Reasons for taking out an individual pension plan
As a self-employed businessperson, you’re no doubt occupied with your firm every day. But do you give enough thought to your own financial future? An IPS enables your firm to fund supplementary pension capital for you, as its manager or director, in a tax-efficient way. The premiums you pay can be deducted as business expenses by your company.
The KBC Keyman Benefit Plan:
- lets you build up a supplementary pension in a tax-friendly way
- provides a replacement income if you become ill or have an accident
- provides death cover
Keyman Benefit Plan
Only for self-employed business managers
This policy is designed specifically for self-employed business managers of a company. It is subject to the requirement that you receive a regular, monthly salary (director's salary) from the business. Company managers or directors who are not salaried (or only receive dividends) cannot build up supplementary pension capital via the business. If you are not a self-employed person company manager, you can build up a pension through a VAPZ (Voluntary Supplementary Pension Scheme for the Self-Employed) or a pension agreement for the self-employed.
When the time comes for you to end your active career as a self-employed person, there is a strong likelihood that your statutory pension will not be enough to maintain your existing standard of living. Many self-employed people find that a problem, but don't know how to solve it. The solution is an IPS. If you take one out you know that your standard of living won’t have to drop when you retire. An IPS gives you the certainty that the pension capital you’ve built up will always be there, even if you subsequently sell your business, struggle due to bankruptcy or because you fall ill. The reserve you have built up is yours whatever happens.
The manager or director’s supplementary pension premiums are deductible as professional expenses under an IPS, provided that conditions such as the 80% rule are met.
What is the 80% rule?
In simple terms, this rule holds that the pension premiums for supplementary pensions are only tax-deductible if the total of your state and supplementary pensions (expressed as an annual annuity) does not exceed 80% of your last normal gross annual salary (taking into account the normal progression of a career).
These premiums do not, however, count as a taxable benefit in kind for you as a self-employed businessperson. Only the capital that you receive further down the line will be subject to one-off taxation at an advantageous rate. This makes an IPS considerably cheaper in terms of tax than a pay rise or a benefit in kind.
Bet you wouldn't half mind making even more tax savings come the end of the year!
If so, why not consider making a service buyback deposit, such as in your personal pension promise? Because, starting in 2018, you have to spread your claim for tax relief on prepaid expenses over the full period that they apply to.
So, if you contract a three-year renting agreement to finance a car, you could, until 2018, ask for a higher bill and fully deduct that rental cost at the close of the fiscal year. From 2018, you have to spread that expense evenly over the term of the renting contract.
The rule also applies to insurance, service contracts and road tax. But it does not apply to service buybacks, like your individual pension scheme. Because they concern the past.
That means you can play catch-up on past years of service if, at that time, you paid in less than the maximum that would have been allowed under the 80% rule. You can do it in one fell swoop or spread the catch-up payments over a number of years.
You can also claim full deduction of the premiums from your taxable profit for that fiscal year. On top of which, of course, you can pay in your pension promise premiums for the fiscal year then ending.
Tip: as a small company you can not only take advantage of the lower rate of corporation tax but also create extra space for your IPP. That way, you pay 20% corporation tax on your first 100,000 euros of profit. One condition is that you have to pay yourself a minimum annual salary of 45,000 euros. Your higher salary therefore allows you to pay more into your IPP.
Your family is very precious to you, so it is good to protect them from the consequences of your premature death. The pension entitlement you build up under an IPS is secure and will be paid out to your chosen beneficiaries. Depending on your family situation, you can also opt, for instance, to take out supplementary death cover.
TIP: if the limit imposed by the 80% rule means you have no further tax-friendly options for building up a supplementary pension or if your business currently lacks the financial elbow room to fund one, a KBC Keyman Benefit Plan means you can still protect your family by making the death cover the principal cover.
Combine an Individual Pension Scheme (IPS) with a VSPSS or social VSPSS for a maximum supplementary pension. Making deposits into a Voluntary Supplementary Pension Scheme for the Self-Employed offers greater benefits than deposits into an IPS, but the contribution must not exceed a certain threshold of the net taxable income.
We therefore recommend that you first get the maximum tax benefit from your standard or social VSPSS, and subsequently supplement it with the tax benefit from an IPS.
When a self-employed person is unable to work due to illness or accident, even if only temporarily, loss of income often results. And there can be other unpleasant financial consequences as well. Your mortgage repayments and other fixed costs, for instance, don’t go away. To avoid problems, you can provide yourself with a replacement income through our supplementary Guaranteed Income cover, the premiums for which are also tax-deductible. The Premium Waiver option, meanwhile, offers you the certainty that your pension capital will continue to be built up, even during periods of work disability.
Additional benefits of an IPS
- If you are planning to buy (or renovate) a property privately, you can take an advance before retirement on the pension capital you have built up. In many cases, that is more straightforward and cheaper (no notary public costs) than a traditional (mortgage) loan. The KBC Keyman Benefit Plan offers you a choice between an interest-paying and an interest-capitalising advance.
- An ideal alternative to traditional loan balance insurance. The KBC Keyman Comfort Plan also allows you to reduce your IPS’s supplementary death cover over time. You can adjust your death cover in line with the repayment of your mortgage, for instance. Your business finances the costs of your death cover, while you maximise fully the private tax breaks available for principal repayments and interest payments.
If you are interested in an IPS or would like to know how to combine it with a standard or social VSPSS or any other supplementary pension savings scheme, please enter your contact details and we will contact you as soon as possible for a no-obligation consultation.