31 October 2023
Why pension planning is key in the early stages of your farming career
Securing an income from a pension after retirement from farming can ease money worries and also ease the cash flow burden on the successor by providing the retiring farmer with a guaranteed income source for their later years.
Both the State pensions and private pensions have a role to play in supplying disposable income to the retired person. However, there are many rules, deadlines and conditions around the setting up and draw down of pensions so you should get professional advice in this area.
Assurances of sufficient income
Most farm families look on the idea of involving the younger generation in the running of the farm business as a positive one– it brings in a fresh pair of hands to take on some of the work and responsibility and it helps ensure that the farm business has a greater chance of continuing as a going concern in the hands of a family member. One area of concern that often exists is that the older generation need some assurances that they will continue to have access to sufficient income to look after their own needs during their retired years.
In order to step back from the farm and forgo whatever farming income this generated they must have access to an alternative income from elsewhere. This may be of particular concern if there are minor dependent children, at school or third level, who still have to be provided for. It can be a case that although the parents want to involve their son or daughter in a meaningful way in the business, the scale of the farm is such that it could not supply enough income to support two families.
It is also a well-known fact that people are living longer as a result of changes in lifestyle and advances in medicine. The older generation will therefore have a requirement for income and support for a much longer period than they would have had in the past.
To ease some of the concerns in this area, it is important for the retiring generation to consider the possibility of ensuring that they have access to an alternative income source for their retirement years. A pension is one such source of income and so it is recommended that pension planning is part of the long term succession plan for the farm business. For a pension to play a meaningful role in the succession process the pension plan must be put in place and maintained while the farmer is in the early years of their farming career.
Pension planning in action
When looking at planning for the future receipt of income on retirement you are essentially looking at two main sources – the state pension scheme and private pensions. It is important to note that you can be in receipt of both types of pensions at the same time, subject to certain conditions. A key factor in availing of pension income is to plan for the pension start early, that is, find out what the qualifying conditions are for the relevant pension, make an early decision what you want to do and start the process of planning for your pension in time. There are rules and conditions involved and in some cases if you have not paid an appropriate amount into a pension fund over a period of years you may find that your pension entitlements are less than you would have hoped for.
The State Pensions Scheme
The state pension schemes are administered by the Department of Social Protection (detailed information can be obtained from their website www.gov.ie/DSP). Citizens Information are also a useful source for information on State Pensions.
If you qualify as eligible for one of the State pensions then the pension payments can be paid from the age of 66. In September 2022, the government announced a more flexible approach was approved to allow people a choice to work up to the age of 70 in return for a higher pension. This new system is to be introduced in 2024. A move towards a Total Contributions Approach will also be introduced over the next decade.
There are currently two main categories of state pension:
- The Contributory State Pension
- The Non Contributory State Pension
The Contributory State Pension
This pension is paid to people who have made Pay Related Social Insurance or PRSI contribution payments as part of their annual tax payments during their preretirement working life. You must have started making these PRSI payments before the age of 56. The final pension payment entitlement is affected by the total number of paid contributions (the normal requirement is 10 years’ worth of contributions) as well as the average number of contributions paid during your working life.
PRSI is currently paid at the annual rate of 4% on all farming income. You can be earning other income and still qualify for the contributory pension since it is not means tested and so does not change regardless of what other income you earn or assets you own. The qualified adult dependant payments are means tested (any income earned by your dependent will affect their payment). The pension is taxable but you are unlikely to be liable for tax if it is your only source of income.
Spouses of self-employed farmers are entitled to make PRSI contributions, provided their income from all sources exceeds the minimum insurability threshold of €5,000. Payment is at the PRSI class S rate of 4%, subject to a minimum of €500. This will be of benefit for individuals who between now and their turning 66 years can make sufficient contributions to bring them up to a minimum of 10 years of contributions (520 full PRSI contributions), thereby qualifying for a contributory pension in their own right.
The Non-Contributory State Pension
This pension is also paid from the age of 66 years, but unlike the previously outlined contributory pension, there is no requirement to have made PRSI contributions. It is however means tested so any cash income or assets such as savings and property will reduce the chances of you being able to avail of this pension.
The total income of a married couple is divided in half to calculate the means of each individual so your spouse’s income is also taken into account. To enquire about your state pension entitlements you should contact: Department of Social Protection, Social Welfare Services, College Road, Sligo, Ireland. Tel: (071) 915 7100 | Locall: 0818 200400 | Web: www.gov.ie/DSP
Private pensions
Farmers like other self-employed people also have the option to pay into a private pension. Many people take the option to pay into a private pension to avail of the tax relief on the pension payments while they are earning income while also expecting to bolster their post-retirement income when they eventually start to draw down their pension.
Most pension schemes involve making regular payments which are paid to a pension provider who invests the money in an investment fund. On reaching the relevant retirement age the fund is then used to pay out a pension to the retiree.
The tax relief referred to here is relief from income tax only since you will still be liable for PRSI and the Universal Social Charge on the regular payments into a pension. By making the regular contributions the aim is to build up a potential fund which will later be available to draw down against when you “retire” according to the rules of the fund which is normally between the ages of 60 and 75.
Depending on the particular scheme and if you have the income to do so, you can continue to make contributions to a personal pension or Personal Retirement Savings Account (PRSA) and avail of the tax relief on the contributions until you reach the later retirement age of 75 and then begin to draw it down. There are complex rules governing how you may draw down your pension fund on retirement but generally you can withdraw a certain percentage of the total fund tax-free on retirement with the remainder of the fund being used to fund a regular pension payment.
The issue of what happens your pension fund when you die is also something you should clarify but the recent pension plans called Approved Retirement Funds usually pass into your estate for distribution and will be subject to the normal taxes on distribution.
To set up a private pension you should talk to your financial adviser (usually your accountant) who will advise how to start the application process. He/she may direct you to a pension provider who will assist in picking the correct pension fund based on your requirements and profile. Select an adviser that is independent and is not tied on a commission basis to a small number of pension providers. Make sure that the adviser takes time to clearly explain any pension plan you are committing to before you sign up to the plan.
General information on pensions
General information on pensions is also available from The Pensions Authority (www. pensionsauthority.ie or 0818 656565). The Citizens Information Board also provide useful summaries on pensions. They have offices in most major towns in the country.
This article was adapted from the Teagasc publication ‘A Guide to Transferring the Family Farm’. Access the full publication here were more detailed information on pension contributions and tax reliefs are available.