Executive Pension: Why It Can Be the Most Tax-Efficient Retirement Strategy for Business Owners

Why Executive Pensions Can Be the Most Tax-Efficient Long-Term Strategy for Business Owners in Their Final 15 Years of Work

For many business owners, the early years are all about building the business.

Money goes back into staff, stock, premises, equipment and growth. There is always something competing for the next euro, and putting money into a pension can easily slip down the priority list.

As the business becomes more established, that often begins to change. Profits may be more dependable; borrowing may have reduced and there can be more room to start thinking seriously about life after the business.

For that reason, the final 10 to 15 years of a business owner’s working life can be an important time for pension planning.

For owners who operate through a limited company, an executive pension can be particularly useful. It allows the company to make pension contributions for a director or key employee within Revenue rules and, depending on the circumstances, there may be scope to contribute considerably more than through personal pension contributions.

Why business owners often build their pensions later

Anyone who has built a business will know how many demands there can be on cash, particularly in the early years. There is payroll to meet, borrowing to repay, customers to win and plans for growth to fund.

It is understandable, then, that pension planning can take a back seat for a while.

This can leave business owners in a slightly unusual position as they approach their fifties. They may have spent 20 or 30 years building considerable value in their company while having much less accumulated in a pension.

The final 15 years before retirement can be a good opportunity to start closing that gap. By this point, there may be more capacity to put money aside and the owner is also likely to have a clearer idea of when they would like to retire and how much income they will need when they get there.

Starting earlier gives your pension more time to grow, while 15 years can still provide plenty of time to build a substantial retirement fund with a clear plan and consistent contributions.

What is an executive pension?

An executive pension is an occupational pension set up by a company for a director or key employee. The company makes contributions to the scheme, with retirement benefits provided within the limits set out for approved occupational pension schemes.

One of the important differences is how the amount that can be contributed is calculated.

Personal pension contributions qualify for tax relief based on age-related percentages and the €115,000 earnings cap. With an executive pension, funding is based mainly on the retirement benefits that can be provided under Revenue rules.

The calculation looks at factors such as your salary, how long you have worked with the company, the number of years until retirement, your existing pension benefits and your planned retirement age.

Pension schemes are subject to Revenue and regulatory requirements. You can find further information on occupational pension schemes from the Pensions Authority.

Why executive pensions can work well in the final 15 years

They can help you catch up after years of focusing on the business

Many business owners reach a point where the company is doing well and they finally have more room to think about their own long-term finances.

An executive pension can be useful here because the funding calculation can take account of your years of service with the company, including years when pension contributions were relatively small.

For someone who has spent much of their career focused on growing the company, this can provide an opportunity to build their pension more quickly during the years leading up to retirement.

There may be scope to make larger contributions

Tax relief on personal pension contributions is limited to an age-related percentage of relevant earnings, subject to the earnings cap. Employer contributions to a PRSA are also subject to a limit of 100% of salary from 1 January 2025 before a benefit-in-kind charge arises.

Executive pension contributions are calculated on a different basis. The amount the company can contribute is linked to the retirement benefits that can be funded under Revenue rules, taking existing and retained pension benefits into account.

For some business owners, this can allow the company to make significant pension contributions in the years before retirement.

The funding calculation needs to be reviewed carefully, particularly where larger contributions are being considered, so that the pension remains within the relevant limits.

A worked example: what 15 years of pension funding could look like

Take a 50-year-old business owner earning a salary of €150,000. The business is now well established and can afford pension contributions averaging €100,000 a year over the next 15 years.

For illustration, contributions could start at around €86,700 and rise by 2% each year, reaching approximately €114,400 in year 15. Over the full 15 years, the company would contribute €1.5 million.

Assuming an average annual return of 5% after charges, with each contribution invested at the end of the year, the pension could grow to approximately €2.12 million. More than €600,000 of that would come from investment growth.

These figures are illustrative and actual returns and charges will vary. The level of contributions would also need to be supported by an executive pension funding calculation and considered alongside existing pension benefits and the Standard Fund Threshold, which is €2.2 million in 2026 and is scheduled to increase under existing rules.

Company contributions can be tax-efficient

There are also tax advantages for the company.

Ordinary annual contributions made by an employer to an exempt approved occupational pension scheme are generally deductible for corporation tax purposes in the period in which they are paid, subject to the relevant conditions.

Qualifying employer pension contributions are also generally free from benefit-in-kind treatment for the director.

This can give business owners a tax-efficient way to use company profits to build up a valuable retirement fund over time.

It gives you another source of wealth outside the business

For many business owners, a large part of their personal wealth is tied up in the company they have spent years building.

Building a pension alongside the business gives you a separate asset for retirement and can bring greater flexibility later in life.

The eventual value of a company can depend on how the business is performing, market conditions and the availability of the right buyer. Your own plans can change too. You may decide to retire earlier, stay involved for longer or keep an interest in the business after stepping back from day-to-day work.

Having a well-funded pension can give you more freedom when making those decisions and reduce how much your retirement plans depend on the eventual sale of the business.

Executive pension or PRSA?

A PRSA can work very well for many business owners. It is straightforward and flexible, and the employer contribution limit of 100% of salary can provide plenty of scope for pension funding.

An executive pension may be worth exploring where an owner has a long period of service, takes a relatively modest salary compared with company profits or wants to put more into their pension during the years leading up to retirement.

Because the funding calculation takes salary, service and permitted retirement benefits into account, there can be greater scope for company contributions in some cases.

There is more administration involved with an executive pension, including occupational scheme rules, trusteeship and regulatory requirements. Looking at both options side by side can help establish which route makes the most sense for the owner and the business.

Building your retirement fund over the next 15 years

Work out what you would like retirement to look like

A good starting point is to think about the income you would like to have once you stop drawing a salary from the business.

Look at what you already have, including existing pensions, the State Pension, savings, investments and any other sources of income. From there, you can get a much clearer idea of the amount you still need to build.

It can also be useful to treat the future value of the business as an additional asset rather than building your entire retirement plan around an expected sale price.

Find out how much the company can contribute

An executive pension funding calculation can show the level of benefits and contributions available under Revenue rules.

It will give you a clearer picture of how much your company may be able to contribute and provide a starting point for building a realistic contribution plan.

Choose a contribution level that works for the business

The best contribution plan is one the company can comfortably maintain.

Regular employer contributions can form the backbone of the plan, with scope to consider additional contributions in stronger years where appropriate and permitted.

It is also important to leave the business with enough cash for its day-to-day needs, tax, borrowing, future investment and any unexpected costs.

Frequently asked questions

Can an executive pension help me catch up after years of making relatively small pension contributions?

Potentially, yes. The funding calculation for an occupational pension can take account of your service with the company and the retirement benefits permitted under Revenue rules.

The amount available will depend on your salary, years of service, retirement age, existing pension benefits and the structure of the scheme. A formal funding calculation will give you a clear picture of how much your company may be able to contribute.

If you have spent years building your business and are now starting to think more seriously about retirement, LHK can help you look at how much you have already built up, what you may need over the next 10 to 15 years and whether an executive pension or PRSA is the better route for you.

From there, we can help you put a contribution plan in place that works for you and your business.

Book a complimentary call with one of our financial advisers to discuss your retirement plans, review your existing pensions and explore whether an executive pension or PRSA could be the right fit for you and your business.

This article is for general information only and does not constitute financial, tax or legal advice. Pension rules, tax treatment and available options depend on individual circumstances and may change. The value of investments can fall as well as rise. You should seek professional advice before establishing a pension scheme, making contributions or changing an existing pension arrangement.