Directors/Executive Pension

How will a Directors Pension work?

Probably the most tax efficient way of getting profits from your business into your own name is through an Executive or Directors Pension. Directors of limited companies who have a shareholding of at least 5% have very attractive levels of pension funding opening to both themselves and their business.

Where a Directors Pension is set up by the company for the benefit of its directors, it allows the company to transfer company profits away from the business and ring fence them in the name of a director. By doing so the company will also avoid the 12.5% corporation tax bill due on these profits (within revenue limits). Any contributions the company makes to the Directors Pension are flexible and the director has no Benefit in Kind (BIK) liability on the pension monies received from the business.

Company directors can also make personal contributions to their Directors Pension and receive tax relief of either 20% or 40% on their contributions (within revenue limits). It is also possible to add death and disability benefits for a director.

Unlike most other occupational pension arrangements, a company director can retire as early as fifty years of age. If they wish to retire and draw on their pension benefits anytime from age fifty on wards they can still remain working in the business. However, the company itself can no longer fund the directors pension from company profits; however the directors themselves can still fund a pension through their PAYE in the normal manner.

At retirement a director will have multiple options to how they wish to use their pension fund. Firstly, they are entitled to take 25% of their fund as a tax-free cash lump sum, within limits; then they have the usual retirement options open to them such as ARF and Annuity. A Director with at least ten years service may also take 150% of their final salary as a tax free lump sum.

Key Benefits

• Saving of 12.5% Corporation Tax on company profits.

• Company creditors have no access to a Directors Pension.

• On retirement 25% of the fund can be taken as a tax-free lump sum, within limits.

• No BIK liability for a director on pension contributions received from the company.

• Allows a director to ring fence company money in their own name and away from their business.

• Director can retire early, from age fifty onwards.

• Contributions are flexible.

• Multiple options on retirement.