Being a self-employed, lone trader is a distinctly unsatisfactory position to be in if you are trying to fund for your retirement. Revenue rules mean that you must, a) restrict your pension contributions to just 15 per cent of your gross (pre-tax) income; and b) you must purchase your pension policy from a conventional Irish-based life and pensions company.
Unless you begin funding at an early age, your chances of ending up with a pension that resembles the usual target of two thirds of your final income (the maximum allowable size) are very slim. Company directors are in a far more envious position because the Revenue allows a limited company to pay a percentage of the director's salary into his pension fund and claim full tax relief against its corporation tax bill. For example, a company can contribute over 73 per cent of annual salary into a pension fund for a director age 40 who has no pension and wants to retire at 60. Most directors' pensions are purchased using conventional life assurance pension contracts, but these have not always reflected good value in the early years because of high upfront charges, including commission. Too often in the past the intermediary, whether a direct sales agent or a broker automatically recommended the ubiquitous `managed fund' for all their clients, regardless of their particular age, risk profile and savings frame. Here too the Revenue has given company directors another break by allowing them to set up what are known as Self-Administered Pension Schemes (SAPS). These apply to companies with more than 12 employees one in which directors hold at least 20 per cent of the share capital. Small SelfAdministered Pension Schemes (SSAPS) are allowed for companies with under 12 employees.
Self-administered pension schemes are being increasingly adopted by company owners and directors "essentially on the strength of issues that have to do with transparency, flexibility and control", says Mr Owen Morton, director of Moneywise Financial Planning, and a registered pension trustee. He is also the author of a short guide to self-administered pensions, My Own Pension Fund.
Business owners, he says, "warm to the idea of knowing what's going on - especially when it comes to sizeable, recurring investment of hard-earned money".
Self-administered pension funds are highly regulated in that the pension trustee with whom you have set up the scheme must adhere to a set of legal guidelines and report to the Revenue each year. Investments can be made in a flexible range of direct investments such as deposits, stock market equities (both domestic and international), gilts, exempt-managed funds, property, forestry, in fact, "any commercial armslength enterprise", which will then receive an annual review from your trustee/consultant as to its progress and growth performance.
There are certain extra restrictions which apply to the `Small' self-administered pension scheme, mainly to do with member-loans, property transactions and share acquisition in the employing company. Even though you cannot remove your funds from these schemes (any more than you can from a private pension), you have considerably more control over their progress than conventional life assurance pension contracts. Another unique attraction of these schemes is that the purchase of the annuity can be postponed for up to five years to take better advantage of better interest rates. The costs associated with selfadministered pension schemes tend to be considerably more transparent than those charged by conventional life assurance companies. Typically, it can cost between £2,000-£5,000 to set up a SAPS or SSAPS plus an annual management charge, usually several hundred pounds. The economic sense of going this route rather than the conventional one (complete with upfront charges, bid-offer spreads, annual management charges and renewal fees, etc.) should be compared over the full term of the contract. The impact of the SAPS fees/management charge on the investment fund value should be taken into account. Moneywise suggests that while a "lower start-up could be considered, a `Small' self-administered scheme should see an investment level of say £20,000 per annum within a short period from startup. For lower investment a traditional approach, either on a fee basis or a spread commission basis would hold its own".
A list of approved self administered pension trustees is available from the Revenue Commissioners or you can consult your own financial adviser. The Moneywise guide, My Own Pension Fund, is available from Moneywise Financial Planning, 31a Westland Square, Dublin 2, tel. 670 5937.
In last week's article on the Scottish Equitable International Global Plus fund, we noted that Capital Gains Tax on profits could be marginally offset by the CGT annual allowance of £1,000 (£2,000 per couple). "This was our understanding," says promoter Mr Sean Buggy of Buggy McCormack Asset Management, "but we have been informed by the Luxembourg regulator that Irish CGT allowances cannot be applied to this product. The overall impact on any profit is negligible."
