SCSB = 3rd secret of Fatima

Discussion in 'Redundancy, unemployment & jobseekers entitlements' started by rogeroleary, Mar 11, 2017.

  1. rogeroleary

    rogeroleary Frequent Poster

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    Last edited: Mar 11, 2017
    I've been around a long time and have seen many many redundancy situations over the years and for all of that I've never heard anyone acutally be able to explain how SCSB works. I always hear "it depends on this and depends on that" or else "it can be interpreted quite liberally or quite generously", for such a critical point in a persos career I always amazed that no one seems to know the answer. Most commonly it seems to boil down to this:

    upload_2017-3-11_15-0-52.png
    So my question is how can one calculate the "Present value of the tax free lump sum received / receivable from the Pension Plan" (even trying to say that bamboozles me :eek:).

    Maybe someone can help if I give sample numbers :
    • Average pay over last 3 years = 90k p.a.
    • Service = 18 years
    • Redundancy pay of 5 weeks per year of service
    • Current pension pot = 500k
    • Age = 58
    • Have not received any redundancy in last 10 years so assume increased exemption of €10k would apply?
    • Wish to retain right to to tax free pension cash
    • Family dog = wheaten terrier (hopefully that is not needed for the calculation :p)
    Any help with this would be much appreciated,

    Rog
     
    Last edited: Mar 11, 2017
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  2. Joe_90

    Joe_90 Frequent Poster

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    Most people can't compute the NPV of the tax free lump sum.

    An actuary produces the figure for the pension provider who give it to you.

    A very amature estimate might be that the fund would grow at 3% and that inflation would eat away it at 1%.

    So you have 7 years to go. So the fund might grow to circa €600,000, 25% of that is €150,000 discounted at 1% for 7 years is €140,000

    So 90,000 x 18/15 - 140,000 = 0
     
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  3. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Joe's right:

    €90k x (18/15) = €108k

    €108k - €140k (using Joe's work) = Nil

    The actuary calculates the Net Present Value of the tax-free pension lump sum by extrapolating its likely future value and then discounting that back to account for inflation.
     
  4. rogeroleary

    rogeroleary Frequent Poster

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    Last edited: Mar 11, 2017
    Thanks gents that certainly takes some of the mystery out of it. So, in a case of a company offering 5 weeks per year of service with the profile I outlined in the original post it looks like the redundancy would be something like this?:

    90k with 18 yrs @ 5 weeks per year = €155,769

    Allowable deductions
    Initial tax free allowance = €10160
    + €765 & 18 years = €13770
    + increased exemption = €10000* * is this impacted by present value of tax free lump sum also? and if so how would it work in this example?
    + statutory redundancy = €21600 (18 years @ 2 weeks per year @ max of €600)
    + SCSB = ZERO ? based on Joe & Gordons earlier feedback
    -------
    Total tax free allowance = €55530
    -----------
    Taxable €100238 @ 48% = €48114 (48% = tax + USC)

    Net payment €155769-€48114 = €107655

    Is that roughly correct? Seems like a lot of tax ie. > 30%? Can that be lessened / reduced or clawed back (for example if not working for 1-2 years)?

    Many thanks,
    Rog
     
    Last edited: Mar 11, 2017
  5. JoeRoberts

    JoeRoberts Frequent Poster

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    The PV as calculated by the actuary uses the same method and discount rates as set out by dept. of social welfare for calculating transfer values. These changed in January 2017.

    http://www.pensionsauthority.ie/en/...the_Pensions_Act_1990_Version_2_Oct_2016_.pdf.

    So, project forward to find pension at retirement age. Then discount back to today. The discount rate is 6% up to age 55 then reduces gradually until 65.
     
  6. JoeRoberts

    JoeRoberts Frequent Poster

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    For the PV, the lump sum will be based on years of service rule rather than the 25%.
     
  7. JoeRoberts

    JoeRoberts Frequent Poster

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    Note also that if pension pot is a PRSA, that is not considered an occupational pension. So there would be no deduction for pension lump sum in such case

    So assuming it is a Dc scheme, the SCSB deduction for PV lump sum would be roughly:

    Lump sum under years of service rule = 3/80 x 18 x 90k = 61k,
    PV roughly 46k after discounted at say 4% average for 7 yrs.

    So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory.

    You can still take your 25% lump sum even though this is not used in the pv calculation. Revenue may close this loophole in the future though.
     
  8. Joe_90

    Joe_90 Frequent Poster

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    Interesting if the €500k had been built up over more than 18 years would that increase the Lump sum?
     
  9. rogeroleary

    rogeroleary Frequent Poster

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    Thank you very much guys, this is very enlightening. A couple of points based on you rcomments:

    • Yes this is a DC scheme
    • Yes the 5 weeks includes statutory
    • The 500k is mostly made up of current employment ie. 18 years but also includes about 50k from previous employment (7 year prior to current)
    Joe R - I note your comment "So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory." Based on all the above what do you reckon is the total tax free amount please? Is it 62k + 55k? as per below?

    upload_2017-3-11_20-10-58.png

    Thanks again guys for all your help,


    Rog
     
  10. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Would it not be 3/80 x 25 x €90k?
     
  11. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Meaning a lump sum of €84k. Call it €60k discounted back.

    So €108k less (say) €60k = €48k

    Statutory is always tax-free, so €22k tax-free.

    So around €70k tax-free.
     
  12. JoeRoberts

    JoeRoberts Frequent Poster

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    As I understand it he is looking at redundancy now with 18yrs service
     
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  13. Gordon Gekko

    Gordon Gekko Frequent Poster

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    You're right.
     
  14. JoeRoberts

    JoeRoberts Frequent Poster

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    Total tax free will be 62 + 22 = 84.
    The SCSB route gives you the best result so the other exemptions are not used. They can only be increased up to the SCSB, you don't get all 3 added together.
    If company is willing to pay for untaken holidays then you should maximise these and it will increase your 3 year average salary to bump up the scsb. Pay in lieu of notice if available can also be used for this purpose.
     
  15. rogeroleary

    rogeroleary Frequent Poster

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    Thanks very much Joe - this has been very helpful. One last question - is top slicing relief still around these days in the event someone does not work in the year or so following redundancy? Sounds like the exposure to tax & USC would be 71k @ 40% and 8% USC so might be nice to get some of that back if a job didn't come along.

    Rog
     
  16. JoeRoberts

    JoeRoberts Frequent Poster

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    No, top slicing is finished. If you have access to cash you could make an avc contribution to your pension before your leave date, that would be quite tax efficient as your fund is below the 200k tax free limit. So you would get 40% relief (subject to the usual limits) and then would be taking 25% of that out tax free when you start your pension.