Should people be allowed draw down their pension at 50?

Thanks for the clarification, Liam.

It grates more than a little that someone can benefit significantly from pension tax relief to build up their fund, and can then draw down this fund from 50 years old. I don't believe that this is the intended purpose of the tax relief.

RainyDay said:

It grates more than a little that someone can benefit significantly from pension tax relief to build up their fund, and can then draw down this fund from 50 years old. I don't believe that this is the intended purpose of the tax relief.

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I don't see the issue. Whether you retire at 50, 60, or 68 the tax position in relation to your pension is the same. You can take part of your fund as a tax-free lump sum and the rest is used in some way (annuity or ARF/AMRF) to provide you with a pension.

In some cases the tax-free lump sum is reduced by taking early retirement, meaning that you may pay more tax on the remaining fund.

The "pension" element of your pension will be subject to tax at your marginal rate as well as the USC. So if your pension income is low you may be tax-exempt. Or some of it may be taxed at 20%. If you're in the fortunate position that your pension (plus any other taxable income you may have) is big enough to push you into the high rate of tax, then you'll pay 41% tax on your pension plus the USC.

If you retire at 50 from a previous pension scheme but are still working in a new job, then it's likely that your combined income (pension + earned) could well be taxed at 41% meaning that you're paying tax at 41% on your pension.

All of this is the same regardless of what age you retire at, so I'm curious to know why you feel that the early retirement provisions are against the spirit of retirement funding.

Liam, my concern is not about the tax treatment of income after retirement. My concern is about the scope of abuse and tax avoidance, where a scheme that is intended to help people plan for retirement becomes a scheme that allows people to avoid tax - particularly people who are wealthy enough to engage professional advice to help them down the avoidance road. Also, it is a scheme that is particularly open to wealthy self-employed professionals who manage their own pension schemes, and therefore approval of trustees becomes a 'given'.

Why should the State allow people to avoid tax by paying into a pension scheme intended to provide for retirement, and then use this income while aged 50-65 years period and while they continue to earn elsewhere?

RainyDay said:

Liam, my concern is not about the tax treatment of income after retirement. My concern is about the scope of abuse and tax avoidance, where a scheme that is intended to help people plan for retirement becomes a scheme that allows people to avoid tax - particularly people who are wealthy enough to engage professional advice to help them down the avoidance road. Also, it is a scheme that is particularly open to wealthy self-employed professionals who manage their own pension schemes, and therefore approval of trustees becomes a 'given'.

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How can a person avoid tax by taking early retirement?

All pension scheme trustees have a legal obligation to act in the best interests of scheme members. So a pension scheme trustee would be breaking the law if s/he made a decision to allow/disallow early retirement for reasons other than for the benefit of the scheme as a whole.

In practice, early retirement is virtually always permitted in the case of a DC scheme as each member's entitlements are ring-fenced and have no bearing on the scheme as a whole.

It's only a DB scheme where early retirements can have an impact on the scheme as a whole and will often be disallowed in the current climate.

Whether one is a company director or not doesn't affect this.

RainyDay said:

Why should the State allow people to avoid tax by paying into a pension scheme intended to provide for retirement, and then use this income while aged 50-65 years period and while they continue to earn elsewhere?

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Again - how is someone avoiding tax by taking early retirement? I'll assume that the person will be on the high-rate tax by combination of their pension and earned income. So their pension is being taxed at 41% and is also subject to the USC. They got 41% tax relief on the way in - they're paying 41% tax and the USC on the way out. Aside from gross roll-up of funds, where's the big avoidance?

I've said it before on AAM that if a person is fortunate enough that they will be paying tax at 41% when they draw their pension, then the arguments in favour of putting money into a pension at all are weakened.

LDFerguson said:

I've said it before on AAM that if a person is fortunate enough that they will be paying tax at 41% when they draw their pension, then the arguments in favour of putting money into a pension at all are weakened.

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That's a point worth making again and again; people who have a large enough income on retirement will end up paying income tax twice. This double taxation of people who are actually funding their own retirement is disgraceful. When the levy is taken into account the net benefit becomes very questionable.

LDFerguson said:

I've said it before on AAM that if a person is fortunate enough that they will be paying tax at 41% when they draw their pension, then the arguments in favour of putting money into a pension at all are weakened.

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So you'd have no concerns about eliminating this tax avoidance scheme then, and revising the rule so that you don't draw down pension funds until you reach retirement age (65 or whatever), or if you do need to draw down in an emergency, you refund the tax breaks that you got then?

Or to put the question another way, what are the arguements, weakened or otherwise, for people to put money into their pension schemes and then draw down at age 50?

RainyDay said:

So you'd have no concerns about eliminating this tax avoidance scheme then, and revising the rule so that you don't draw down pension funds until you reach retirement age (65 or whatever), or if you do need to draw down in an emergency, you refund the tax breaks that you got then?

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I think you've missed my point. The current system is already structured so that those who have the biggest pension pots get no benefit from making further contributions, while those who have smaller pension funds can avail of tax relief on contributions towards their retirement.

Or to put it another way - if your pension fund is big enough that your pension will be taxed at 41% when you retire, then you have little incentive to contribute any further and therefore you get no further tax relief.

If your funds are smaller, i.e. your pension in retirement will be tax-exempt or taxed at 20% but you are paying tax at 41% then there is a tax benefit for you.

That's the system as it stands at present.

If you eliminate the current system, then the people who will lose out the most are those with the smaller funds, i.e. those paying tax at 41% who will not have enough accumulated at retirement to pay tax at 41%. The big guys have already been stopped from gaining any further tax relief. Is that what you're suggesting?

RainyDay said:

Or to put the question another way, what are the arguements, weakened or otherwise, for people to put money into their pension schemes and then draw down at age 50?

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The arguments are the same whether you're planning (or able) to retire at 50 or 70. If your pension is going to be taxed at the low rate or not at all (i.e. your pension will be less than €32,800 per year under the current tax bands for a single person) but you're paying tax at 41% on your earned income (i.e. a salary of >€32,800 for a single person), then you have an incentive to get tax relief at 41% and pay tax at a lower rate when you retire. If you will have a pension of >€32,800 per year when you retire, the incentives are reduced.

LDFerguson said:

I think you've missed my point. The current system is already structured so that those who have the biggest pension pots get no benefit from making further contributions, while those who have smaller pension funds can avail of tax relief on contributions towards their retirement.

Or to put it another way - if your pension fund is big enough that your pension will be taxed at 41% when you retire, then you have little incentive to contribute any further and therefore you get no further tax relief.

If your funds are smaller, i.e. your pension in retirement will be tax-exempt or taxed at 20% but you are paying tax at 41% then there is a tax benefit for you.

That's the system as it stands at present.

If you eliminate the current system, then the people who will lose out the most are those with the smaller funds, i.e. those paying tax at 41% who will not have enough accumulated at retirement to pay tax at 41%. The big guys have already been stopped from gaining any further tax relief. Is that what you're suggesting?



The arguments are the same whether you're planning (or able) to retire at 50 or 70. If your pension is going to be taxed at the low rate or not at all (i.e. your pension will be less than €32,800 per year under the current tax bands for a single person) but you're paying tax at 41% on your earned income (i.e. a salary of >€32,800 for a single person), then you have an incentive to get tax relief at 41% and pay tax at a lower rate when you retire. If you will have a pension of >€32,800 per year when you retire, the incentives are reduced.

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Yes, I think we're arguing at cross-purposes a bit. So let me step back and keep it simple.

The only bit of the current system that I proposing changing (for the sake of this arguement) is the ability to retire early and draw down a pension early. I believe it is wrong that some people are able to avoid paying tax on their income by putting money into their pension fund, benefit from growth on their pension fund that is largely tax free, and then draw down that money to supplement their income during their working years. This is an abuse of pension tax relief in my view.

So let's say we change the system tomorrow to eliminate the right to draw down pension funds before age 65. What would be impact of this change?

RainyDay said:

Yes, I think we're arguing at cross-purposes a bit. So let me step back and keep it simple.

The only bit of the current system that I proposing changing (for the sake of this arguement) is the ability to retire early and draw down a pension early. I believe it is wrong that some people are able to avoid paying tax on their income by putting money into their pension fund, benefit from growth on their pension fund that is largely tax free, and then draw down that money to supplement their income during their working years. This is an abuse of pension tax relief in my view.

So let's say we change the system tomorrow to eliminate the right to draw down pension funds before age 65. What would be impact of this change?

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Ah - I think I understand your point better now. (I still don't agree with it, but at least I think we're debating the same point now. ) Your issue is the ability of someone to draw their pension at age 50 or 51 and then continue working and earning in a different employment. I know that this is quite common with gardai and army personnel who can accrue full pension rights at an earlier age than most because of the nature of their jobs. Those that retire in their 50s (or for army, sometimes 40s) would often get a new job.

In practice, this could only be stopped in one of two ways - (a) abolish the practice of early retirement altogether or (b) implement a rule that someone who has availed of early retirement cannot subsequently take up paid employment. I just don't see who this would benefit.

Let's say I have accumulated a pension of €20,000 per year from a previous employment. In my current job I'm earning €40,000 per year. So I hit 50 and start drawing down my €20,000 per year pension. Because of my concurrent salary I now have to pay nearly half of my pension in tax and USC. If I had no earned income I would pay very little tax on my pension. In this example, the exchequer is doing quite nicely from my decision to take my retirement benefits early while continuing to work - they're getting around €9,000 per year from my pension that they wouldn't have otherwise got.

Granted, that's an example I concocted to illustrate my point. But I'm struggling to think of another example where it would benefit the exchequer to bar me from taking early retirement from a pension scheme while continuing to work.

Can you give me an example of the sort of thing you would like to see abolished and how the exchequer would benefit?

LDFerguson said:

Ah - I think I understand your point better now. (I still don't agree with it, but at least I think we're debating the same point now. ) Your issue is the ability of someone to draw their pension at age 50 or 51 and then continue working and earning in a different employment.

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Yep, that's the issue.

LDFerguson said:

Ah - I think I understand your point better now. (I still don't agree with it, but at least I think we're debating the same point now. ) Your issue is the ability of someone to draw their pension at age 50 or 51 and then continue working and earning in a different employment. I know that this is quite common with gardai and army personnel who can accrue full pension rights at an earlier age than most because of the nature of their jobs. Those that retire in their 50s (or for army, sometimes 40s) would often get a new job.

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Yes, I was aware of those situations. I don't see any real justification for allowing early retirement in such cases, while people still have earning potential. If there was a situation where the nature of the job meant that people were basically completely burnt out by age 50 and had no reasonable hope of finding further employment, then maybe the early retirement could be justified. But I don't think that reflects the situation for army or Gardai personnel that I've come across.
I think the rules for Ministerial pensions changed recently to stop Ministers from drawing down pensions until they reach 65, and rightfully so.

LDFerguson said:

Let's say I have accumulated a pension of €20,000 per year from a previous employment. In my current job I'm earning €40,000 per year. So I hit 50 and start drawing down my €20,000 per year pension. Because of my concurrent salary I now have to pay nearly half of my pension in tax and USC. If I had no earned income I would pay very little tax on my pension. In this example, the exchequer is doing quite nicely from my decision to take my retirement benefits early while continuing to work - they're getting around €9,000 per year from my pension that they wouldn't have otherwise got.

Granted, that's an example I concocted to illustrate my point. But I'm struggling to think of another example where it would benefit the exchequer to bar me from taking early retirement from a pension scheme while continuing to work.

Can you give me an example of the sort of thing you would like to see abolished and how the exchequer would benefit?

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I think the examples would need to look at the kind of tax relief given to person in order to build up that pension pot. Would the State be better off not giving the tax relief that was given to build up this pot, taking the normal income tax as the money was earned, and let the person supplement their later income with normal savings from after tax income, rather than with drawn down pension?

There is also an issue about the ability to minimise tax paid by spreading income over a longer period. In a 'standard' pension situation, you will get your pension at 65 and have approx 10 years life remaining. So you get the benefit of tax credits for a 10 year period.

If you take your pension early at 50, you get to spread the same pot of money over a 25 year period, and you are therefore going to be paying less tax overall on the same pot of money.

In line with LD Ferguson's earlier commentary, I suggest that you should look at his response to the core issue of your arguement. " Is the state losing out on tax due to those who retire early". In effect the short answer is no as while pension relief was given on contributions made, the actual pension payments are taxable. Admittedly, some people will have availed of relief at 41% on the way in and if pension paid is low it will be taxed at the lower rate, but this is generally restricted to employees who avail of the 50 age bracket for early retirement and those forced to retire early due to ill health etc. I would not regard it as a loophole in the system and in many ways it facilitates additional jobs being made available.

44brendan said:

In line with LD Ferguson's earlier commentary, I suggest that you should look at his response to the core issue of your arguement. " Is the state losing out on tax due to those who retire early". In effect the short answer is no as while pension relief was given on contributions made, the actual pension payments are taxable. Admittedly, some people will have availed of relief at 41% on the way in and if pension paid is low it will be taxed at the lower rate, but this is generally restricted to employees who avail of the 50 age bracket for early retirement and those forced to retire early due to ill health etc. I would not regard it as a loophole in the system and in many ways it facilitates additional jobs being made available.

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I'm not so sure it facilitates additional jobs being made available, as my concern is about people who continue in employment after retirement, i.e. are drawing down on their retirement pension, while continuing to work.

I'm also not so sure about it being tax neutral, because of the ability to spread the pension drawdown over a much longer period of time, e.g. 25 years instead of a more typical 10 years.

But regardless, if it is tax neutral, and there is no significant gain for the tax payer, can I assume that you'd have no objection to eliminating this option to retire early while continuing to work?

RainyDay said:

I'm not so sure it facilitates additional jobs being made available, as my concern is about people who continue in employment after retirement, i.e. are drawing down on their retirement pension, while continuing to work.

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What about people over 65 who continue to work?
what about an expert in a particular field who is asked to consult with a business after they retire early?
What about retired people who do speaking tours?
What if a retired person starts a business?

I can't see how people who are drawing a pension can be stopped from working.
I don't see why they should either.

It's quite simple really. If someone availed of 41% tax relief on pension contributions on the way in and continue to work past 50, chances are they are still going to be higher rate tax payers.

Therefore, they're going to go over the threshold and continue to pay higher rate tax on their earned income. If they draw their pension, they're also going to pay higher rate tax on the entire pension income.

I think you're going to be alone in arguing that people shouldn't be allowed to draw down on private pensions before state retirement age but, even so, removing this feature wouldn't provide much, if any, benefit to the exchequer.

marathonic said:

It's quite simple really. If someone availed of 41% tax relief on pension contributions on the way in and continue to work past 50, chances are they are still going to be higher rate tax payers.

Therefore, they're going to go over the threshold and continue to pay higher rate tax on their earned income. If they draw their pension, they're also going to pay higher rate tax on the entire pension income.

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You're ignoring the fact that those who avail of the 41% tax relief get the opportunity to benefit from the growth in the gross amount, and use this benefit to fund their age 50-65 years. Those who don't have this opportunity, because they don't have influence over their trustees, don't get this benefit.

I'm kind-of confused by how people keep telling me how there is no real tax benefit for people who do retire early and draw down pensions, but we really shouldn't change the rules. If there is no real benefit, then there is no problem with change the rules to rule out such a benefit - right?

For me, it is an equality issue. We have two guys, Mr A and Mr B, both IT developers and programmers. Mr A is a full-time employee of ACME corp, and a member of their DC pension fund. Mr B is a contractor at ACME Corp, and contributes to his own pension fund. They both contribute 10% of salary to their pension funds. Mr B gets a higher day rate than Mr A, but doesn't get sick pay or holiday pay or other employee benefits. They both hit 50, and ACME Corp closes down the IT unit, though the main business stays open. They both pick up new jobs, albeit at lower income rates than before.

The trustees of Acme Corp fund won't allow early retirements, so Mr A has to wait until he hits 65 to get at his pension. Mr B controls his own fund, and therefore can take early retirement, and enjoy the fruits of his contributions from age 50.

In these situations, why should the State have given a tax break to Mr B that is not available to Mr A?

RainyDay said:

Those who don't have this opportunity, because they don't have influence over their trustees, don't get this benefit.

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Red herring. Nobody gets to retire early because they have some "influence over the trustees". Either the scheme allows early retirement or it doesn't. You seem to be under the misconception that if one is in a senior position or a director of a company, or indeed is a pension scheme trustee, that somehow this means that the clearly-defined rules governing what a trustee can and cannot do can somehow be circumvented for personal gain. They can't.

In practice the only people who are disallowed early retirements are those in Defined Benefit schemes where early retirements would have an adverse financial impact on other members of the scheme.

So your example of Mr A and Mr B is also wrong, in that either one would be permitted to leave early.

RainyDay said:

I'm kind-of confused by how people keep telling me how there is no real tax benefit for people who do retire early and draw down pensions, but we really shouldn't change the rules. If there is no real benefit, then there is no problem with change the rules to rule out such a benefit - right?

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Just because there is no real tax benefit for something isn't a good enough reason for it to be banned by law. The current regime allows people to make choices that may suit their lifestyle. Do you want to take that away even though it would not benefit the exchequer?

Example - person works 60 hours a week. At 55 he decides he'd like to cut back on his hours and spend more time with his family. Financial commitments dictate that he cannot afford to give up work altogether. So he leaves his present job, takes up a new job at a lower rate of pay but less hours and supplements his income by drawing down his pension early. He's still paying 41% tax on his pension and part-time income combined.

I just don't who would be the winner by banning early retirements / continuing to work. I can see only those who would lose out.

The original Question was should people be permitted to Draw Pension @ 50.
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Definately the answer must be yes,if the folowing applies.
1. On starting the Pension Fund that it was clear they could retire on pension @50+.

Otherwise no-one dare trust that what they sign up for today is safe in the future.If long term decisions are not ring -fenced , why would anyone sign up for something that could be changed at the whim of Government.
{Eg I consider the Pension Fund Levy to be grossly unfair and it sets a dangerous precedent.}

It may Gall that someone used the system to (avoid) taxes at the time they set up their fund . but to now penalise would be just wrong.

Gerry Canning said:

The original Question was should people be permitted to Draw Pension @ 50.
.................................
Definately the answer must be yes,if the folowing applies.
1. On starting the Pension Fund that it was clear they could retire on pension @50+.

Otherwise no-one dare trust that what they sign up for today is safe in the future.If long term decisions are not ring -fenced , why would anyone sign up for something that could be changed at the whim of Government.
{Eg I consider the Pension Fund Levy to be grossly unfair and it sets a dangerous precedent.}

It may Gall that someone used the system to (avoid) taxes at the time they set up their fund . but to now penalise would be just wrong.

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I see your point, but that same logic could be applied to eliminate the Pension Levy (aka salary cut) that was applied to public servants. It could be applied to any planned change to pension rules. I don't think any Govt can be frozen into inaction on changing bad laws.

LDFerguson said:

Red herring. Nobody gets to retire early because they have some "influence over the trustees". Either the scheme allows early retirement or it doesn't. You seem to be under the misconception that if one is in a senior position or a director of a company, or indeed is a pension scheme trustee, that somehow this means that the clearly-defined rules governing what a trustee can and cannot do can somehow be circumvented for personal gain. They can't.

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I see a number of pension providers highlighting early retirement options as important product features for Directors pensions and SSAPS, so some of those in the industry seem to feel that it is certainly a benefit for those who are largely in control over their own pensions.

LDFerguson said:

In practice the only people who are disallowed early retirements are those in Defined Benefit schemes where early retirements would have an adverse financial impact on other members of the scheme.

So your example of Mr A and Mr B is also wrong, in that either one would be permitted to leave early.

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OK, so for the sake of arguement, let's say that the ACME pension scheme is a DB scheme, and Mr A is a member of the DB scheme.

Why should the state give Mr B a tax break to save for his 50-65 years that is not available to Mr A?

LDFerguson said:

Just because there is no real tax benefit for something isn't a good enough reason for it to be banned by law. The current regime allows people to make choices that may suit their lifestyle. Do you want to take that away even though it would not benefit the exchequer?

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Just to be clear, it's not about 'banning' early retirement. It is about removing the current tax break for early retirement.

People are welcome to make their own lifestyle choices, but why would they expect a tax break for it?

LDFerguson said:

Example - person works 60 hours a week. At 55 he decides he'd like to cut back on his hours and spend more time with his family. Financial commitments dictate that he cannot afford to give up work altogether. So he leaves his present job, takes up a new job at a lower rate of pay but less hours and supplements his income by drawing down his pension early. He's still paying 41% tax on his pension and part-time income combined.

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While he's still paying tax on his pension, he benefited from growth in the tax-free contribution, an option that is not available to other people. You could apply to same logic to the situation many young parents find themselves in their 30s or 40s dealing with reduced salaries and extra expenses for young children. Or to people who lose their jobs at any age. Or to anyone who's going to college to study and has little/no income. Do we allow all of these to draw down any pension contributions that they've made tax free? If not, why not?

LDFerguson said:

I just don't who would be the winner by banning early retirements / continuing to work. I can see only those who would lose out.

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The winner would be the State, as people would be less likely to avail of the tax break on pension contributions that are really just savings for their middle years, rather than true pension contributions.

The loser would probably be the pensions industry, with reduced commission income.

Let's step back for a minute and assume we are working with a blank sheet of paper, designing a totally new pension system. Why would we give people a tax break in their 30s and 40s to save for their 50-65s?