A look at self-directed retirement portfolios

Conor White outlines the benefits of establishing self directed retirement portfolios, which allow professionals to have an effective tax management plan in place for minimising tax on earned income.
A self-directed retirement portfolio allows medical and other professionals to accumulate an investment portfolio for retirement in a very tax-effective way, and with wide investment flexibility.

Since the liberalisation of the tax regime governing retirement funding some years ago, self directed has become the vehicle of choice for investors who wish to have an effective tax management plan in place for minimising tax on earned income.
h4. An integral part
Retirement funds are now an integral part of personal and family wealth and retirement investors (as opposed to ‘pensions buyers’) are no longer comfortable with the arms’ length, default nature of traditional managed fund options.
The immediate tax advantage is that your investment is allowable against income tax, within limits which have increased substantially in recent years.
Investment income and gains accumulate in your portfolio tax free. The exemption from capital gains tax substantially increases the effect of compound interest on your returns over the long term.
Deposits earn a DIRT-free return, and dividends from Irish resident companies are not subject to Dividend Withholding Tax.
h4. Extensive freedom
You have extensive freedom in how your retirement portfolio is invested. You can invest in equities, property, bonds, structured product, etc. Stockbrokers can source and assess ‘best of breed’ external products to meet your specific criteria and many of these options come with capital security, if that is what suits your particular circumstances.
There is only one principal restriction on your investment choices in that investment in certain assets that could be connected with you or used by your or your family are not allowed by law.
Your allowances in respect of sheltering your private income are in accordance with a revenue scale (see below). The principal service that stockbrokers provide initially is to help you work out the optimum level of funding to maximise the tax advantages for you.
For maximum allowable contributions as a percentage of net relevant earnings see table below. In addition, the earnings limit for pensions tax relief purposes has been increased to €275,238 for the tax year 2008.
You can draw on your retirement portfolio at your normal retirement age, which is usually when you are aged between 60 and 75. When you do draw on your portfolio, you can take 25 per cent tax free and transfer the balance of your portfolio assets to an Approved Retirement Fund (ARF), where it will continue to enjoy investment flexibility and tax-free investment growth in retirement.
Making a pension contribution now, before 31 October 2008 (or 16 November, if you are paying and filing tax on ROS), is particularly attractive. This is because you can opt to backdate it, for tax-relief purposes, to the 2007 tax year if you have unused capacity, which may help you to reduce any balance of tax that you are due to pay for 2008.
h4. Reduce your income tax
Alternatively, you can have the pension contribution counted in the current 2008 year and, in doing so, possibly reduce the amount of preliminary income tax you might otherwise have to pay for 2008.
The advantages of Approved Retirement Funds as a wealth creation vehicle can be summarised as follows:
* It builds inheritable assets outside your estate;
* Assets are built from pre-tax income;
* Spouse inherits ARF tax-free;
* Children over 21
* Pay the standard rate of income tax- currently 20 per cent;
* Retain a full inheritance tax threshold.
ARF portfolio
Any assets left in your Approved Retirement Fund portfolio on the event of your death can, therefore, be passed on to your dependants, subject to a basic rate tax charge only for your children (aged over 21).
Goodbody Stockbrokers has a wealth of experience in the design, establishment and management of self directed retirement portfolios.
We will work with you to create a unique structure for you to maximise your tax allowances and to ensure that the underlying investments reflect your personal preferences.
We can help if:
* You have not been using your allowances to the full;
* You want investment flexibility;
* You have existing arrangements but you want an alternative to the traditional fund options;
* You want to bring your existing funds under your own control. Our service to you includes a full review of any existing arrangements and offering appropriate recommendations.
* You want accountability and transparency on pricing and performance;
* You want advice on your retirement options.
* Conor White is a Senior Portfolio Manager with Goodbody Stockbrokers. He can be contacted on 01 6419295 or conor.p.white@goodbody.ie
* Goodbody Stockbrokers is the stockbroking arm of the AIB Group. Goodbody Stockbrokers is regulated by the Financial Regulator and is a member firm of the Irish Stock Exchange and the London Stock Exchange.
l This publication has been approved by Goodbody Stockbrokers. The information has been taken from sources we believe to be reliable, we do not guarantee their accuracy or completeness and any such information may be incomplete or condensed. All opinions and estimates constitute best judgement at the time of the publication and are subject to change without notice. The information, tools and material presented in this article are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities.