OK thank you, but can you decide how much/little to take out as a 'top-up' to the state pension in order to keep overall tax rate at the lower rate? Also a little confused by the tax-free lump sum, because what do you do with it if you already have other cash in hand. Wouldn't it be better to keep it invested/growing in the pot?A few things -
1. Obviously we can only estimate tax rates, bands, etc in the future so there is an element of guess work here.
2. Similarly, we don’t know what returns (if any) our pension is going to earn so we can only estimate the final balance.
3. Bear in mind that 25% of the pension, over and above the tax-free lump sum, can be taken as a lump sum which is taxed at 20%.
4. There’s no PRSI or USC on the State contributory pension and no PRSI on your pension drawdowns once in receipt of the State pension.
So, putting it all together, it makes financial sense to continue contributing the maximum age-appropriate percentage of your salary (subject to the €115k cap) that you can, assuming you are getting relief on contributions at the higher rate.
The one caveat to this is if you are very close to reaching the single fund threshold of €2m (and this ceiling may well be raised).
I think it is a single withdrawal at a point in time per pension. So if you happen to have 2 pensions you could access part of your TFLS on 2 different dates. But you can't draw down the TFLS on individual pensions in dribs and drabs.One question i have on this, if you decide not to take the 25% tax free lump at the start, i`m guessing you can still use that 25% tax free lump sum in dribs and drabs, to pay out monthly so keeping you below any tax bands (while still invested in a fund). If that is correct, how would that be done? Would that be the pension provider managing your pension after retirement. Would be nice to understand that, as i`m sure a few people don`t understand that could be done? or can it be done?
You may find this Askaboutmoney post to be of interest.
If you choose an Approved Retirement Fund (ARF) in retirement, you can set your own level of income from it, to a minimum of 4% per year if you're over 60. So depending on your circumstances in retirement you might be able to calculate a withdrawal which keeps you just below the higher 40% tax rate.
For a lot of people, they receive 40% tax relief on contributions and pay 20% tax on 75% of the proceeds (after taking out 25% of the fund tax-free) so an effective tax rate of less than 15% on the proceeds when you account for tax credits. That's efficient: 40% tax relief on the way in; less than 15% tax on the way out.
Brilliant thanks both. So based on today's numbers, once we've each taken out the 25% lump sum, we should ideally aim to take a yearly payout each of €27.5k (+14.5k state pension) to stay at the €42k lower rate threshold? That sounds decent enough.Well, the current threshold for the lower rate is €42k and the current rate of a full State contributory pension is €14.5k.
But the important thing to bear in mind is the blended tax rate on drawdown, taking the TFLS into account.
This will always be lower than the current higher rate of income tax.
Trust me, it makes financial sense to build up the largest pension pot that you can - up to the €2m SFT.
No, you just have one chance at the 25% from each pension.One question i have on this, if you decide not to take the 25% tax free lump at the start, i`m guessing you can still use that 25% tax free lump sum in dribs and drabs, to pay out monthly so keeping you below any tax bands (while still invested in a fund). If that is correct, how would that be done? Would that be the pension provider managing your pension after retirement. Would be nice to understand that, as i`m sure a few people don`t understand that could be done? or can it be done?
So based on today's numbers, once we've each taken out the 25% lump sum, we should ideally aim to take a yearly payout each of €27.5k (+14.5k state pension) to stay at the €42k lower rate threshold?
I think it is a single withdrawal at a point in time per pension. So if you happen to have 2 pensions you could access part of your TFLS on 2 different dates. But you can't draw down the TFLS on individual pensions in dribs and drabs.
No, you just have one chance at the 25% from each pension.
Thanks for the clarification, and shame its that way. Would have been nice to drip feed your TFLS into your payments, and try miss tax bands. Maybe one reason to have multiply pensions and not combining then, so you can take TFLS bit by bit that way.
So the ARF would last 25 years at that rate, and since unlikely both spouses would live til 90, it’s possibly good estate planning of leftovers too for any dependents?If you've no other taxable income by then, yes. To do this would require a fund each of over €900,000. (25% lump sum would be €225,000, on which you'd pay €5,000 tax. Remaining ARF €675,000. Income of 4% of the ARF = €27,000.)
That's right, each pension can be retired separately, and the TFLS is a lifetime/cumulative amount that can span across any number of pensions on any timeline.Correct me if I'm wrong, but if you have multiple DC pensions collected over the years you don't have to convert them all to ARFs at the same time. So to be even more tax efficient, convert what you need to ARFs to stay under the higher rate band at the imputed distribution and leave the rest in your pensions (although after 75 I'm not at all sure what the current rules are).
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