then arrange for the transfer of funds from the SAPS bank account, with your signature and approval, to the relevant product provider.
When the investment matures funds will be transferred back to your SAPS bank account for re-investment.
In the case of a share portfolio you decide which broker you would like to use, an account will be opened with the broker in the name of the SAPS. Funds are then transferred to the broker to allow you to start investing. You are free to buy and sell whatever shares you want to, and as with all investments in your SAPS.
At any time please feel free to contact your financial advisor or Bespoke Trustees on 041 980 6666 or at email@example.com to discuss a proposed investment.
A SAPS is an extremely flexible, cost effective and tax efficient means of providing an income or lump sum in your retirement.
© Bespoke Trustees Ltd, 2008
This brochure is based on our understanding of current legislation and Revenue practice as at August 2008
While every care has been taken in its preparation, this brochure is of a general nature, is based on our understanding of current legislation and Revenue practice, and should not be relied on in relation to a specific issue without taking appropriate financial, insurance or other advice. The content of this document is for information purposes only and does not constitute an offer or recommendation to buy or sell any investment or to subscribe to any investment management or advisory service. If any conflict arises between this brochure and the trust deed and rules establishing your SAPS, the provisions of the trust deed and rules of your SAPS will apply.
Terms and conditions apply, investing in a geared investment or fund that contains an element of gearing may result in greater volatility than that associated with non geared investments. In the event that an investment does not perform as intended an investor may not receive back all of the original capital and in extreme circumstances may lose the entire amount invested.