Retirement Planning Update Are you thinking of retiring?

Transcription

1 Retirement Planning Update 2014 Are you thinking of retiring?

2 Pensions and Retirement planning continue to be a very topical item in In this series of Pension updates, Bank of Ireland Private Banking provides you with an update on the key items that you need to consider when putting your financial plans for retirement together. If you are about to retire, then this edition is for you.

3 Approaching Retirement If you are on the glide path to retirement it is important to review your pension plans and your planning. It is critical in the final few years before you actually draw down your pension benefits to have a thorough check-up of your plans and to make any adjustments necessary. Amongst the issues to be considered are: ff How can I maximise my contributions in the remaining period to retirement? ff If I operate through a Company, what contributions can the Company make to my pension fund? ff How should I structure the investment strategy of the funds? ff What is my target fund likely to be on eventual drawdown? ff What is my plan for the business when I do retire? ff Do I need to review my Life Cover options, in the event that I don t make it to retirement? 1. Company Director One of the main issues facing Company directors is that the majority of their wealth can be tied up in their Company, resulting in a significant tax exposure when they draw cash down from it, and the risk involved in the majority of wealth being housed within a single structure. If you are approaching retirement but planning to continue working for some years yet, it presents an opportunity to maximise the transfer of Company funds into your personal Director s Pension Scheme in advance of actual retirement. Under current Revenue rules, the maximum pension fund is capped at a capital value of 2m, with any excess being potentially subject to additional taxation. Directors Pension Scheme Planning for those left behind ff Extracting surplus cash via a Director s Pension Scheme can reduce risk exposure and is a tax effective way of extracting cash ff The company contribution is treated as a normal trading expense ff The Director is not subject to any BIK. It also secures pension assets from any potential creditors in the event of company failure ff Adding a simple Life Assurance element to the company funded pension structure can help deal with the financial impact caused by the premature death of the breadwinner The need for an effective pensions plan ff Apart from providing a source of income in retirement, the Pension Plan also better enables the business owner to pass on the business to the next generation when the time arrives ff People are living much longer in retirement (on average 20 years) therefore setting funds aside for retirement years is more important than ever Ongoing management of a Revenue approved structure Our Private Banking pensions specialists can help advise and guide you through the complexities of Revenue and Tax regulations. In particular they can help you: ff Manage your Revenue approved structure ff Determine the level of annual contribution required ff Decide on an investment strategy for the fund ff Ensure that Revenue regulations are adhered to. 2. Self Employed If retirement is on the horizon but you are planning to continue working for some years, it presents an opportunity to maximise the level of personal contributions which you can invest into your Personal Pension Plan. Recent tax and regulatory changes have not made it any easier to build up a retirement portfolio. The maximum contribution which any individual can invest and get tax relief upon has been reduced in recent Budgets. So in effect it is even more critical that professionals take maximum advantage of the reliefs available each year. The maximum tax deductible contribution you can make is as follows: Age attained in tax year Contribution as % of Net Relevant Earnings % of NRE 60 and over 40% of NRE Note: The maximum Net Relevant Earnings figure on which tax relief is allowed is currently 115,000.

4 case study case study Client Scenario 1 Client Scenario 2 Background Questions ff Professional ff Aged 59 ff Income circa 200,000 p.a. ff Plans to continue working for a few years yet 1. When do you plan to retire? 2. What happens to the practice at that stage? 3. What other assets do you have that will support you in retirement? 4. Are you planning to maximise your pension contributions until you retire? ff Current Pension Fund value circa 500,000. But a large portion has been invested in a low yielding Cash 5. Should we review the current investment strategy in the run up Fund for the past two years to retirement? ff Has some Life Cover in place which covers a commercial 6. Do you want to examine mortgage. Also has personal Life extending the Life Cover under Cover of 300,000 due to expire the Conversion Option? in 6 months. This latter policy has a Conversion Option (facility to convert to another policy without medical evidence) Outcomes Background ff At this stage he plans to continue working until age 65. The practice is still going well ff Company Director ff At retirement, it might be possible to sell on the practice, but putting a value on it is difficult ff Aged 65 ff He has rental income from two rented properties of circa 40,000 p.a. The mortgages are almost repaid ff Easing out of the business and passing it over to the next generation. ff Now that he is approaching age 60, he intends to increase his pension contribution to the maximum of 40% of 115,000, i.e. 46,000 p.a. ff At this stage he is undecided as to whether he will invest the 75% residual fund in an ARF or an Annuity when he retires ff With the Mortgage Protection cover almost expired, he wants to examine what his Life Cover options are under the Continuation Option Possible Recommendations ff With a possible 5 further contributions of circa 46,000 p.a., the target fund at age 65 will be circa 900,000 ff This will give a retirement lump sum of circa 225,000 (gross) or 220,000 (net) and leaves circa 675,000 for investment into an ARF or an Annuity ff With deposit rates falling, the Cash Fund is now delivering less than 1% p.a. We should consider adjusting the investment strategy in the run up to age 65. There are other secure/low risk options which can deliver higher returns ff We will obtain quotations for continuing the Life Cover. We will look at a variety of cover terms. ff Pension Fund of 2m ff Not sure what his options are in relation to Pension Fund Questions Outcomes 1. What are your plans in retirement? ff He plans to remain as Chairman of the Company (and retain a small shareholding) and will draw a modest income as such 2. Will you continue to draw an income from the business? 3. When do you plan to ease yourself out of the business? 4. Do you need to draw down an income from the Pension Fund immediately? 5. What other assets do you have that might support you in retirement? 6. Is your wife drawing a salary from the business? 7. Is the Company funding a Pension Plan for her? 8. If the Company has ceased contributing to your Pension Plan, is it now contributing to Plans for your two children? ff He will have some other income (rental income, dividends etc) ff With the retirement lump sum of 500,000, he has no immediate need for a drawdown from the remaining Fund ff His wife (aged 61) is Company Secretary and draws a modest salary. The Company has not pensioned her income ff The two children have not yet established a Pension Plan for themselves Possible Recommendations 1. From his retirement lump sum, there will be a small tax liability (20% on excess over 200,000). The net figure will be 440, In relation to his wife, the Company can establish a Pension Plan for her based on her salary (possibly review the salary) 2. In relation to the balance of 1,500,000 the client can either: 4. Suggest that we meet with the two children to start a wealth extraction plan for each of them. ff Invest in an ARF from which he will have to drawdown at least 5% p.a. and/or ff Buy an annuity (an income for life)

5 Lump Sum ff 25% of your pension fund can be taken as a lump sum Up to 200,000 can be taken tax-free ff The next 300,000 is taxable at Standard Rate Income Tax (currently 20%) What are your retirement options? Having accumulated a pension fund and reached an age where you decide to retire or simply work less, you now have to figure out how you will use the accumulated pension fund. For Company Directors and Self Employed there are now three main options: 1. Part of the accumulated pension fund (typically 25%) can be taken as a retirement lump sum 2. With the remaining 75% you can either buy an annuity (a guaranteed income for life) from a Life Assurance Company, or 3. You can invest the 75% into an Approved Retirement Fund (ARF) from which you can subsequently draw down an income. ff With the remaining 75% you can either buy an Annuity or invest in an ARF (or a combination of both). Annuity ff An annuity is a guaranteed income for life ff However, increased longevity has meant that the rate at which cash is converted into an annuity has fallen in recent years ff There are numerous annuity products available; we can help you decide on the most appropriate product for your retirement ff For many, the real downside of buying an annuity is that you have to give away the full capital to the Life Company, so that if you die prematurely the capital may be lost Approved Retirement Funds (ARFs) ff An ARF is a flexible way for you to control your retirement income ff You retain control of the capital. On your eventual death in retirement, any capital remaining in the ARF passes to your spouse (as an ARF in their name) and on their subsequent death any capital remaining passes to your estate ff Careful consideration needs to be given to the likely level of income you intend to draw down each year. A minimum of 5% of the ongoing value must be drawn down each year ff In determining the ARF investment strategy, consideration should also be given as to how other (non pension) assets might be invested ff Bank of Ireland Private Banking can help you decide on the most appropriate ARF strategy and advise on any investment decisions. ff Bank of Ireland Private Banking can help you navigate the complexities of these decisions and advise on the different annuity options available to you. Key considerations when deciding between an Annuity or an ARF: ff Your state of health at retirement ff Your spouse s state of health ff What other assets you have that will provide an income in retirement ff Whether this will be the only source of income in retirement ff Your attitude to risk ff Whether you wish to draw a regular income immediately.

6 How can Bank of Ireland Private Banking help? Investment Expertise ff With all the recent tax and regulatory changes, good advice is invaluable. Private Banking s team of pension and investment specialists can ensure that all clients receive the very best of advice. Financial Advisor ff Whilst part of the Bank of Ireland Group, Private Banking can access products and services from a wide variety of providers in the local market. Access to Global Investment Managers ff In addition, we also have partnerships with a panel of specialist global investment managers. This enables us to offer clients a unique multi-manager, multi-asset and multi-strategy investment platform with a focus on diversification and managing investment risk. Tailored Pensions Options ff The advantage to our clients is that we can offer a wide range of pension and investment options, tailored to suit each client s particular needs. We can also advise in relation to any existing arrangements which clients may have in place. Private Banking expertise ff For the typical Private Banking client Company Directors and Professional Self-Employed our independence, depth of resources, range of product offerings and our reporting capabilities ensures that we have the resources and expertise to advise on any of the complexities of a pension plan.

7 Bank of Ireland Private Banking Limited 40 Mespil Road, Dublin Fax: Dockgate House, Dockgate, Galway Fax: South Mall, Cork Fax: Disclaimers Bank of Ireland Private Banking Limited (BOIPBL) believes any information contained in this document to be accurate but BOIPBL does not warrant its accuracy and accepts no responsibility whatsoever for any loss or damage caused by any act or omission made as a result of the information contained in this document. Any investment, trading or hedging decision of a party will be based on their own judgement and not upon any view expressed by BOIPBL. Any service, security, investment, fund or product outlined herein may not be available to or suitable for you, and may not be available in your jurisdiction. It is your responsibility to ensure that any service, security, investment, fund or product outlined is available in your jurisdiction before any approach is made regarding that service, security, investment, fund or product. The distribution of this document may be restricted in your jurisdiction. This document does not constitute an offer or solicitation in any jurisdiction in which to make such an offer or solicitation would be unlawful and should not be relied upon by persons who do not have professional experience of participating in such offers. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. You should obtain independent professional advice before making any investment decision. Any expression of opinion reflects current opinions of BOIPBL as at September Any opinion expressed (including estimates and forecasts) may be subject to change without notice. This publication is based on information available as at September For private circulation only. Not to be reproduced in whole or in part without prior permission. Bank of Ireland Private Banking Limited is regulated by the Central Bank of Ireland. Bank of Ireland Private Banking Limited is a member of the Bank of Ireland Group. RC148-14