Executive pensions are defined contribution occupational pension plans, issued by a pension provider to an employer, with an employee/director of the company named as the beneficiary of the pension plan. The plan is held by the trustees on behalf of the employee/director. This type of pension can be set up for any employee or director of a limited company, but is typically set up for owner directors of small businesses. They can also be set up for senior company employees.
In order to gain revenue approval and qualify for valuable tax relief, the pension plan must fulfil certain requirements:
- The scheme must be set up under a trust, where trustees (typically the employer) hold the scheme assets separate from the company assets.
- Benefits paid out from the scheme must not exceed revenue approved limits.
- The employer must contribute to the cost of the scheme. It is expected that the employer will make at least 10% of the contributions to the scheme.
- There is no obligation for the employee to make contributions, but if they do, they can also gain income tax relief within revenue limits.
Any contribution made by the employer to the executive pension scheme is treated as a tax deductible business expense, up to revenue applied limits.
Contributions made by the individual scheme member to his / her executive pension plan are tax deductible for the individual against net relevant earnings. The current maximum limits for income tax relief are as follows:
Maximum Tax Relief
The limits above are capped to a maximum earnings ceiling of €115,000 for 2011.
It is possible to backdate personal once off contributions paid in the current tax year, to the previous tax year, once the contribution has been made before Oct 31st. It also possible to carry forward any excess contribution made, in order to gain tax relief in future years.
What Can the Executive Pension Plan Invest in?
This is typically down to the trustees (usually the employer). Usually the employee is senior enough to have an influence on the investment decisions taken by the trustees. It would be unusual for investment decisions to be taken by the trustees without the input of the scheme member. The trustees will be able to choose from a list of pension funds made available by the pension provider.