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2011 Finance Bill Changes - Self Employed Professionals - Pension Funding - new approach required.
Phoenix Magazine Article, 10th February 2011
Pat Ryan Head of Pensions Canada life Assurance (Ire) Ltd
Finance Bill 2011
The recently published Finance Bill 2011 makes depressing reading for professionals who rely primarily on private practice earnings.
Self-employed individuals such as doctors, accountants and legal practitioners are now limited to making pension contributions only against income up to €115k pa.
Furthermore, any other pensionable income (such as HSE or GMS earnings in the case of medical practitioners) makes up the first part of this €115k ceiling, meaning that private practice allowance for pension funding will be zero for doctors with public income of €115k pa or more.
It gets worse. The new Universal Social Charge (USC) is now payable on all self employed income over €16,000 @ 7% and @ 10% for earnings over €100,000 pa. with no deduction for pension contributions.
In addition, we will all have to work longer before qualifying for our State contributory pension with retirement age extended to 67 for persons retiring in 2021 and to age 68 from 2028.
With high personal taxation rates, PRSI and the new USC devouring up to 55% of earnings and dreams of alternative property based retirement plans evaporating all around us, thoughts turn to how self-employed earners can actually fund a decent retirement lifestyle?
Solution needed
To find a solution to this serious problem it is useful to look at how pensions are structured both for professionals within the public sector and for senior executives and company directors in the private sector. Here, pension schemes are funded or deemed to be funded predominantly by employer paid contributions. This way an employer may fund annual pensions for directors and / or employees up to 2/3rds of pre-retirement earnings. In addition, options may attach to convert pensions into approved retirement funds to avoid annuity purchase.
Employer funding
The benefits of employer pension funding are simple and fundamental. This is the case in respect of both public sector and private sector superannuation or occupational pension schemes.
- Employer paid pension contributions are exempt from benefit-in-kind taxation on behalf of the employee or salaried director in respect of whom the contribution is paid or deemed to be paid. This means that PRSI and USC will not impact as contributions are borne by the employer.
- €115,000 earnings ceiling does not apply in respect of employer paid pension contributions.
- Contributions paid by employer may be much greater than allowable contributions paid by an individual as the employer funding rules allow catch up provision. This is an important aspect for professionals who will usually be in mid thirties before their practice becomes established.
- Employer funded schemes may produce much higher levels of retirement benefits up to the tax approved fund threshold of €2.3M.
So how can self-employed practitioners benefit from the very attractive corporate pension structures available to other professionals employed in both public and private sectors? Clearly the answer is to ensure that pension funding, where possible, is made by way of employer contributions rather than by employee or self-employed funding.
Business structure review
One way of achieving this benefit is to review the business structure under which the practice currently operates. For example, most private medical practitioners are still structured as sole traders or partnerships and now liable for up to 55% tax, PRSI and USC on net income generated. Medical Council rules place no restriction on incorporation but prohibit a medical practitioner from taking steps to try to limit his / her liability. As such, there is no restriction upon a medical practitioner in Ireland operating his /her practice through an unlimited company.
The taxation regime for unlimited companies and for salaries paid by unlimited companies to directors and employees is similar to that as applies to limited companies. Likewise the favourable employer paid pension rules are no different for directors of unlimited companies.
Compare the difference
For example, compare the tax and pension options for a doctor aged 48 with private practice profits of €200k between operating in a self-employed capacity and operating via an unlimited company. Using the unlimited company structure here allows savings of over €50k in income tax, PRSI and USC to be transferred into additional private pension assets. We don't need a degree in applied mathematics to work this one out!
Check out incorporation profile now
If post Finance Act 2011 you are self-employed, looking at paying combined taxes of up to 55% of earnings and denied the tax allowances to fund an adequate retirement, then ask your pension adviser or tax adviser to assess the suitability of your practice for incorporation. As in all matters of significant consequence, incorporation may not be feasible nor the best answer for all professional practices but now is the time to find out. Incorporation can provide significant other benefits in addition to pension funding and every month saved from paying a 55% combined tax rate makes a difference.
The views expressed in this article are those of the author and do not necessarily reflect the views of Canada Life Assurance (Ireland) Limited.