Taxation of pension lump sum

L

landlord

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i got this from the website.....
http://www.oneview.mercer.ie/plan-your-pension/retiring-now/tax-free-lump-sum-pension.html
Taxation of lump sums
Lump sum entitlements up to the value of €200,000 can be taken tax free. Under current rules, a further €300,000 can be taken at the standard rate of income tax (currently 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.

however the revenue IT21 form says
Are PRSI and Universal Social Charge payable?
Universal Social Charge is due on the taxable part of the lump sum. There is no PRSI liability.


so the first 200,000 is tax free
200,000 to 500,000 at standard rate of 20% with USC and/or PRSI?
then above 500,000 (seen also 575,000) its 40% with USC and/or PRSI?

Also above the 2 million SFT your pension is taxed at 41% (not an income tax) and not subject to USC or PRSI ......is that correct?
 
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- €200k tax free
- €300k taxed at 20%
- Portion above €500k subject to income tax at 40%, PRSI and USC.
- Excess above €2.15m subject to a once of tax charge of 40% on retirement.
 
Sorry…completely confused now Gordon after reading your post ….found this on the citizensinformation.ie

http://www.citizensinformation.ie/e...ce/pensions/occupational_pensions.html#l1f4da

Taxation of retirement lump sum

Since 1 January 2011 there is a limit of €200,000 on the amount of the tax-free retirement lump sum. Lump sum payments above that limit will be taxed as follows (in 2014 and 2015):

Amount of lump sum

Income tax rate

Up to €200,000

0%

€200,001 - €500,000

20%

Over €500,000

Taxpayer's marginal rate

Gordon also you mentioned...
Portion above €500k subject to income tax at 40%, PRSI and USC.
But from my original post please see the reference from the revenue IT21 form.


And on
http://www.citizensinformation.ie/e...ce/pensions/occupational_pensions.html#l1f4da
(below) it mentions the SFT is 2 million (not 2.15 million) now and the excess above this is charged at 41% (not 40%) . (I checked and there was no change in 2015 budget)

Limit on overall value of fund
The Finance Act 2006 introduced a limit on the value of an individual's pension fund which may attract tax relief and this may vary from year to year. This is called the Standard Fund Threshold. From 7 December 2010 to 31 December 2013 the maximum allowable pension fund on retirement for tax purposes was €2.3 million. If the fund is greater than the limit then tax at 41% will be charged on the excess when it is drawn down from the fund. From 1 January 2014 the absolute value of the Standard Fund Threshold reduced to €2 million. From the same date the value of a defined benefit differs depending on the age at which the pension is drawn down. You can read more about the new formula used to value pension rights on Revenue's website (pdf).

And from this web page

[broken link removed]

Any amounts in excess of a SFT/PFT at claim stage continue to be subject to tax at 41%, with an offset allowed for any tax payable at 20% on the retirement lump sum. This tax rate on excess over SFT/PFT is not ‘higher rate’ income tax but is a specified rate of 41%.

thanks.....
 
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Interesting Post

Let’s say A received a lump sum of €800,000

My reading of the legislation is:

The first 200,000 is exempt, leaving a chargeable excess of €600,000.

The €600,000 is treated as two different income types.

  1. €300,000 (the Standard Chargeable Amount) is chargeable to income tax under Schedule D, Case IV. It is subject to a special tax rate of 20%.

    It does not form part of A’s total income. A’s tax reliefs cannot be used to reduce the amount payable. PRSI and USC do not apply.

  2. The remaining €300,000 is taxable under Schedule E as employment profits. It is chargeable at A’s marginal rate for the year in question. Tax credits apply. USC applies.

    As you mentioned, Revenue and according to this, the Social Protection Dept say that PRSI does not apply to any portion of the chargeable excess. However, I notice that a lot of pension/tax advisory websites seem to think that it does, but do not say why.

Where the capital value of an individual’s pension fund exceeds €2M, the excess is subject to a “Chargeable Excess Tax” of 41%.

In certain circumstances, this can be reduced by the amount of income tax paid on the lump sum at 20%.
 
Guys

Chargeable excess tax is levied at 40%. Finance Act 2014 reduced it in line with the top rate of income tax.

The threshold is effectively €2.15m because there's credit for the €60k tax on a €500k lump sum against the chargeable excess tax liability of €60k on a chargeable excess of €150k.
 
Gordon Gekko said:
Guys

Chargeable excess tax is levied at 40%. Finance Act 2014 reduced it in line with the top rate of income tax.

The threshold is effectively €2.15m because there's credit for the €60k tax on a €500k lump sum against the chargeable excess tax liability of €60k on a chargeable excess of €150k.
Click to expand...

The amount in excess of the Standard Chargeable Amount is taxable at the marginal rate, which may be 40% unless the individual's tax reliefs reduce it to 20%.

But to establish whether there is an excess in the capital value should a figure of €2M not be used?

What about PRSI?
 
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There are 3 different taxes being mentioned here which is causing the confusion. Hope below clarifies.......

Pension Lump Sum
- The first €200k of an allowable lump sum is not subject to any deductions
- The portion between €200k and €500k, the Standard Chargeable amount, a tax charge of 20% applies with no USC or PRSI
- The portion in excess of €500k is treated as normal income and is subject to marginal rate tax, PRSI and USC
[This is consistent with the Mercer link provided by Landlord]

Termination of employment - taxable portion of any lump sum
- Subject to marginal rate tax and USC only
[This is consistent with the link provided by Sophrosyne and IT21 provided by Landlord - and probably explains the key confusion?]

Tax of pension funds in excess of the Standard Fund Threshold (SFT)
- Funds in excess of €2m are subject to tax at 40%
- As Gordon Gekko pointed out, tax payable in relation to the Standard Chargeable amount may be offset against the SFT charge. However, stating that the SFT is effectively €2.15m may not always be accurate. [For example, a civil servant with a salary of €200k, a pension of €100k and a lump sum of €300k]
 
elacsaplau said:
Termination of employment - taxable portion of any lump sum
- Subject to marginal rate tax and USC only
[This is consistent with the link provided by Sophrosyne and IT21 provided by Landlord - and probably explains the key confusion?]
Click to expand...

That IT21 form from revenue is titled

IT21 - Lump Sum Payments (Redundancy/Retirement)

So it doesn't just cover termination of employment, but also retirement.
I have to say that the opinions expressed on this thread seem so vastly different, That I feel I need to get clarification from someone high up in revenue.
 
Hi Landlord

IT21 refers to where the employer makes an ex-gratia payment in respect of an employee who leaves service and receives a termination of employment payment. This is not the same as a lump sum from a pension plan!!!! I accept that the title of IT21 is very sloppy but the detail within it is very clear in relation to the nature of the lump sum payment it addresses.

For completion, there is a link (again as detailed in IT21) between the taxable amount of any termination payment and the lump sum paid or payable from a pension plan of the associated relevant employment. This is a separate point, beyond the scope of your original question....
 
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Ok thanks Elacsaplau.

So in summary and I know some might still not agree with this.

LUMP SUM.....
FIRST 200,000 tax free with no deductions
200,001 to 500,000 at 20% with no USC or PRSI.
Above 500,000, marginal rate of income tax (20/40%) + PRSI and USC
SFT......
above 2 million (2.15 potentially...don't understand this but will accept it) at 40% no PRSI or USC.

I finally found a reference to that reduction from 41 to 40% ......from
http://www.bline.ie/uploadedFiles/bline/Revamp_2012/Pensions/Finance-Act-2014-Pensions-Update.pdf
  1. Excess over SFT/PFT

    The tax on excess over the €2m SFT or an individual’s PFT to be changed from a specified rate of 41% to the “higher rate” from 1 January 2015. Which means that from 1 January 2015 the tax on any excess over the SFT or PFT will reduce to 40%.
 
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Yes Landlord - perfect summary.

So just for completion. I don't particularly like the reference to €2.15m as it can cause confusion and is not always accurate - as per the example I gave earlier. Nonetheless, it is an interesting way of looking at things though for those in a DC plan as the point being made is, as follows:

- Pension assets: €2.15m
- Excess assets: €0.15m
- Tax on excess: €0.15m * 40% = €60k (let's call A)
- Standard Chargeable Amount = €300k
- Tax on SCA = €300k * 20% = €60k (let's call B)
- Net taxable on excess over SFT = A less B = €0

Clear as the Liffey?!
 
Paragraph from the Revenue PDF
[broken link removed]

Changes to the Standard Fund Threshold Regime Finance (No.2) Bill 2013


"How does the SFT regime work?
On each occasion that an individual becomes entitled to receive a benefit under a pension arrangement for the first time (called a “benefit crystallisation event” or BCE) they use up part of their SFT or PFT, as the case may be. At each BCE, a capital value has to be attributed to the benefits that crystallise and the value is then tested against the SFT or the individual’s PFT, as appropriate, by the pension scheme administrator.
When the capital value of a BCE, either on its own or when aggregated with earlier BCEs, exceeds the SFT, or an individual’s PFT, the excess (called a “chargeable excess”) is subject to an immediate tax charge at 41% (called “chargeable excess tax”). Any chargeable excess tax due has to be paid upfront by the pension fund administrator and recovered from the individual.
In addition, when the remainder of the excess is subsequently drawn down as a pension (or, for example, by way of a distribution from an Approved Retirement Fund or vested Personal Retirement Savings Account) it is subject to tax at the individual’s marginal rate. The effective income tax rate on a chargeable excess can, therefore, be as high as 65%, excluding any liability to USC and PRSI."

Firstly we know from the finance act 2014 that the chargable excess is reduced from 41% to 40% as mentioned in an earlier post.
In the company I work for many of my more senior colleagues have exceeded the SFT/PFT. The company was supposed to cease the individuals contribution, but carry on their contribution. In some cases this was not done and the employees contribution continued. I was initially of the opinion that this wasn't so bad, since the charge for this employee contribution entering the pension over and about the SFT was 40% with no PRSI or USC, as opposed to this sum being paid to the employee at the higher rate of 40% + PRSI and USC =52%. However after reading the revenue paragraph above I am a little confused where it mentions there can be a chargable excess as high as 65%. How do they arrive at this figure? Is there USC and PRSI to be paid on top?
 
This is is tricky area to conceptualise. In my view, talk of a 65%/70% tax rate is misleading as it assumes that on the "excess", the individual is hit with chargeable excess tax and PAYE on the net of chargeable excess tax amount.

Forget the €2.15m point for a second and assume the threshold is €2m. And then assume that the fund is €3m. At retirement, a chargeable excess liabiity of €400k arises. But in order for a 70% tax liability to arise, they'd have to exhaust their ARF and end up drawing down this "extra" €600k.

Put another way, plenty of people view €400k as a small price to pay in order to get €600k into a gross-roll-up environment for perhaps 30 years.
 
I have a Related question.
I have been made redundant. I await tax calculations from employer on ex gratia lump sum.

In the context of the SCSB calculation I understand i can give up the right to a future tax free lump from pension scheme to increase the amount of ex gratia redundancy i can get tax free.

My question is if i do this (give up the right to tax free lump from DC pension scheme) can i get the lump sum in the future ( 5 years say) from DC pension scheme at standard rate ( assuming no change in rules)?

( FYI I am well below the 200k limit overall)
 
5 full years and on rough calculations scsb giving up right to tax free lump sun will come in at 50k ( and zero if don't give up right to tax free lump sum)
 
Okay. In this case, you can actually have your cake and eat it. Give up the right to a future lump sum from the pension scheme. Pocket your €50k. Then move your preserved benefit (i.e. what you've got in the pension scheme) to a PRSA (you can do this because you've less than 15 years service). Your pension assets then lose the characteristics of the old occupational scheme and you can get your tax free lump sum at retirement.
 
Gordon Gekko said:
Okay. In this case, you can actually have your cake and eat it. Give up the right to a future lump sum from the pension scheme. Pocket your €50k. Then move your preserved benefit (i.e. what you've got in the pension scheme) to a PRSA (you can do this because you've less than 15 years service). Your pension assets then lose the characteristics of the old occupational scheme and you can get your tax free lump sum at retirement.
Click to expand...
Thanks Gordon I don't need any "clearance" to do this?
 
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