Having enough income in retirement is a question that we all think about as we get older. But how much is enough? It depends on your standard of living, but most people want to be comfortable. Comfortable, for me, means a decent car, going for a few meals out, and a foreign holiday. Being able to do the things you want to do. A Ferrari in the driveway and a yacht in Barcelona wouldn’t be on the bucket list. Sure, if I crashed the yacht I’d be in trouble because I’m not a great swimmer and the sharks would get me.
Betty DaSilva has been thinking about this a lot lately. She’s 59 and runs a successful PR company above in the big smoke. She owns 100% of DaSilva Intimate Relations Ltd. Betty is a lady who’s not afraid of hard graft and has a few blue-chip clients on her books.
“All the boys think she’s a spy, she’s got Betty DaSilva eyes”
Let’s take a look at
- The Company
- Betty’s Finances
- Exiting the Company
- Pension drawdown
- Her Home
The Company
DaSilva IRL has been running since 2004 and has 7 staff including Betty as the boss. The company has built up cash reserves of €800k. Betty takes a salary of €90k and the company makes annual pension contributions for her of €50,000. In the last few weeks they lost a contract with a financial services company. The business is close to breakeven every year but they will lose money this year with the current cost base. The choice is either to reduce headcount or get busy selling.
Betty’s view is that there’s a good business there but for a smaller team. They have a quality brand and good contacts in the industry. She’s just not sure if she has the energy to keep going at the level she has been before and is considering her options. Does she close down the business and take the cash out? Or somehow sell the business but have a reduced role to work with the clients she loves and bring in an income too. Albeit a lower income than what she’s on now.
Betty’s Finances
She has a home on Killiney Hill. In her view, the house is worth €900,000. There’s a mortgage on the property with a balance owing of €150,000. She pays €1,600 per month to service this. Her monthly net salary, after taxes, is €4,900
| Gross Salary | €90,000 |
| First €42,000 x 20% | €8,400 |
| Next €48,000 x 40% | €19,200 |
| Total | €27,600 |
| Less Tax Credits | €3,750 |
| Net Tax Liability | €23,850 |
| Add PRSI & USC | €7,303 |
| Tax Liability | €31,153 |
| Net Salary | €58,847 |
| Net Monthly Salary | €4,904 |
Betty is single although she does have a partner, Jimmy Guiney from Killiney. If she were to exit the company, she’d like to clear her mortgage but maintain the same standard of living. If she didn’t have a mortgage a net monthly salary of €3,300 leaves her with the same disposable income. A gross salary of €52,200 would leave her with a net salary of €40,000. That’s a net monthly income of €3,333.
Exit the Company
Betty would like to take a sharp left and exit the company. But she’s not sure how she’d do that. The plan would be to get as much of the cash reserves of €800k as possible. And in a tax-efficient manner so a big lump of it doesn’t go to Michael & Paschal. There are a few options to consider.
Liquidation
The liquidation option is to close the company and appoint a liquidator to get rid of the company. A liquidation takes a certain amount of time, but the key is that a payment from a liquidator is a payment for shares. As such it is a capital payment and would be liable to Capital Gains Tax [CGT].
Let’s assume that there was €800k left in the company after paying all the liabilities. The liquidator pays that to Betty. Without any CGT reliefs, Betty would pay 33% tax on that which comes to €264,000. If Betty can claim Retirement Relief her tax liability will be
| Proceeds for her shares | €800,000 |
| Less Lifetime limit | €750,000 |
| Excess | €50,000 |
| Marginal Relief 50% | €25,000 |
On the face of it, it looks like she would meet the conditions to get Retirement Relief. However, it would be worth taking a close look.
If she didn’t get Retirement Relief then Entrepreneurs Relief is an option and that is CGT at 10%. In that case, the tax would be €80,000.
Betty is not convinced about the liquidation route. She thinks that they can take too long and could be costly. Another option is a share buyback
Share buyback
A Share buyback can work once it is for the benefit of the trade. The question for Betty is if there’s someone in the business who would want to take it on. Is there a younger person who will drive the business, keep existing clients and some of the current team? If there is then this route can work.
The key Revenue rule is that the buyback must benefit the trade. In their guidance, they give the following example that meets the trade benefit test
“A controlling shareholder who is retiring as a director and wishes to make way for new management”
There are a few steps to the share buyback process. The first one is to ensure they satisfy the terms and conditions. The main ones are around the ownership of the shares and a set reduction in the number of shares. Then it’s a case of passing some shares to the new boss. After that, the company buys back Betty’s shares and uses the cash in the company to pay her for them. The company cancels those shares so they no longer exist. This leaves the new boss owning 100% of the shares.
I would stress she would need a proper valuation to confirm the value of the company. This is for a few reasons to include
- Putting a value on the initial share transfer to the new boss and
- Placing a value on the remaining shares so she knows what the company should pay her for them.
Once the share buyback route works the payment the company makes to Betty is a capital payment. And then it’s to look at the CGT reliefs as mentioned above. Another potential is an MBO
Management Buy Out – MBO
An MBO would be a good option if Betty felt the trade benefit test isn’t a runner for a share buyback. Or if there are insufficient funds in the company to pay her for her shares.
The first step is to see what the company is worth, so she needs a valuation. The second step is to see if a “new boss” is willing to go down the MBO route. Let’s assume the company is worth €1 million but there’s cash there of €800,000. As part of the deal, Betty would like to get €750,000 upfront and the balance of €250,000 over the next 3 years. She’s happy to leave €50,000 in the company as working capital
We’ll call the new boss Paddy. Paddy can’t use the existing funds in the company to pay Betty. He’d have to set up a new company and take out a borrowing in that company for €750k and use that to pay Betty for her share. After that transaction, he could use the cash in DaSilva IRL to pay back the bank finance. In the next 3 years, Paddy has to come up with €83,333 each year. That would become payable once the company met set performance targets.
In an MBO scenario, Betty could keep some role in the company and take a salary for this. Paddy wants her to do this so that he can meet her contacts and use her considerable experience to help him.
Pension Drawdown
When it comes to pension drawdown Betty knows she’ll get a tax-free lump sum and will pay tax on any income. Her company pension is worth €900,000. She’d like to take as much as she can tax-free at 60 and then put the balance into an approved retirement fund ARF.
She can get 25% tax-free subject to a maximum of €200,000.
| 25% of €900,000 | €225,000 |
| Tax-free | €200,000 |
| Balance | €25,000 |
| Tax payable 20% | €5,000 |
| Net tax-free amount | €220,000 |
The balance of €675,000 goes into an ARF and Betty decides to take 5% of that as an Income. That comes to €33,750.
Betty needs another €20,000 of income to bring her up to €53,000 which will give her the same net monthly income. She’ll pay off the mortgage with the money from the company sale. This extra income can come from retaining a lesser role in the company through the MBO route. Or even providing some consultancy services to the company if the share buyback is an option. Even if she had no role she has plenty of cash to supplement the ARF income.
State Pension
When she hits 66 Betty will get the State Pension that is €14,400 per annum. Her annual income, with the ARF, is now €48,000. She can decide to work less or not at all as there’s only a €5,000 shortfall. Anyway, with ample savings she doesn’t have to work.
If she stops working at 60 then it’s important to know that she has enough PRSI contribution to get the maximum state pension. The ARF income drawdown will be liable to PRSI and will give her contributions for those years. Of course, if she stays working she’ll pay PRSI on her salary.
Her Home
Her home in Killiney is worth €900,000 with no mortgage. She can sell that and pay no tax given it is her principal private residence. The option is to downsize and buy a lovely apartment in the locality for €500,000. Or even move in with Jimmy, perish the thought, and buy half his home.
She has €750,000 left in savings and this would bring her cash position above the million euro mark. It’s time to start spending and planning those dream holidays.
Having enough income in retirement gives you security and the cash to do the things you enjoy. I wonder is Betty in the market for a yacht off the coast of Barcelona!
Are you exiting your business or planning for the future? If so, start here
