Converting Company Profits to Personal Ownership via a Directors Pension Plan

    Taxworld blog

    Converting Company Profits to Personal Ownership via a Directors Pension Plan

    Posted by James Caron on 14 August 2019





    In an earlier article I had looked specifically at how once off company pension contributions can be used to fund pensions. As a companion piece this article will focus more generally on how attractive and tax efficient it is for company directors to extract profits from their companies and turn these corporate profits into personal wealth through the mechanism of a company pension scheme. What are the key advantages of this course of action? Essentially we have a combination of tax efficiencies in operation, namely, tax breaks on the way in (contributions) for both employer and director, tax free growth on the way through, on exit 25% of fund available as tax efficient cash (maximum tax efficient cash allowed is €500,000 with the first €200,000 tax free and the balance of €300,000 taxed at standard rate tax) and ARF option on the way out and finally the ability to pass (if desired) any residual ARF funds on death. This article seeks to provide a reference point for some of the more common queries/issues encountered. It is not nor was it ever intended to be an exhaustive analysis of these areas.


    What is the Maximum Permitted Pension at Normal Retirement Age?

    Under Revenue rules the maximum pension that a scheme member can receive at Normal Retirement Age is a pension of 2/3rds final salary. This maximum benefit can be in calculated in one of two ways. A pension of 1/60th of final salary can be provided for each year of completed service with the employer, subject to a maximum of 40 years service at normal retirement age. The maximum pension is therefore 40/60ths or 2/3rds of final salary. This basis is known as the n/60ths scale (or ‘strict’ 60ths). Where this scale is used to determine benefits at normal retirement age, retained benefits (pension benefits held elsewhere) can be ignored.

    Where a member has less than 40 years service it is possible to earn a pension of 2/3rds of final salary over a shorter period using what is called the uplifted scale of benefits. Under this scale a maximum pension of 2/3rds final salary can also be provided less any retained benefits for any member who has completed at least ten years service with the employer by Normal Retirement Age. Simply how it works is that for each year of service a pension equivalent of 4/60ths for each completed year of service may be provided. So if 10 years service completed the maximum pension is therefore 40/60ths or 2/3rds final salary. For clarity, let us assume that member has 5 years service the maximum pension is therefore 20/60ths or 1/3rd of final salary. This is the most commonly used method in determining maximum permitted benefits as in most cases it will provide for a higher level of allowable benefits. However in instances where large retained benefits it may be more efficient to use the straight n/60th scale..

    Funding can be via Employer Regular Premium Contributions or Employer Single Premium Contributions or a combination of both. However a single contribution cannot be made to provide benefits for future service so where an employee has just started service or has short service there may well be little or no scope to make a single contribution. Revenue rules apply to the payment of single contributions. If the employer’s Total Single Contributions do not exceed the greater of their Total Regular Contributions, or €6,350 in the chargeable period then full tax relief will be given in the year in which it was paid. Where the employer single contribution exceeds the greater of €6,350 and the Total Regular Contributions the relief must be spread forward. The number of years that relief is spread forward is arrived at by dividing the Total Single Contributions by the Total Regular Contributions. This is subject to a maximum spread of 5 years and minimum divisor of €6,350. The rules relating to Single Premium Contributions have been covered in greater detail in an earlier article.


    Maximum Funding in operation

    Jill’s situation

    Jill is 45, married and has been running her own business for 15 years. She is currently drawing a salary of €50,000 and hopes to retire at age 60. She currently has no pension provision in place. Her company has been very profitable over the last couple of years and these levels of profits are expected to continue. Jill is considering using a company pension scheme as a method of transferring some of these profits into personal ownership. How might this work?

    What contribution options are available for Jill?

    There are three options for Jill, depending on the amount of company profit for the year that will be committed to pension funding and I will look at the tax treatment for each of these options. In each case, the projected value of the fund is approximately €1.58 million.


    New Single Premium Contribution

    New Regular Premium Contribution



    €33,333 per annum



    €62,500 per annum



    €66,667 per annum

    OPTION 1:

    What tax relief would be available on the employer contributions?

    Company could offset the €33,333 a year regular premium contribution in the current trading year. As single premium contribution of €500,000 is more than the regular premium contribution the company will spread the tax relief forward. As the single premium is over 5 times the regular premium contribution, the relief will be spread forward over the next 5 trading years

    (€100,000 x 5 years), potentially reducing the company’s corporation tax in each of these years too.

    OPTION 2:

    What tax relief would be available on the employer contributions?

    Once the single premium contribution is less than or equal to the regular premium contribution, the company can offset both the regular premium and single premium contributions in the current trading year. Thus the entire €125,000 (€62,500 x 2) can be offset in the current trading year, thus reducing the company’s corporation tax bill.

    OPTION 3:

    What tax relief would be available on the employer contributions?

    Under this option, the company pays the maximum regular premium contribution and, again, can offset the full amount in the current trading year. This would reduce the company’s corporation tax bill for the current trading year. Assuming the company continues to make a contribution of €66,667 per annum in future trading years they could offset this amount in those years, potentially reducing the corporation tax bill each year.



    This article has primarily sought to focus on the advantages of utilising the maximum funding limits currently available. The article seeks to highlight how in years where the company has been extremely profitable it is possible for proprietary directors to use the excess profits to top up their pension funding. Then in addition to the obvious tax advantages, a company, by utilising the maximum funding rates, can effectively, over a short period of time secure a proprietary directors retirement future.

    Pension funding does not have to be thought of as a process to be undertaken over the entire working life of the proprietary director. Instead, if desired, and cash flow permitting, pension funding can be compressed into a relatively short time frame through the use of both annual and single pension contributions.

    With such high funding rates the level of profit that can be transferred in this manner is enormous. Unlike the personal pension regime this allows huge flexibility in terms of both remuneration and profit distribution.

    The advantages of a directors pension plan can be summarised as follows:


    1. The cost of the director’s pension plan can be borne totally by the company, if desired. There may therefore be no personal cost to the individual in respect of the plan.
    2. Company contributions to a directors pension plan are normally fully deductible against corporation tax.
    3. There is no benefit in kind for the employee or director in respect of pension contributions paid to the plan by the employer.
    4. Pension fund growth is tax-free.
    5. 25% of the pension fund may be drawn as tax-efficient cash (subject to limits).
    6. Remaining 75% of the fund invested in an ARF or used to purchase an annuity or taken as taxed cash, subject to criteria or a combination of all these options.
    7. Any residual ARF funds form on death form part of individuals estate


    In essence the ability through generous maximum funding rates to compress pension funding into a short time frame with full tax relief on contributions coupled with the above listed advantages and the choices available at time of access make a directors pension plan a very attractive proposition to both director and company. Whilst great care has been taken in its preparation, this article is of a general nature and should not be relied on in relation to a specific issue without taking appropriate professional advice. Such advice should always be taken before acting on any of the issues mentioned. It is based on my understanding of pension and tax legislation as at August 2019 and is subject to change.


    If you have any questions in relation to this article or if you need help in solving any other financial problem  you are more than welcome to contact me. 

    Written by James Caron

    Financial Consultant at Lucas Financial Consulting Ltd. Specialties: Pensions,Shareholder/Partnership Protection,Investments, Life Asssurance, Providing training and coaching services for Credit Unions, Financial Organisations and Representative Bodies.
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