Is the lifetime cap of €200k tax free apply to both pension and redundancy payments?

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CormacH

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Hi. I've been searching through AAM and could not find this answer unfortunately so hopefully someone knows?

If, for example, you have received €100k ex gratia payments during your working lifetime, would this affect the possibility of drawing down €150k as part of a tax free lump sum when accessing your pension? I would have paid tax on some of these ex gratia payments.

Note: the ex gratia payments did not have increased exemptions applied so do not affect the possibility of accessing the tax free lump sum from the pension funds.
 
Regarding ex gratia payments:

There is a €200,000 lifetime cap on the amount of relief any individual taxpayer can claim in respect of a payment taxable under Section 123 (i.e. ex gratia termination payments). This relief is provided for in Section 201 and Schedule 3 TCA.

Section 201(8) TCA provides that the maximum amount of relief available will be restricted to the lower of the relief otherwise available or €200,000.

Regarding pension lump sums:

The aggregate amount of pension lump sums that can be taken tax free is capped at €200,000 (per Section 790AA TCA). The €200,000 limit is a lifetime cap and all pension lump sums taken since 7 December 2005 are taken into account in calculating how much of the €200,000 cap has been utilised when future pension benefits crystallise.

The upshot of all the above is that the reliefs above are separate and that depending on the particular circumstances and decisions taken, an individual could receive €200,000 tax free via ex gratia payments in a lifetime and €200,000 tax free via pension lump sums in a lifetime.

Achieving full utilisation of the €200,000 tax free relief via ex gratia payments is more likely for those with very high earnings and/or long service.

Coming back to the actual (or hypothetical) example, if no pension lump sum waiver has been signed in connection with any termination deal, then the relief under Section 790AA should be still available (i.e. if there is an entitlement to a lump sum of €150k from an occupational pension, notwithstanding that €100k was received tax free on employment termination(s), the €150k is under the €200k limit in Section 790AA and so the €150k should be tax free also).
 
One additional question re this thread please:
I took a TFLS 6 years ago from my DC pension before transferring the balance to an ARF, which I haven’t yet started to draw down. The ARF has grown in value in the intervening years. I am now 60. Can I take a further TFLS now before starting to drawdown the ARF?
 
I thought that you could only take a tax free lump sum from a pension when using it to buy an annuity or investing it in an ARF (and/or when converting a PRSA to a vested PRSA?) but not thereafter?
 
Can I just ask one quick question - it states that the 200K cap is cumulative from December 2005 onwards. What impact does this have on a lumpsum payment prior to this date, say from 2002? Is that exempt?
 
I am due to retire (aged 59) in October 2025 via redundancy.
Redundancy package circa €350k gross.
40 years service, average salary circa €300k PA for last three years.
Circa €1.2m in pension , mix of company and AVC roughly 900k & 300k.

Trying to figure out that by using SCSB method what tax will I pay if I dont waive my right to tax free lump sum from pension or can I get both.
Does moving pension to PRSA make sense . Thanks
 
In relation to AAAContributor's informative post on the Ex Gratia Payments and Pension Lump Sums capped at €200,000 each, I may have read it wrong but I took from the detailed post that "an individual could receive €200,000 tax free via ex gratia payments in a lifetime and €200,000 tax free via pension lump sums in a lifetime." It would great and I hope this is so but on my reading of the Payments on Termination of an Office or Employment or Removal from an Office or Employment Part 05-05-19, when calculating the Standard Capital Superannuation Benefit any tax-free lump sum payments you have received, or are entitled to receive, from your work pension are subtracted from this benefit thereby limiting your lifetime TFLS to €200,000 on all payments. If you are fortunate enough to have a large pension pot to extract the max TFLS and a generous redundancy package from a 30 plus year employment to also extract a large TFLS, the limit to extract from both is €200,000 in a lifetime it seems. I could be wrong but that's the way the example is explained in the Tax and Duty Manual. Thanks to all contributors.
 
JackKilkenny said:
the limit to extract from both is €200,000 in a lifetime it seem
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The limit to extract from *each* is €200k. Although one is used in the calculation of the other, it doesn't preclude getting €200k from each.

With high enough salary and ling enough service it's possible for the tax free element of the redundancy payment to be €200k even after the pension lump sum is taken into account.
 
Stevod66 said:
Trying to figure out that by using SCSB method what tax will I pay if I dont waive my right to tax free lump sum from pension or can I get both.
Does moving pension to PRSA make sense . Thanks
Click to expand...
You could waive the right to your pension tax free lump sump and then move your pension to a PRSA to purge this waive. This loophole is still open with no sign of the government closing it soon. This would probably save you > €60K in tax.
 
JackKilkenny said:
It would great and I hope this is so
Click to expand...

It is!

JackKilkenny said:
on my reading of the Payments on Termination of an Office or Employment or Removal from an Office or Employment Part 05-05-19, when calculating the Standard Capital Superannuation Benefit any tax-free lump sum payments you have received, or are entitled to receive, from your work pension are subtracted from this benefit
Click to expand...

That's correct. But, if an individual has high enough earnings and lengthy service, and doesn't sign the waiver, the SCSB calculation could allow them to take up to €200k tax free from an ex gratia payment. They could also take up to €200k tax free from a pension.

JackKilkenny said:
I could be wrong but that's the way the example is explained in the Tax and Duty Manual.
Click to expand...

Are you referring to the 'Lorna' example on Page 16?

In this example, the question asked is: "What exemptions are available to Lorna if she is paid an ex-gratia lump sum by her employer?"

The answer at the bottom of the example is: "Maximum Exemption Available - €200,000" (according to Sect 201(8) TCA 1997).

This implies that Lorna could receive €200,000 tax free if her employer paid her an ex gratia payment.

But, from the first paragraph in the example, she has also "received a pension lump sum of 1.5 times her salary on retirement." As her salary was €180k, she received a lump sum of €270k, of which €200k of this would be tax free (according to Sect 790AA TCA 1997).

There is a clearer example outlining how an individual can avail of both reliefs in part 9 here.
 
Thanks AAAContributor and Fortune, that helps a lot. The example I was looking at was actually Alan on page 20 where he had a lump sum taken from his pension that was used in the SCSB calculation. So to recap, the TFLS from a pension now or into the future is used in the SCSB calculation but that doesn't nullify it i.e. the €200,000 lifetime limit re a pension lump sum stands on it's own as does the €200,000 limit re ex-gratia payments (which you have stated!) Having the pension sum part of the SCSB calculation threw me a bit, thanks again.
 
JackKilkenny said:
So to recap, the TFLS from a pension now or into the future is used in the SCSB calculation but that doesn't nullify it
Click to expand...

That's right.

In the Lorna example, Lorna's tax free pension lump sum from her occupational pension is used in her SCSB calculation to calculate how much tax free she could receive from a termination payment but the resulting SCSB calculation sees her being (also) able to avail of €200,000 tax free from a termination payment (as she had the remuneration and service figures to do so).

The fact that a figure of €200k for the pension tax free lump sum is used in the SCSB calculation is recognition that she receives and is entitled to €200k tax free from her pension.

In this case, for Lorna it's not one-or-the-other.
 
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