https://m.independent.ie/business/m...ways-the-smartest-thing-to-do/a512610867.html
Interesting article in today’s Sunday independent
Interesting article in today’s Sunday independent
...it’s important to challenge the automatic assumption that opting for a tax-free lump sum at the start of retirement is the best strategy.
Leaving a lump sum invested can provide better inflation protection through continued equity exposure, while lump sums in deposit accounts lose purchasing power over time.
Option A : Taking a lump sum
The median outcome over a 25-year retirement period showed a lifetime income of about €1.2m from the ARF alone. And the ARF maintained a median value of €1.3m at the end of this period, providing a substantial amount to leave as an inheritance.
Option B: leaving the lump sum invested
Our analysis suggests a lifetime income of €1.64m from the ARF, with the median fund valued at €1.8m upon death.
Whatever about the press article, the original blog post linked above didn't seem to do that - although I found it a complex read and ended up only skimming most of it because I couldn't understand the details and the gist...He should not be comparing the returns on an equity portfolio with the returns on a deposit account.
As late as 75 for personal pensions and (non AVC) PRSAs and 70 for most or all occupational schemes as far as I know.Can't you leave the pension fund sitting there growing tax-free and then make the decision on the 25% at age 70?
Whatever about the press article, the original blog post linked above didn't seem to do that
We'll assume that you use €50k of the cash to buy yourself or a loved-one something nice such as a holiday/gift/car etc.
You bank the rest in a deposit account for use over the next 10-15 years. Interest rates are on the floor but you manage to secure 1% per year net from a State Savings Account.
As you are entitled to the State Pension (€243 Gross) and your partner is classed as a ‘Qualified Dependant’ (€162 Gross), you have a joint income of €21,080 per year from State Pension.
Once you take your Tax Free Lump Sum and start taking the 5% from your ARF (€37,000), you now have a total income of €58,080. As a result of Nil PRSI, Tax Band, Joint Assessment and Tax Credits your total tax liability on that combined income is in the region of €9,800 per year. Your effective tax rate, therefore, on all incomes is approximately 17%.
If the TFLS was taken out and put in some investment subject to CGT then do you have to pay CGT on any gains first and then income tax on whatever money you withdraw to spend?Scenario B: Take out the €250k which is €210k net. Let it grow subject to Income Tax and CGT and see which has the better return.
I did some very rough calculations comparing taking a €200k lump sum and investing it in a life assurance company fund with 4% p.a. withdrawals from each (same funds in an ARF as are in a Life bond product). Assuming the same growth in each, the ARF withdrawals would need to have an effective tax rate of <10% to equal the life assurance option's outcome after 5 years I was too lazy to deal with 8 year deemed exit tax.My tentative conclusion is that it is better to take out €250k now and pay €10k tax on it
I don't understand. What exactly is being compared here? Taking the TFLS and investing it outside any pension wrapper versus putting the same amount in an ARF? If the latter involves tax free growth and both involve the same tax on withdrawals how could the non pension option be better from a purely financial point of view? Or am I misunderstanding something here?I did some very rough calculations comparing taking a €200k lump sum and investing it in a life assurance company fund with 4% p.a. withdrawals from each (same funds in an ARF as are in a Life bond product).
I don't think it's a tentative conclusion at all, it should be a nailed on certainty.My tentative conclusion is that it is better to take out €250k now and pay €10k tax on it
But they won't have the same tax on withdrawals. You pay your marginal rate on the full amount you withdraw from the ARF, including the 250k you start with. If you take it tax free and invest it, tax is only charged on gains made in the investment.I don't understand. What exactly is being compared here? Taking the TFLS and investing it outside any pension wrapper versus putting the same amount in an ARF? If the latter involves tax free growth and both involve the same tax on withdrawals how could the non pension option be better from a purely financial point of view? Or am I misunderstanding something here?
YesTaking the TFLS and investing it outside any pension wrapper versus putting the same amount in an ARF?
Both have tax free growth, however the entire amount withdrawn from an ARF is taxed, while only the growth element of the life assurance policy withdrawn is taxed.If the latter involves tax free growth and both involve the same tax on withdrawals how could the non pension option be better from a purely financial point of view?
Both have tax free growth, however the entire amount withdrawn from an ARF is taxed, while only the growth element of the life assurance policy withdrawn is taxed.
Thanks - I was overlooking this key (and probably obvious) point.But they won't have the same tax on withdrawals. You pay your marginal rate on the full amount you withdraw from the ARF, including the 250k you start with. If you take it tax free and invest it, tax is only charged on gains made in the investment.
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?