PENSION PANIC BUTTON

Brian Sullivan Head of Pension Sales for Bank of Ireland

Planning a pension for the future is essential for entrepreneurs explains Brian O’Sullivan.

The number of entrepreneurs in Ireland is constantly growing. In fact we now have over 193,000 entrepreneurs in Ireland, an increase of 68% from 115,000 in 2002. This means that over 10% of the working population is now involved in some level of entrepreneurial activity. But how many entrepreneurs actually have a pension?

According to Bank of Ireland Life’s research, just one third of selfemployed business people have a pension. Given the significant tax relief on offer, almost double the bonus on an SSIA for higher income earners, this is surprising.

TAX RELIEF AVAILABLE

Research findings suggest that the reason not all self-employed people take advantage of the tax savings a pension can offer, is because they simply don’t know about it. A shocking 71% of people in a recent pensions survey were not aware of the generous tax relief available. This is worrying trend, especially when you consider that for most business owners a pension could not only significantly reduce their annual tax bill, but also help them to secure a comfortable future in retirement. A recent report predicts that over 21,000 new companies will start up in Ireland by the end of this year. The biggest worries for entrepreneurs are how they will manage their time and finances, the day-to-day running of their business and developing their product or service.

When you factor in all these concerns, quite often pension provision falls to the bottom of the pile. Furthermore, many business owners see their business as their pension and so don’t take out separate cover. However, few stop to think of the dangers inherent in relying on your business as your pension, and as surveys reveal a staggering amount of people do not understand the tax benefits of taking out a pension, like cutting their tax bill before this year’s tax deadline.

The Government provides tax relief on up to 40% of your net relevant earnings on all pensions, potentially saving thousands of euros in tax and helping to provide you with a comfortable income in retirement.

RETIREMENT INCOME

Since the recent Finance Act increased the maximum tax relief percentages available to those contributing to a pension, the 31st October tax deadline presents an opportunity for existing pension plan holders to review the level of their payments, particularly if they happened to be a late starter. The target level of retirement income you should aim for will vary from person to person. As a rough guide however, a target pension of 50% of your estimated final annual earnings, with your payments indexed to increase by 3% per annum (to offset the effects of inflation) would be considered a reasonable level of retirement income. The pension contributions required to produce this level of income in retirement will depend on a number of factors including, whether you are male or female, the age at which you start contributing to a pension fund, and the date from which you wish to take your retirement benefit.

If you are a late starter and the “ideal” contribution is simply too high to secure an adequate income in retirement, don’t despair! A sensible approach is to gradually increase your monthly payments over a period of 3 to 5 years. Just don’t delay any longer – a delay of even five years in starting your pension could reduce your final retirement fund by up to a third.