Questions on Buy out bond: lump sum withdrawal, AMRF/ARF, imputed distribution

Steven Barrett

Registered User
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4,221
Two questions
  • Can you take numerous tax free lump sums up to the max? i.e. could I take out 80k in 2 years to pay off some of the mortgage? And then leave the rest in the BOB until age 61? At which point my understanding is imputed distribution kicks in.
  • Looks like the TFLS from 200k to 500k is taxed at only 20%. Do "most people" take that withdrawal, or is it complex to work out when this would be advantageous? Presume it is to do with minimising tax while ensuring you have income to support lifestyle.
You get one go at the lump sum from your pension. If you have multiple policies, you can draw down your lump sum at multiple times. If you have one policy, you get one go at the lump sum.

Everyone takes the maximum lump sum and pays 20% tax if over €200,000. Otherwise, the remainder will most likely be liable to income tax at 20% plus USC and PRSI if withdrawn before age 65.


Steven
www.bluewaterfp.ie
 

David_Dublin

Registered User
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690
Thanks @Steven Barrett - that makes a massive difference to me so. I would definitely not want to use the max "tax efficient" TFLS withdrawal of 500k at age 50 to get my hands on 150k. It would leave my pension value halved, and I would have no use of the remaining 350k - I'd be re-investing where presumably any gains would be subject to CGT.

The alternative would be to "only" take out the 150k when/if I need it, and then to just accept being unable to take out the other 350k at favourable tax rate. Or the closer I get to retirement age, the more likely it is that I will take out the full 500k.

What do most people do with the 500k? As in, as you say, people generally take it out to benefit from the tax efficiency of it - if they have no immediate need for it, what do they do with it?
 

Sarenco

Registered User
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7,014
If you retire your BOB at 50, you could take the 25% lump sum and invest the balance in an ARF.

Deemed distributions on an ARF don't kick in until the year you reach 61.

Mind you, I would query whether it is wise to spend €400k on house renovations given your circumstances.
 

Marc

Registered User
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1,574
I have teased out some of the arguments for taking a lump sum from a pension at 50 in this post


I think it makes perfect sense to use lump sums at 50 to repay debt rather than switch via a lifestyle strategy to low expected return bonds and this is particularly true if the surplus income is then directed towards additional pension provision via AVCs
 

David_Dublin

Registered User
Messages
690
If you retire your BOB at 50, you could take the 25% lump sum and invest the balance in an ARF.

Deemed distributions on an ARF don't kick in until the year you reach 61.

Mind you, I would query whether it is wise to spend €400k on house renovations given your circumstances.
What circumstances @Sarenco? My current mortgage is about 10% LTV and I have excess savings over spend month on month, I have a good job and decent salary. I have no other debt and I have 250k in cash savings. And I have a pretty strong pension for late forties.
 

Sarenco

Registered User
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7,014
What circumstances @Sarenco?
Well, you seem to be concerned about your ability to comfortably service an additional mortgage of €150k.

€400k is a pretty big budget for a house renovation - do you really need to spend that much?
 

50andOut

Registered User
Messages
152
Thanks @Steven Barrett - that makes a massive difference to me so. I would definitely not want to use the max "tax efficient" TFLS withdrawal of 500k at age 50 to get my hands on 150k. It would leave my pension value halved, and I would have no use of the remaining 350k - I'd be re-investing where presumably any gains would be subject to CGT.
In order to get 500K you need a fund value of €2m (25%) so you fund value would not be halved. it would be down to 3/4 and a healthy €1.5m

something is not adding up here.
 

David_Dublin

Registered User
Messages
690
Well, you seem to be concerned about your ability to comfortably service an additional mortgage of €150k.

€400k is a pretty big budget for a house renovation - do you really need to spend that much?

Extra outgoing of 900 a month is what I want to give due attention to. I'm not overly concerned, I guess we have always lived conservatively from a finances perspective, and we've always had lots of savings. So this is a bit of a big step - current mortgage is < 900. I just want to be all over any possible rainy day options. I still feel this will be do-able with existing salary, but am doing analysis of spending to validate.

We've been around the houses (excuse the pun) on the house renovations. It may not be as much as 400k but after all is done it probably won't be too far off. We have to spend a fair bit to address issues with the house - heating, insulation, wiring, damp. We could probably spend 200k to address issues plus small extension. I'd prefer to spend more and get some wow stuff. But I guess "no" is the actual answer - we don't need to spend so much.
 

David_Dublin

Registered User
Messages
690
In order to get 500K you need a fund value of €2m (25%) so you fund value would not be halved. it would be down to 3/4 and a healthy €1.5m

something is not adding up here.
Sorry, that's my maths.....I neglected to limit the TFLS to 25% of the fund value. So it would be 250k max based on current fund value (1m)
 

Sarenco

Registered User
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7,014
I just want to be all over any possible rainy day options.
Ah, understood.

You could retire the BOB and drawdown the 25% lumpsum to partly fund the renovation costs and/or to clear your remaining mortgage.

I would agree with @Marc that it makes more sense to avoid or clear debt rather than transferring any of your pension assets to bonds/cash.

The only drawbacks with retiring your BOB early is that you will lose a period of tax-free growth and imputed distributions from the ARF will kick in at 61 when you may still be working (i.e. the distributions will be taxed at your marginal rate).
 

David_Dublin

Registered User
Messages
690
Ah, understood.

You could retire the BOB and drawdown the 25% lumpsum to partly fund the renovation costs and/or to clear your remaining mortgage.

I would agree with @Marc that it makes more sense to avoid or clear debt rather than transferring any of your pension assets to bonds/cash.

The only drawbacks with retiring your BOB early is that you will lose a period of tax-free growth and imputed distributions from the ARF will kick in at 61 when you may still be working (i.e. the distributions will be taxed at your marginal rate).
Thanks for the input. I'd be loathe to retire it early, would be very much the last resort.
 
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