Planning your personal pension – A guide for small-medium business owners

When running a business, it is easy to get caught up dealing with day-to-day matters and managing your pension can understandably take a backseat. Whether you are a small-medium business owner or self-employed, here are five tips to help secure your own l

SETTING A TARGET

Take the time to determine how much savings you can afford to put aside each month. Once you have decided on the amount, commit to transferring this into a savings account at the beginning of the month, an Executive Pension Plan, or a Small Self-Administered Pension (SSAPs). If you are a selfemployed individual, consider a Personal Retirement Savings Account (PRSA) or Personal Pension Plan. The size of your pension fund is driven by many factors, such as the performance of the assets your pension is invested in, fees and charges, the contributions that you make and the length of time between starting the pension and retirement age.

Jerry Moriarty, IAPF, says, “The amount you can afford to put aside depends on what age you are starting, the type of lifestyle you want in retirement and what other savings you might have. That is why getting independent financial advice is so important. A 23-year-old will have their State Pension paid at age 68. If they want half their salary as a pension at retirement, they will need to save €310 per month or 9.3% of their salary. With tax relief, this will cost them €186 per month in take home pay.

“If they started at age 38, they would need to pay €527 or 15.8% per month or €331 net. The Pensions Authority have a calculator on their website which will show those figures.” (www.pensionsauthority.ie/en/Calculators/ PensionCalculator/)

CHECK THE TIME

According to Jerry Moriarty, time is of the essence when it comes to pensions.

“While it’s never too late to start, it’s so much more beneficial to begin saving in your early years if at all possible.”

Moriarty says the monetary benefits of pension saving in your 20s and early 30s far outweigh the value of waiting until you are in your 40s and 50s. This is the case even if you save for 30 years, having started later in life.

UNDERSTAND YOUR INVESTMENTS

In Ireland, approximately 345,000 individuals work for themselves. If you are self-employed and have not set up your own pension, you will be entirely dependent on the State pension (if you qualify for it), which is €238.30 a week. This means that when those who are now in their 30s and 40s reach retirement age, they may find the State will not be able to support them financially. When setting up your own pension fund, Moriarty says PRSAs are suitable for individuals who are uncertain about their income, as “they allow for once-off or regular contributions”.

For self-employed people with a more stable income, a personal pension plan provides a greater choice of investment funds in which to put their money, however the contribution charges can be higher or lower.

“When shopping around, make sure you are aware of allocation rates or charges,” advises Moriarty.

REVIEW YOUR FUND

It is important to review your pension on a regular basis and avoid ignoring your annual statement from your pension provider. Any changes, such as whether you want to pay more into your pension or update your expected retirement age, need to be considered annually. As most pensions are invested in a mixture of shares, property, bonds and cash, pension funds can go up and down in value throughout the course of your life. If you are close to the retirement age, be conscious that there could be a detrimental effect on the final income that you will receive at retirement.

SUCCESSFUL SUCCESSION

At the moment, the thought of transitioning out of your business might seem years down the line, but even if these plans are distant, planning for the company’s future now will help to ensure long-term success. As you develop or update your business plan, look at creating a transition plan. For example, if you are planning on selling the business, arrange a list and timeline for meeting prospective buyers. Or, if you think passing the company onto an employee may be the best option, then develop a timeline for training your successor. Consult a professional to help you with ways to increase the value of your business and to ensure that you can sell it for the right price at the right time.

If you do plan to sell your company to finance your retirement, consider paying a large lump sum into your pension fund before exiting. Not only will this provide you with a sizeable pension, but it can reduce the capital gains tax on the sale of the company