Traditional Pensions Schemes v Self-Administered Pension Schemes
There are several different pension products available in the Irish market. A lot of people get confused when trying to understand the difference between traditional insured pensions and self-administered pensions.
This week I am going to look at the key similarities and differences between the two main types of pension plans.
What are the similarities?
A self-administered company pension also known as a small self-administered pension scheme. The amount of money you can invest into this type of plan is the same as if you are investing in a traditional insured pension plan. When you reach retirement, the way in which you access your benefits are also the same, you will not get a larger tax-free lump sum and the post-retirement ARF and Annuity options are the same.
There are however some key differences in the type of underlying investment strategies you can deploy within a self-administered scheme v the more traditional insured pension structure.
What are the differences?
The main differences between an insured pension plan and a self-administered plan is in how your funds are invested.
Traditional insured pension plans invest in unit linked funds. In other words, your monthly contribution is pooled together with other people and the collective amount is invested as one. This generally gives you better buying power. Your investment options are also limited to those investment funds being offered by the respective insurance company. However, insurance companies do offer a wide range of investment funds for investors to choose from, ranging from active, passive, cash, real estate, fixed income and alternative (commodities, hedge funds as examples) investment strategies.
Self-administered pensions on the other hand provide with you with a greater investment choice. You can choose whichever fund manager or stockbroker you want to use, make your investments in ETF’s, funds or purchase shares directly. You may also purchase direct property through your self-administered plan; the pension will receive all the rental income free of income tax.
There are several Revenue rules you must adhere to with a self-administered pension.
The most significant rule is that all transactions must be at “arm’s length”, in other words you cannot buy property or shares from yourself and put them into your pension plan. If you do hold a property in your pension plan you cannot rent it out to your family, business or any connected party. An independent pensioner trustee must be appointed to ensure that you are compliant with all Revenue rules.
Small self-administered pension schemes must first be submitted to Revenue for approval, depending on the time of year this approval process may take up to 6 weeks. It is worth bearing this in mind if your year end is fast approaching and you want to make a pension contribution.
Self-administered pensions were traditionally more expensive to implement and therefore the preserve of those with larger pension funds. However, in recent times the cost of administering a self-administered scheme has become more affordable. In most cases, you would still need to have an accumulated pension fund of €100k to make this type of plan cost effective.
As with all financial decisions, and particularly long-term retirement planning, always seek the advice of an independent professional before making any decisions.
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based at 27 Cook Street, Cork.
For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
Disclaimer: All data and information provided within this article is for informational purposes only. Heritage Wealth Management Limited makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries, or damages arising from its use.