As the deadline of 31st October for finalising your tax returns for 2001 approaches, or if you are reviewing your retirement options, this brief note may be of interest to you.  Most people need to make some financial provision for the future. At present, the State provides a self-employed individual with a Contributory Pension at the age of 65, provided certain PRSI contributions have been made during their working career.  The current level of this benefit is €147.30 p.w. for a single person under age 80 and increases to a total of €245.40 / €261.10 p.w. with an adult dependant (depending on whether the adult dependant is under or over the age of 66).

The objective of pension planning is to bridge the ‘gap’ between the State retirement benefit and the income required to maintain a reasonable standard of living.  In recent times, the Irish Government has increased the emphasis for responsible and prudent pension planning by individuals.  Significant changes have been made by the Government with a view to encouraging individuals to be more self-sufficient in appraising their own pension provision.   This is evidenced over the last number of years with the increase in the level of pension contributions which are allowed as a deduction for income tax purposes, in addition to recent developments under new retirement options and the Pensions (Amendment) Act 2002.

Key Dates for Self-Employed

Final Tax for Year 2001:
You can reduce your final tax liability for 2001 by making a Retirement Annuity Contract (RAC) payment by 31 October 2002. Consider the following:-

Your final tax liability for 2001 =    €20,000
Make an RAC before 31st Oct. of €10,000
Your tax liability is reduced to      €15,800*
Tax saving                                  € 4,200

Preliminary Tax for Year 2002:
You may also be able to reduce your preliminary tax liability for 2002 by making an RAC payment by 31 October 2002. For example:-

135%** of the final tax liability for 2002 amounts to   €27,000
Make an RAC contribution                                      €10,000
Your tax liability is reduced to                                 €21,330*
Tax saving                                                             € 5,670

The above example assumes an income tax rate of 42%; It is also assumed that you base your preliminary tax for the year 2002 on 135% of the final tax liability  for 2001.  There are other alternative methods of calculating your preliminary tax for 2002.  

Tax Relief Table

Age	% of Net Relevant Earnings
Under age 30	15%
30 – 39	20%
40  - 49	25%
50 – 74	30%

* Income tax relief is limited to maximum
   earnings of €187,960 for 2001 and 
   €254,000 for 2002.

Retirement Issues Affecting Self-Employed

The biggest issue facing self-employed individuals is ensuring that adequate provision is made to look after ‘you and yours’.

Many self-employed individuals have a tendency to reinvest profits of the business to maximise the potential for growth.  Many self-employed individuals are involved in high-risk ventures, they, more than others, need to balance their passionate pursuit of the growth of the business with regular savings. From experience, we know that one should not depend on the proceeds from selling the business to provide a comfortable retirement.

Too often, those who work for themselves, either as sole-practitioner professionals or owners of small businesses, may feel that as long as their business appreciates in value, they have no need to save for retirement.  The truth is that harsh economic realities exist and sometimes the business you own or work for is a victim of those realities.  Regardless of how astute one is in business, the message here is clear – diversify your assets.  Setting up a pension plan is an excellent way to do this. One can use Personal Pension Plans, also known as RACs or Personal Retirement Savings Accounts (PRSAs).

Lifestyle Approach