Does taking redunancy reduce Tax Free limit on Early Retirement

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Moribund

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Scenario:

  • I am part of a DB pension scheme and as part of that may be allowed take early retirement. The DB plan allows for a tax free lump sum of €105K (1.5 x Salary).

  • I also have an AVC amount of €250k

  • Age 53
There is a possibility that I may be offered redundancy of approx €120k. My SCSB limit is €140k so all of this would be tax free.

My question is if I received the €120k redundancy would this reduce the amount of tax free lump sum that I could take on early retirement as I know there is a €200k limit on that.
 
Thanks for the response Joe_90. I think I may have mis phrased my question.

My Query is "are you entitled to get early retirement tax free lump sum AND redundancy sum tax where each individually is below the €200k threshold but combined if they are greater than €200k."

e.g. in the following scenario
€105k Allowed Early Retirement Tax Free Lump sum
€120k Redundancy Tax free Lump Sum

Would this mean that the total Tax Free amount allowed was €225k or would revenue cap the amount at €200k (i.e. combine both)
 
If you are opting for the SCSB figure this takes into account the fact that you are entitled to a pension lump sum in the future. So if you want to maximize your redundancy tax-free figure now then you may have to forgo the right to a pension lump sum later.
The SCSB calculation takes into account the “present value” of the future pension lump sum. So it’s a case of :
- a higher tax free lump sum now (based on the SCSB redundancy figure) and no pension tax free later, or
- a lower tax free lump sum now (based on the Standard or enhanced redundancy payment) and retaining the right to the full pension tax free lump sum later

Ideally your Employer should outline the options.
 
Moribund said:
Thanks for the response Joe_90. I think I may have mis phrased my question.

My Query is "are you entitled to get early retirement tax free lump sum AND redundancy sum tax where each individually is below the €200k threshold but combined if they are greater than €200k."

e.g. in the following scenario
€105k Allowed Early Retirement Tax Free Lump sum
€120k Redundancy Tax free Lump Sum

Would this mean that the total Tax Free amount allowed was €225k or would revenue cap the amount at €200k (i.e. combine both)
Click to expand...

They are separate issues and not combined for the 200k calculation. But they are interlinked and this is what often confuses people.
But as said, the SCSB is reduced by the present value of the pension lump sum that is receivable in the future. If you are taking immediate retirement them the actual lump sum amount is used, which is higher than a PV lump payable at retirement ( usually 65). You need to ensure there is a slight delay in your retirement from the pension fund ( i.e. the date you start drawing the pension after you leave work ) to ensure the lump sum is "in the future". Worth ensuring this happens. 2 or 3 months seems to be ok but it is a bit of a grey area for the pension companies I think.
 
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