Cashing In DC Pension Early - Tax implications

[fayf]

While this would rarely be advised, i was wondering about this scenario, where someone who has recently been made redundant ( and is already in new employment)wants to cash in their Former Employment DC scheme - in full. Age 55.

Previous Employment DC Pension Scheme : 400k pot

25 % TFLS : 100k

Balance of : 300k

How would the 300k be taxed ?, i assumed at marginal rate, which would be 40 % but just want to check.
In addition, are there any PRSI of USC implications for the 300k ?

 

[AAAContributor]

How would the 300k be taxed ?

See page 7 of this Standard Life Guide:

A full encashment of the 75% balance will be subject to:

marginal rate (assuming the new employment is soaking up the lower rate band)

+ USC (very few exemptions from USC and this is not one of them)

+ PRSI (no exemption until age 66).

Interestingly, the document does not have a line item for your specific scenario - let's call it 'Taxable Cash for 75% balance' (probably because it is not that common) but effectively the tax treatment mirrors that of the line item 'ARF full encashment'.

Also, from this Irish Life Guide:

TAX MUST BE PAID ON RETIREMENT INCOME
Retirement income is treated like normal income so income tax must be paid on it. Retirement income includes:

• Guaranteed income for life – also called an annuity.
• Withdrawals made from an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF).
• Withdrawals from a Vested PRSA.
• Taxable Cash Payments.
• Trivial Pension Payments.

 

[Fortune]

See page 7 of this Standard Life Guide:

A full encashment of the 75% balance will be subject to:

marginal rate (assuming the new employment is soaking up the lower rate band)

+ USC (very few exemptions from USC and this is not one of them)

+ PRSI (no exemption until age 66).

Interestingly, the document does not have a line item for your specific scenario - let's call it 'Taxable Cash for 75% balance' (probably because it is not that common) but effectively the tax treatment mirrors that of the line item 'ARF full encashment'.

Also, from this Irish Life Guide:

TAX MUST BE PAID ON RETIREMENT INCOME
Retirement income is treated like normal income so income tax must be paid on it. Retirement income includes:

• Guaranteed income for life – also called an annuity.
• Withdrawals made from an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF).
• Withdrawals from a Vested PRSA.
• Taxable Cash Payments.
• Trivial Pension Payments.

Technically, the balance after 25% retirement lump sum must go into an ARF. The ARF is then allowed to be fully cashed out. If someone wanted to immediately cash out, no ARF provider is going to bother with the setting up and cancelling the ARF steps.

 

[fayf]

Thanks both, it is, as i was thinking re PAYE.

This is a very nuclear option, if a full cashout, but there would need to be very specific and unique circumstances, to go down this road.

 

[Steven Barrett]

Thanks both, it is, as i was thinking re PAYE.

This is a very nuclear option, if a full cashout, but there would need to be very specific and unique circumstances, to go down this road.

The only examples I have seen of cashing out large enough sized pensions was after the financial crises when business owners were cashing in their pensions to keep the business going. Otherwise I haven't seen it. If you want to exhaust the ARF, it's much better to do it over a number of years at the lower rate of tax than pay 40% income tax, 8% USC and 4% PRSI.


Steven
www.bluewaterfp.ie