Exiting a former employer DC pension fund at 50.

[PMOB1972]

I have a DC occupational pension from previous employment (2000-2005) with a well known multinational. I had completely forgotten about this until recently. To my surprise there is currently circa €145k in the fund. As I’m over 50, the fund management company has indicated that I can retire and withdraw 100% of the fund by way of cash. They will provide the relevant information in the coming weeks. Can anyone tell me what the tax implications of doing this would be. From what I can determine 25% is tax free, but I’m unclear regarding the remaining 75%. Depending on what I read, it will be subject to either 20% tax or full marginal rate income tax (52% in my case).

 

[jpd]

Income from the 75% will be taxed at your marginal rate

 

[Fortune]

I have a DC occupational pension from previous employment (2000-2005) with a well known multinational. I had completely forgotten about this until recently. To my surprise there is currently circa €145k in the fund. As I’m over 50, the fund management company has indicated that I can retire and withdraw 100% of the fund by way of cash. They will provide the relevant information in the coming weeks. Can anyone tell me what the tax implications of doing this would be. From what I can determine 25% is tax free, but I’m unclear regarding the remaining 75%. Depending on what I read, it will be subject to either 20% tax or full marginal rate income tax (52% in my case).

Did the fund provider tell you how much was taxable? It's possible that the whole fund could be a tax free lump sum.

 

[Steven Barrett]

It will be liable to income tax, USC and PRSI. If you are still working and in receipt of income, you will pay 52% on the remaining 75%. Unless you are in desperate need of a lump sum, I would dodge this.

The ARF is in existence 25 years and the only instances I have seen of people taking the taxed cash option was after the 2008 recession when people were cashing in pensions to keep their businesses afloat.

If you need income, set up an ARF and take the money out on a regular basis over a number of years. You will be able to control the taxation element of it and it will last you longer.


Steven
www.bluewaterfp.ie

 

[murphaph1]

Finding a 145k pension pot you'd forgotten about is better than finding a fiver down the back of the sofa anyway. I'd say that was a rather pleasant surprise!

 

[Flybytheseat]

Actually, doing DIY divorce with with company that has good reviews, cost about 600E

Can i bring a few back benchers?

It will be liable to income tax, USC and PRSI. If you are still working and in receipt of income, you will pay 52% on the remaining 75%. Unless you are in desperate need of a lump sum, I would dodge this.

The ARF is in existence 25 years and the only instances I have seen of people taking the taxed cash option was after the 2008 recession when people were cashing in pensions to keep their businesses afloat.

If you need income, set up an ARF and take the money out on a regular basis over a number of years. You will be able to control the taxation element of it and it will last you longer.


Steven
www.bluewaterfp.ie

The ARF in the above case would be subject to deemed disposal of 4% per annum from the age of 60 ?

 

[PMOB1972]

Income from the 75% will be taxed at your marginal rate

Would it not fall into the €200-€500k bracket (€2,000,000 x 25%), taxable at 20%?

Income from the 75% will be taxed at your marginal rate

Not 20% per Revenue, given its well under the €2m threshold.

“You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).”

 

[Flybytheseat]

Would it not fall into the €200-€500k bracket (€2,000,000 x 25%), taxable at 20%?

Not 20% per Revenue, given its well under the €2m threshold.

“You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).”

Tax free lump sump is max 25% of the fund value so 25% of 140K in this case. The rest is subject to tax at the marginal rate if drawn as cash or alternatively reinvested in an ARF an drawn down over multiple years (starting latest at age of 60).

 

[AAAContributor]

“You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).”

Revenue should be a little clearer in their wording as I can see how you could come to that conclusion. For absolute clarity it really should read in the bit you have highlighted in bold: "The retirement lump sum amount between......."

Your pot is €145,000.

Your lump sum entitlement on the 25% option (non salary & service option) is €36,250.

As this €36,250 is less than €200,000, €36,250 is tax free but the balance (non lump sum amount) is taxable as income at your marginal rate (if you take it all as cash).

The 20% rate on retirement lumps between €200 - €500k is only applicable to larger pension pots. If you had €1m in your fund, €250,000 could be taken as a retirement lump sum - €200,000 tax free and €50,000 chargeable at the 20% rate. The balance of €750,000 would be taxable at the marginal rate if it was all taken as income.

 

[Fortune]

Would it not fall into the €200-€500k bracket (€2,000,000 x 25%), taxable at 20%?

Not 20% per Revenue, given its well under the €2m threshold.

“You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).”

You need to tell us what the fund administrator has said your lump sum is based on before anyone can answer your question

 

[PMOB1972]

You need to tell us what the fund administrator has said your lump sum is based on before anyone can answer your question

I don’t understand. It’s a DC occupational pension (pfizer) that I stopped contributing to in 2005 and had completely forgotten about until I read an advert about unlocking a 25% tax free lump sum from old employer occupational pensions if over 50.

 

[Fortune]

I don’t understand. It’s a DC occupational pension (pfizer) that I stopped contributing to in 2005 and had completely forgotten about until I read an advert about unlocking a 25% tax free lump sum from old employer occupational pensions if over 50.

You can also get a lump sum calculated based on your salary and how long you worked there. It may allow you to take the whole fund as a lump sum, and if that's the case it would all be tax free.

 

[Steven Barrett]

The ARF in the above case would be subject to deemed disposal of 4% per annum from the age of 60 ?

Imputed distribution from age 61. The rule is you have to be 60 for the entire year so it's 61 for everyone except the few born on New Years day!

 

[PMOB1972]

Did the fund provider tell you how much was taxable? It's possible that the whole fund could be a tax free lump sum.

On what basis could it be 100% tax free? If it was, I’d use it to clear my mortgage, which would free up €1,200 per month for other things, including AVCs to my current occupational pension. I’d like to increase it to 30%. If it’s taxed above 20% I’ll leave it for a few more years. The fund managers will provide the relevant information in the coming weeks, including the tax implications, but I’m impatient!

 

[PMOB1972]

You can also get a lump sum calculated based on your salary and how long you worked there. It may allow you to take the whole fund as a lump sum, and if that's the case it would all be tax free.

Five years, 19 years ago? I left age 33.

 

[AAAContributor]

On what basis could it be 100% tax free?

If your best final remuneration (i.e. salary plus bonus) as at 2005, adjusted for inflation to 2024, was an extraordinarily high number, then yes, you could receive your pension pot 100% tax free.

Given the details laid out in post number 1 (years of service, approximate age), it is probably not realistic that this calculation approach would deliver a lump sum amount greater than 25% of the value your pension pot, let alone 100% of the value of the fund.

 

[PMOB1972]

I have a DC occupational pension from previous employment (2000-2005) with a well known multinational. I had completely forgotten about this until recently. To my surprise there is currently circa €145k in the fund. As I’m over 50, the fund management company has indicated that I can retire and withdraw 100% of the fund by way of cash. They will provide the relevant information in the coming weeks. Can anyone tell me what the tax implications of doing this would be. From what I can determine 25% is tax free, but I’m unclear regarding the remaining 75%. Depending on what I read, it will be subject to either 20% tax or full marginal rate income tax (52% in my case).

Thank you to everyone for the info. Appreciated.

 

[PaddyW]

Sorry to jump on the thread, but I'll be looking at a similar situation in a number of years. I left job which I have my previous pension pot with in 2017. I will be 50 in 7 years. Can I use inflation adjustment to increase my remuneration at that stage? Would this allow me to pay a little less tax on the 75% left? Thanks.

 

[AAAContributor]

I left job which I have my previous pension pot with in 2017. I will be 50 in 7 years. Can I use inflation adjustment to increase my remuneration at that stage? Would this allow me to pay a little less tax on the 75% left?

Retiring members of DC employer pension schemes can choose to use their retirement fund to provide retirement benefits in one of two ways:

1. Under the Traditional Benefit option, the retiree:

- First uses their fund to provide the maximum lump sum Revenue will allow, related to completed service, final remuneration and retained lump sums

AND

- Must then use the balance, if any, to buy an annuity with a life assurance company, to provide a fixed pension for life.

2. Under the ARF option, the retiree:

- Can take 25% of the fund as a lump sum (tax free up to €200,000 for all lump sums taken from all pension arrangements),

and

has three options with the balance of the fund (i.e. the 75%):

- Take as a lump sum subject to PAYE

OR

- Transfer to an ARF

OR

- Use to buy an annuity.

It’s possible with the balance to use a mix of these three options.

Seeing as you mentioned "the 75% left", you can see that remuneration is not a variable under the ARF option. The 25% lump sum is by reference to the value of the fund and not anything to do with your previous salary. Same for the balance ("the 75%").

Your previous salary is only relevant if you go for the Traditional Benefit option. In some cases the tax-free lump sum entitlement of a retiring DC scheme member under the traditional benefit option may be higher than the 25% allowed under the ARF option, but the remaining part of the fund under the traditional benefit option must then be used to buy an annuity.

In any event, when you approach the administrators of your pension scheme to access the benefits, you will be presented with the two options. Indexation (or "dynamisation" in Revenue-speak) will factor into the calculation of the Traditional Benefit option.

 

[PaddyW]

Thanks for the detailed reply. I really appreciate it.