Many of the world’s leading companies in the areas of life sciences, technology and finance, amongst others, have major operations in Ireland. Ireland has also got many successful indigenous companies. Ireland is still a global competitive force due to our flexible, productive, well-educated and skilled work force. We also have a reputation for being business-friendly and have a low corporate tax regime. Despite pressure from many in the European Union we have not increased the corporate tax rate which has helped preserve Ireland as an international hub for business. However, well-paid company executives have been the subject of increased income tax, levies and capital taxes. In addition, pension funds have also been severely hit with standard fund thresholds being reduced to a maximum of €2 million. Whilst this fund size may sound considerable to some, we have seen very significant reductions in the allowable fund size over the last number of years and it will have a significant effect on future pension benefits available. These changes will force many well-paid company executives with defined benefit and defined contribution schemes to re-think their remuneration packages. There are also proposed changes to the tax rates on Additional Voluntary Contributions (AVCs) made by employees and proposed restrictions on other attractive incentives to employees.
Despite these changes introduced by the government, there are still many financial planning opportunities available to company executives. We, in Opes Wealth Trust, have significant experience in working with company executives to ensure that they have the best opportunity of achieving their financial ambitions effectively and within their desired timescale. While each client is different, we include the case study below as an example of the type of planning that we have provided for company executives.
Jim is a 44-year-old pharmaceutical sales director earning €200,000 per annum in PAYE income. He is married to Joanne, aged 45, with whom he has three children aged 3, 5 and 7. Joanne is a home carer. Jim has a company pension plan. He has some death benefit and illness protection cover in place that he established a number of years previously. Jim and his wife also own property in Spain and France. They also have a home in Ireland with reasonably sized outstanding mortgage and a number of investment properties which they purchased in recent years. They have some cash on deposit which they are considering investing.
The first stage in our ‘Financial Solutions Service’ involves carrying out a detailed fact-finding exercise. The comprehensive planning exercise itself primarily focused on the following:
(1) Devising a Financial Plan to include:
- Setting & reviewing a desired financial target.
- Pension/retirement planning.
- Debt analysis – of home loan and investment property debt.
- Investment management and risk profiling.
- Cash flow planning/ family savings (provision for children’s education/emergency fund).
(2) Estate Management
· Organising their affairs and final wishes for their estate.
- Analysis of their Wills (Irish and foreign) and if it is consistent with their stated wishes.
- Assisting in defining certain roles Executor/Trustee/Guardian for the estate.
- Creating a centralised and up-to-date Statement of Affairs.
- Assisting in updating their Will.
(3) Tax Management
- Providing an indicative income tax computation.
- Assessment of effective tax rate.
- Outline of general tax reliefs available.
- Calculation of allowable pension contribution.
- Cash flow budgeting plan for the tax bill.
The main specific findings are detailed below.
Assessment of Financial Objectives
- We assisted in defining Jim and Joanne’s lifestyle income requirement of €8,000 net per month (in today’s terms) at their target date (Jim’s 60th birthday) – this is the after tax income they require to fund their lifestyle every month from their target date and it is an essential figure for the calculation of the future capital requirement to fund their future lifestyle costs.
- We outlined to them that the gross of tax capital fund (level of assets) required in 16 years’ time to meet their target is approximately €5.7Million (depending on how this income is being provided; we outlined a number of possible scenarios and calculations).
- We assessed their progress against this financial target based on their current asset base and the existing level of regular pension funding and savings. We calculated that they would attain approximately 75% of their financial target should they continue to do what they are currently doing (i.e. make no changes).
- We outlined the additional regular funding/investment that would be required to help reach their financial objectives.
- We detailed tax-efficient planning tools and how more tax-efficient investing can accelerate the narrowing of the financial gap between their current situation and where they want to be financially in 16 years’ time.
- We highlighted the benefits of accelerating their home loan repayments to clear the loan within 5 years and save approximately €5,500 in interest payments over that period, significantly more of a return than leaving the required cash to do this sitting in a deposit account for the same period. We also outlined a strategy for reducing the outgoings and improving the tax-efficiency of the outstanding loans for the investment properties.
- We provided a detailed analysis of their investments and detailed the annual investment returns that would need to be achieved to reach their financial goal. We also provided an analysis of their stated tolerance to investment risk versus where their current assets actually are at present relative to this. We outlined the relevance of this to them and the relationship between investment risk and reward.
Pensions and Tax Planning
- Jim is a member of the company pension plan (and contributes 5% of his salary (€10,000) personally each year) and makes no other pension contributions.
- We reviewed the scheme booklet, the fund choices and performance as well as outlining other relevant benefits of the company scheme (such as his options at retirement/early retirement, what happens to his fund on death with regard to provision for his dependents, and so on).
- We outlined the benefits of Additional Voluntary Contributions (AVCs) to his pension scheme from an income tax relief perspective and with regard to further options open to him at retirement. We calculated that the extra level of contribution he is entitled to make based on his personal limits, salary and age through an AVC is €18,750 (or 25% of the income limit of €115,000 less the 5% personal contribution already made to the main scheme) to his company scheme. This alone will effectively reduce his annual tax bill by at least €7,688 and provide more funds for his future.
- We outlined the effects that investing with pre-tax money can have in accelerating Jim and Joanne to their financial target.
- We provided Jim with guidance on how to reduce his effective tax rate from its current rate of almost 50% down to 30% of income. Again, this will help him bridge the financial gap to this target. We provided Jim with an outline of certain types of investments (such as BES and Film Relief) that provided the added benefit of a tax rebate of income tax paid. We detailed the potential risks and benefits of such investments.
We outlined the various potential threats to achieving their financial objectives such as illness, disability and death. We put together a protection proposal tailored to their own circumstances and requirements, to ensure that Jim and Joanne have the correct type and level of protection in place and at the most competitive prices available.
Provision for children’s education
We devised an appropriate savings strategy specifically for the provision of their children’s education. This will be kept separate from Jim and Joanne’s financial target assets.
As Jim and Joanne have properties in France and Spain, we highlighted some of the complex tax implications of owning assets in such jurisdictions (Income Tax, Capital Gains Tax, Inheritance Tax, local tax).
- We reviewed their Will, which was executed prior to them having children.
- We highlighted the importance of updating their Will and reflecting all non-Irish Wills (i.e. Spain and France, specifically ensuring that any new Will does not revoke previous Wills).
- We held a number of meetings with Jim and Joanne to discuss the sensitive issue of their final wishes and who they would like to perform certain roles e.g. the Executor, the Trustee and the Guardian/s.
- We also devised a financial model that provided the Guardian with access to funds both on a regular basis and on a specific needs basis.
- We highlighted the need to have a centralised and up-to-date register of their assets and liabilities.
Having completed this comprehensive planning exercise and implemented our recommendations, Jim and Joanne now have both clarity and a sense of purpose with regard to their financial planning and are now making specific provision for their future in a tax-efficient manner. They also have the peace of mind that comes with knowing that, in the unfortunate event of something happening either of them, they have a tax-efficient and up-to-date estate plan that deals with how their children are looked after, and ensures that their final wishes for their estate are adhered to.