Implications on Pension if taking Redundancy

[SCA911]

A family member has recently looked into a Voluntary Parting Package at work and has a big decision to make. The decision is mostly around future job security in the field, currently limited promotional prospects and current age. They are at an age where changing career is not impossible, though will require an open mind and some work, possibly up-skilling. They are unsure of the impact of some decisions now required if package is to be formally offered. The basic details are:
24 years service
17 years to retirement age
The main area of confusion is surrounding the decision below:
O p t i o n A – You retain your right to a tax-free lump sum from the Pension Plan when you retire.
O p t i o n B – You waive your right to a tax-free lump sum from the Pension Plan when you retire.
What is the benefit, if any, of waiving the right to a tax free lump sum on retirement when applying for a redundancy package? The tax application of Option B results in less than €2K increase in the redundancy payment.
If you waive the right to a lump sum at retirement does that mean the pension pot remains at a higher value to allow for higher monthly pension payments, which I understand are taxable?
Also, if they take the package are they entitled to any Social Protection payments?
We are all very inexperienced in this area and most family members are PAYE workers, both private and public sector, and have paid into work pensions from a young age without having much knowledge around the implications of the above and leaving a plan early.
Any advice on the implications of the above two options would be much appreciated.

 

[Peanuts20]

The benefit of waiving your right to take a tax free lump sum on redundancy is that you potentially have a subsequent right to take a tax free lump sum from your pension. Given the persons age, and for the sake of €2k, I'd go with Option A.

Yes, the person may have an entitlement to Social Welfare, timing will depend on whether this is badged as compulsory or voluntary but a quick conversation with Citizens Advice should confirm that.

 

[SCA911]

@Peanuts20 Thanks for the response.

So is it that the waiver decision to be made is on the application of tax free redundancy payment now or tax free lump sum on retirement? Am I reading this correctly?

Am I also correct in saying that not all of the redundancy payment is subject to tax, that some of it is exempt.....thought I had read that somewhere but not sure?

Obviously they will double check all this with their HR Dept but wanted to get a grasp of it for them beforehand.

 

[Castlelyons]

With 17 years to retirement, option A.

 

[Peanuts20]

So is it that the waiver decision to be made is on the application of tax free redundancy payment now or tax free lump sum on retirement? Am I reading this correctly?

Am I also correct in saying that not all of the redundancy payment is subject to tax, that some of it is exempt.....thought I had read that somewhere but not sure?

The waiver decision on this occassion is made on the redundancy payment, not on retirement

In terms of tax free, any payment on leaving via redundancy can be divided into 4 tranches

• Pay in Lieu of Notice (Pilon), so payment made if your relative does not need to work out their notice and gets "paid off" is normally taxed as normal salary.
• Outstanding leave is taxed as part of normal salary
• Ex Gratia payment, in other words, what the company is paying above statutory
  • Under the Basic Exemption rules the first €10160 is tax free
  • €765 per complete year of service is also tax free.
  • So in this case, assuming it is 24 years completed service, he will get €10160 +(24 X €765) tax free =€28250
• Statutory redundancy (2 weeks per week of service capped at €600 per week) + 1 weeks additional pay capped at €600 is tax free
  • So in this case, with 24 years service and assuming the weekly salary is €600 per week or above that, then he will get (€600 X24 X2)+ €600 =€29400 tax free
• So all of that means, he should get €57650 (€29400 +€28250) tax free for starters
• There is also an increased exemption of €10k if you have not received a tax free sum in the last 10 years and waive the right to receive one from your pension in the future

And now it gets complicated !
There is an portion that can also be paid tax free called SCSB or Standard Capital Superannuation Benefit (SCSB). The formula for that is

1. Take the average annual earnings over the previous 3 years
2. Multiply this figure by the number of years' service
3. Divide by 15
4. Subtract any lump sum pension payment received (or €0 if nothing is received)
5. Then add to the amount above to get to the total paid tax free

I've always advised people to speak to Citizens advice and a good competent financial advisor on these things but the employer should be clearly setting out all the numbers as well.