Does it make sense to take the TFLS now or defer it as long as possible?

[CharlieMac]

But the idea of deferring taking the lump sum and letting it grow tax-free is a good one.

Hopefully the OP will post a Money Makeover thread and this will be discussed further.

I thought it always made sense to take every cent of the tax free lump sum (TFLS)? There are investments, outside a pension, that effectively offer tax free growth aren't there? Taxation only applies on these investment gains and likely at a lower rate (CGT @33%, ETFs at 38% and dropping) than the income tax the OP will likely pay (?40%) on their pension in retirement.

200k max TFLS invested outside a pension would only liable for tax on any growth and not on every cent of it as you gradually use it for your pension. If the OP is going to fund a pension with an ARF surely it makes even more sense to invest the TFLS outside the pension and aim to make ARF pension withdrawals sufficient to stay within the 20% income tax band?

 

[Brendan Burgess]

There are investments, outside a pension, that effectively offer tax free growth aren't there?

Not equity investments as far as I know?

I thought it was clear that one should defer retirement if one didn't need the TFLS, but maybe it's not. Here is my first shot at it and I am open to correction.

Let's take a 65 year old with a €600k pension fund

Option 1 - defer taking your pension TFLS until 70

Your pension fund will grow tax-free.

The eventual tax-rate will be 25% @0% + 75% @20% = 15%
Or 25%@0% + 75% @40% = 30%

Option 2 - take €150k TFLS now and ARF the balance

The return on the €150k will be subject to tax.
You must draw down a minimum 5% of the ARF - so €22k (€450k @5%)

Your tax position will be
OAP: €16,000 @0%

Drawdown: €4,000 @ 0%
€18k @20%

The OAP uses up most of your tax credits, so effectively you will be taxed at 20%

It seems right to defer.

 

[Brendan Burgess]

If you need the cash to live on or to clear the mortgage or help your kids, you take it now.

But if you can afford to defer your retirement, are there circumstances in which not deferring it makes sense?

If you will be on 40% at age 70 but only 20% now, it might make sense to drawdown as much as possible to use up your 20% tax band. ( I can't envisage such a situation, but maybe there is one.)

Does taking a pension now exempt you from PRSI on other income?

 

[ClubMan]

I thought it always made sense to take every cent of the tax free lump sum (TFLS)?

I thought it was clear that one should defer retirement if one didn't need the TFLS, but maybe it's not.

It may not be a binary "either/or" issue - i.e. take the pension TFLS or not. In some (many?) cases - e.g. PRSA - there's the option of fragmenting the pension into smaller policies/pots allowing staggered partial access to pension benefits (TFLS and ongoing income) over time.

 

[ClubMan]

Does taking a pension now exempt you from PRSI on other income?

Not a private or occupational pension.

Pay Related Social Insurance (PRSI) and Universal Social Charge (USC)

This section explains Pay Related Social Insurance (PRSI) and Universal Social Charge (USC)

www.revenue.ie

From 1 January 2024, you will be able to draw down your State Pension (Contributory) between age 66 and 70. You will continue to be liable for PRSI until you:

• are awarded the State Pension (Contributory)
• or
• reach age 70.

 

[Brendan Burgess]

I think it is, but does that matter?

If the principle is correct for one, it's probably correct for them all?

Though I suppose if you had an €800k fund and only needed €20k, you could retire an €80k sub fund.

 

[CharlieMac]

Thanks both. My comment was referring to the OP in the previous thread believing it better to leave the tax free lump sum (TFLS) in the pension fund at retirement because it can continue to grow tax free.

So his plan :

Sell the property, pay all taxes. Pocket €250k after taxes and selling costs.
Instead of taking his €200k tax free lump sum from his pension fund just leave it to grow tax free inside the pension until he draws it out. He assumes this will stay in line with the average growth he has seen in his pension over the last 30 years of about 8% plus.

As I re-read that thread I'm not sure if the plan was to eventually take the allowed amount out as a TFLS or leave it in the pension and take it out as taxable income gradually throughout retirement. The assumption being, I suppose, that more money in the fund means more compounded returns and thus more income to live on, albeit taxed income.

My understanding is the better choice is to take the full amount of the TFLS either all in one go or, as @ClubMan interestingly pointed out, in stages.

 

[ClubMan]

or leave it in the pension and take it out as taxable income gradually throughout retirement.

Surely that wouldn't make sense at all? Forego a tax free €200K (in one go or staggered as per my scenario) only to most presumably pay tax on the income eventually drawn down? And the individual in the related thread seems to be of significant means (e.g. €1M+ pension plus other non-pension assets) so we can probably assume that they'll be a high rate taxpayer in retirement? So the only way foregoing the TFLS would make sense would be if tax free growth in the meantime compensates for the tax that would eventually be paid on pension income drawn down?

 

[ArthurMcB]

I think taking it in stages via several PRSAs could be a good option

Setting up multiple PRSAs upon retirement is prob not difficult. The structure is highly flexible but I think can be more costly due to potentially higher administrative and fund management fees associated with managing several accounts instead of one consolidated fund.

 

[ClubMan]

I think taking it in stages via several PRSAs could be a good option

Setting up multiple PRSAs upon retirement is prob not difficult.

I agree, but in the case of the person mentioned in the related thread we don't know what sort of pension they have and if this sort of fragmentation is an option. E.g. if it's a public service pension or an occupational pension then fragmentation may not be an option. If it's a PRSA (or RAC or BOB?) then it is.

 

[S class]

Option 1 - defer taking your pension TFLS until 70

if this persons only retirement income after age 66 is the COAP, they are missing out on potential tax free ARF drawdowns of over 4K per year from age 66 to 70.

If they claimed BP65 from age 65 to 66, they potentially miss out on a tax free ARF drawdown of over 6k for this year.

 

[Brendan Burgess]

they are missing out on potential tax free ARF drawdowns of over 4K per year from age 66 to 70.

So by doing this they lose €20k @20% = €4k.

But they have their much bigger pot growing tax-free for those 5 years.

Or is the solution to retire a pot worth €30k. Take 25% tax-free Lump sum. And draw down €4k per year?

 

[S class]

Or is the solution to retire a pot worth €30k. Take 25% tax-free Lump sum. And draw down €4k per year?

That would be a good tax efficient plan.

 

[ArthurMcB]

E.g. if it's a public service pension or an occupational pension then fragmentation may not be an option

Occupational pensions can be transfered to a PRSA, upon retirement, I believe.

 

[S class]

Occupational pension would be a Defined Benefit pension.
This is a pension paid for life. Nothing can be transferred from this into a PRSA.

You could transfer out of the DB scheme, before retirement, into a buy out bond.
this would allow you to transfer into a PRSA.

 

[ArthurMcB]

Sorry i mean dc pension with employer. That can be crstalised at age 50 and split into several PRSAs, cant it?

Occupational pension would be a Defined Benefit pension.
This is pension paid for life. Nothing can be transferred from this to a PRSA.

 

[ClubMan]

Occupational pension would be a Defined Benefit pension.

I was using "occupational pension" in the general sense of it being tied to the employment as opposed to a pension that is personally owned - e.g. PRSA, RAC/PPP, BOB/PRB etc. I didn't mean DB specifically. I didn't think that the term "occupational pension" necessarily implied DB and excluded DC?

Occupational pensions

Occupational pensions are organised by employers to provide pensions to one or more employees on retirement. What are the rules about occupational pension schemes?

www.citizensinformation.ie

Types of occupational pensions​

Occupational pension schemes may be:

• Contributory or non-contributory
• Funded or unfunded
• Defined benefit, defined contribution or a hybrid of both

 

[ClubMan]

Sorry i mean dc pension with employer. That can be crstalised at age 50 and split into several PRSAs, cant it?

Yes.

Transfer of benefits - pensionsauthority

Pension arrangements generally allow you to transfer your pension benefits from one arrangement to another. The transfer rules depend on the arrangement you are transferring from and the arrangement you are transferring to.

pensionsauthority.ie

Benefits from an occupational pension scheme can be transferred to another occupational pension scheme, a PRSA, a buy-out bond (or personal retirement bond) with an insurance company, or an overseas pension arrangement.

Early retirement - pensionsauthority

Most pension arrangements in the private sector permit members to retire early in certain circumstances. However, the benefits you receive are likely to be lower than they would otherwise be at normal retirement age.

pensionsauthority.ie

Under personal retirement savings account arrangements, early retirement from an employment is possible from age 50.

 

[S class]

I didn't think that the term "occupational pension" necessarily implied DB and excluded DC?

Yes you are correct. Sorry.

DSP use the term "occupational pension" to describe a DB pension and state that this is subject to Prsi class M.
I assumed that this was the only meaning of the term.

 

[Fortune]

DSP use the term........I assumed that this was the only meaning of the term.

I think current events are demonstrating that DSP don't have the greatest grasp of pensions.