JAMES CARON MAXIMUM FUNDING

1
JAMES CARONMAXIMUM FUNDING

• Wealth Management Opportunities

2
Background

• Revenue Commissioners have in place Maximum
  Funding Rates.
• Rates relate to current remuneration and length
  of service.
• For maximum benefits individuals must have at
  least 10 years pensionable service with the
  Company i.e. having been in receipt of
  remuneration.
• If an individual has 10 years service the company
  can contribute sufficient premia to ensure a
  pension equivalent of 2/3rds final salary.

3
Comparison between maximum funding levels
Personal v Corporate Pensions

• Married Man, 10 years pensionable service at NRD
  60
• Personal Pension (subject to an overall earnings
  cap of 254,000 p.a.).
• Personal Pensions Corporate Pensions
• Age Max. Age Max
• Under 30 yrs 15
• 30-39 20 35 112
• 40-49 25 40 123
• 50 30 45 142
• 50 178

4
Practical Implications

• The amount of money a Company can contribute to a
  pension scheme on behalf of its employees is
  enormous.
• In effect a lifetimes pension planning can be
  compressed into a 10yr, 7yr 5yr time frame.
• Compressed pension funding does not have to occur
  at the latter end of an individuals working life.
  A typical 35 year old married individual can
  have contributions made in excess of 100 of
  salary.
• An example may illustrate this

5
Case Study

• John a 60 year old married Proprietary Director.
• The company has 500,000 in its accounts which
  it wishes to dissipate.
• John could take the 500,000 as salary.

6
Option 1

• John takes additional salary of 500,000
• less tax _at_ 42 210,000
  (Note 1)
• Net Figure
  290,000
• Note 1 PRSI implications have been ignored.

7
Option 2

• Company effects an EPP and pays 500,000 single
  contribution.
• Total Fund _at_ age 60 500,000 (Note 2)
• Tax Free Cash _at_ 25 125,000
• Balance of Fund 375,000
• Less Tax _at_ 42 157,500 (Note 3)
• Net Fund 217,500
• Plus Tax Free Cash 125,000
• Combined Net Fund 342,500
• available

8
Option 2 (cont.)

• Note 1 - Assumes no necessity to invest 63,500
  in an AMRF.
• Note 2 - PRSI implications have been ignored.
• Note 3 - Company will receive Corporation Tax
  Relief on a single premium contribution (possibly
  spread over 5 years). If we assume a Corporation
  Tax Rate of 12.5 this equates to 62,500.

9
Max Funding (The Current Situation)

• Those in non pensionable employment have maximum
  contribution levels subject to an overall
  earnings cap of 254,000 p.a.
• No such earnings cap for Proprietary
  Directors/Employees
• Except in respect of AVCs
• Will this situation change?

10
UK Experience

• UK introduced a salary cap of 60,000 p.a.
  (indexed) in 1989. With indexation this figure
  is currently in the region of 100,000.
• However, proposed new simplified regime from
  April 2006.

11
Proposed UK Changes The Lifetime Allowance

• New limit on amount of pension savings anyone can
  take in their lifetime, without tax penalty.

12
Lifetime Allowance

• Initially - 1.5 million
  
  
• 2007/08 - 1.6 million
• 2008/09 - 1.65 million
• 2009/10 - 1.75 million
• 2010/11 - 1.8 million
• Then reviewed every 5 years

13
Lifetime Allowance Charge

• Tax charge on funds above the Lifetime Allowance
  or any protected amount.
• 55 if taken as lump sum.
• 25 if taken as income, then taxed under PAYE.
• (Effective charge - 55, for higher rate)

14
The Annual Allowance

• Total payments attracting tax relief
• 2006/07 - 215,000
• increasing by 10,000 each year reaching
• 2010/11 - 255,000
• Expected to be reviewed every 5 years.

15
Question

• Do Irish Proprietary Directors know how fortunate
  they are?
• Proprietary Director retires at age 60 on
  final salary of 7.5m
• Maximum permissible pension benefit, equivalent
  to 2/3rds final salary - 5m

16
Opportunities

• Funding For Cash.
• Funding _at_ The Point Of Retirement.

17
Funding for Cash

• Max Lump Sum that may be provided _at_ N.R.A. for an
  employee is 1.5 final remuneration subject to 20
  years service
• Can this be exploited?
• Lump Sum may be commuted even if it eliminates
  the full value of the fund applicable to the
  individual.
• It is permissible for a scheme to provide only a
  lump sum retirement benefit.
• There is no obligation to provide a pension.

18
Case Study

• John _at_ N.R.A. 60 has 40 years service.
• His final remuneration is 50,000 P.A.
• He has no previous benefits.
• Company are anxious to reward long/loyal service.
• Company Makes a lump sum payment of 75,000 into
  an employer sponsored scheme.
• Once revenue approved benefits are accessed by
  way of tax free cash.
• 50,000 1.5 75,000 tax free

19
Funding at the point of retirement

• What if director hasnt availed of max funding
  opportunities during employment.
• A company may make a one off special contribution
  to fund for 2/3 final salary.
• This payment attracts tax relief which may be
  spread forward up to a maximum of 5 years.
• Director than may exercise FA 99/2000 options.

20
Process

• Company contribution treated for tax purposes as
  a single premium.
• Cash Fund.
• No B/O spread, No Fund Management Charge.
• May be one off administrative charge.
• If Revenue Approval required can take up to three
  weeks but if existing case then pre - approved.
• FA 99/2000 options exercised.

21
Case Study

• Mary, 62 Yr old, married, director of cash rich
  company looking to retire.
• Mary has no pension benefits.
• Company has retained profits of circa 3,000,000.
• Company is allowed fund to provide maximum
  benefits of up to 2/3 final salary.
• Mary has a final pensionable salary of 76,500.
• Thus maximum pension is 51,000 - 2/3.
• Fund required To Purchase These Benefits circa
  2,600,000.
• Contribution qualifies for tax relief spread
  forward up to 5 years.
• F.A. 99/2000 options apply - 25 TFC AMRF/ARF.
• SLAC has a specific process for dealing with this
  business - thus fast turn around times.

22
Funding At Point Of Retirement - Company Sale

• As before but -
• Can be integrated into sale process - Due
  Diligence.
• Has effect of reducing company assets thus
  reducing CGT expense.
• Tax relief can be factored into the sale price.
• Also applicable in the event of company wind-ups.

23
The Opportunity

• PENSIONS WILL NEVER BE THIS GOOD!