Why it pays to
plan AHE A
There is a lot of mystique attached to pensions, but stripped of their jargon and regulations the objective is simple: to accumulate money at retirement to replace pre-retirement pay. Kevin Finucane looks at the many pensions vehicles available to solicitors
recent survey by the Economic and Social Research Institute disclosed that only 46% of employees and the selfemployed are covered by a pension scheme. There are no statistics on solicitors only, but no doubt we are a little bit up on the average. The Irish Association of Pension Funds undertook a survey recently on why people do not belong to pension schemes. ‘I can’t afford a pension scheme at the moment’, ‘the charges involved in organising a pension are too high’ and ‘I don’t really understand pensions’ were three of the main reasons given. Whatever the reason, any delay in starting to provide for a pension is expensive, as Table 1 shows. A male solicitor aged 25 will need to pay just under 10% of his salary each year to provide for a single pension of two-thirds of his salary at age 65. If he does nothing until age 40, he will have to pay nearly 18% and at age 55 a staggering 51.7%. It is more costly if the solicitor wants a pension that increases every year and a spouse’s pension on death. What makes it worse is that there are limits on the contributions that can be paid into a pension arrangement (see below). The figures in Table 2 illustrate the need to
Table 1 ANNUAL COST OF FUNDING FOR A PENSION OF TWO-THIRDS OF SALARY AT RETIREMENT (COST EXPRESSED AS A PERCENTAGE OF SALARY) Age at which solicitor starts 25 30 35 40 45 50 55
Single life pension 0% spouse’s pension 0% escalation Male Female 9.6% 11.5% 14.1% 17.8% 23.5% 32.8% 51.7%
10.7% 12.9% 15.9% 20.1% 26.3% 36.9% 58.1%
Single life pension 50% spouse’s pension 3% escalation Male Female 13.9% 16.7% 20.5% 25.9% 34.0% 47.6% 75.0%
14.2% 17.2% 21.1% 26.6% 35.0% 49.0% 77.1%
It is assumed for the purposes of these figures that investment return will be 8% a year and salary/pensionable earnings will increase at 6% a year.
16 LAW SOCIETY GAZETTE
plan your pension as early as possible. What is the appropriate pensions vehicle? The common features of all approved pension arrangements are that: ● Contributions into the arrangement are fully relieved against income tax and PRSI ● Income and gain on the fund itself are exempt from tax ● The pension payable in retirement is liable to income tax, and ● Part of the fund can be taken at retirement as a tax-free lump sum.
But there are major differences also. In examining these differences, let us consider whether the solicitor is self-employed (sole practitioner or partner) or an employed solicitor. Sole practitioners/partners The pension that a sole practitioner or partner can take out is known as a ‘retirement annuity contract’, a ‘self-employed arrangement’ or a ‘personal pension plan’. Whatever its name, it is a policy taken out with a life assurance company under section 235 of the Income Tax Act, 1967 and is approved by the Revenue Commissioners. Retirement benefits are provided under section 235 and life assurance benefits under section 235A. The solicitor receives a retirement annuity certificate (RAC) from the insurer confirming the contributions which have been paid and gets relief against his or her income tax bill. A maximum of 15% of net relevant earnings can be contributed each year, rising to 20% from age 55 onwards. Broadly, ‘net relevant earnings’ are income from the business less certain deductions such as mortgage relief, capital allowances and losses. There is one important exception to the requirement that a self-employed arrangement be taken out with a life assurance company. A group scheme can be established under trust through a merchant bank or a life office. This is known as a trust scheme and a prime example is the Law Society’s own scheme currently invested with Bank of Ireland Asset Managers. Trustees must be appointed to manage the scheme.
OCTOBER 1997