If you are a member of an Occupational Pension Scheme provided by your employer, you should be entitled to a lump sum at retirement. For most people, their lump sum entitlement can be taken tax free. It is usually, though not always, advisable to take your full Retirement Lump Sum entitlement.
- Members of defined benefit pension schemes, along with those members of defined contribution pension schemes who intend to use the balance of their pension to buy an income for life (an annuity), will be entitled to a lump sum based on their final salary with the relevant employer and their years of service. The maximum lump sum available to them will be 1.5 times their final salary, but some will not have built up enough years of service to entitle them to this.
- Members of defined contribution schemes who intend to use the balance of their pension to buy an Approved Retirement Fund or an
Approved Minimum Retirement Fund can take 25% of their fund value as a Retirement Lump Sum.
- Retirement Lump Sum entitlements up to the value of €200,000 can be taken tax free.
- The optimum Pre-Retirement Pension fund is €800,000 in order to receive the maximum Tax-Free cash of €200,000 (€800,000 x 25%).
- Any Tax-Free Cash amount taken between €200,000 and €500,000 is taxed at the standard rate of 20%. Any excess over this, if taken, will be liable to income tax at the individual’s marginal rate along with PRSI and the Universal Social Charge.
- In most cases, it is usually best to take the maximum tax free cash from your pension for Defined Contribution Pension Schemes. This may not always be the case for members of Defined Benefit Pension Schemes. This is because the reduction in Annual Income from the Defined Benefit Pension may in some cases be greater than the value of the Retirement Lump Sum can justify.
- You may have the following options for the balance of your pension after your Retirement Lump Sum:
- You may receive an annuity, or income for life – this is the case for most people.
- You may be able to purchase an Approved Retirement Fund or Approved Minimum Retirement Fund (post-retirement pensions that can be inherited).
- You may under certain circumstances be able to take the balance of your pension as taxable cash.
Not all of these options are available for all retirees.
- Typical uses for a Retirement Lump Sum include:
- Clearing outstanding debt
- Buying a car
- Increased spending in the first few years of retirement
- Provision of financial assistance to children
- Investment for the future.
- When you retire, if you are not using your Retirement Lump Sum immediately, it is important to consider your investment options. Most Retirees tend to leave their Retirement Lump Sum on Bank Deposit. If you have not got an immediate requirement for your Tax-Free lump sum it is worth considering alternative investments to Bank Deposits. Of Course, each Retirees circumstances are different and advice should be taken on what is the most suitable investment option.
- In the event of you being made redundant prior to your retirement you may be also entitled to an element of Tax-Free Termination Payments as follows:
- Statutory Redundancy Payments.
- Ex-Gratia Payments ( i.e. Payments over and above Statutory Redundancy) Certain Ex-Gratia payments may be exempt if they meet the criteria for the following reliefs:
- Basic Exemption,
- Increase Basic Exemption,
- Standard Capital Superannuation Benefit ( SCSB).
Employee Pension Advisors, Employee Pension Education and Premier Financial are registered trade names of PCS Financial Services (Kerry) Ltd. © 2019 – PCS Financial Services ( Kerry ) Ltd. t/a Employee Pension Advisors, Employee Pension Education and Premier Financial is regulated by the Central Bank of Ireland.