Redundancy taxation: Increased exemption and SCSB

U

Usjes

Registered User
Messages
70
Hi,

I am trying to figure out the tax-free allowances that may be applicable to a redundancy lump sum if I am made redundant. I have read the revenue leaflet
(http://www.revenue.ie/en/tax/it/leaf....html#section4) but I am still unsure. Specifically it seems to me that the Increased exemption and SCSB are completely worthless except in the most extreme or contrived cases so I am wondering if I have misunderstood. Specifically the SCSB is:

CurrentSalary*YearsOfService/15 - CurrentValueOfFuturePensionLumpSum

But this prompts the questions:
1. What is the 'current value' of a pension lump sum which may be receiveable in the future. I guess it is the value that when compounded over the years from now to retirement equals the amount receivable upon retirement. Is this correct ? What is the compounding rate that is used, where is this rate specified ?
2. My pension allows me, upon retirement to receive 1.5xFinalSalary lump sum tax free. Is this 1.5x normal or is it unusually generous? I ask because it seems to render the SCSB worthless.
For example, say I have 22.5 years service then
SCSB = CurrentSalary*22.5/15 - CurrentValueOf{FinalSalary*1.5}

But if the CurrentValue of the future payment is calculated by a compounding factor it seems logical that the projected FinalSalary would be calculated by a roughly reciprocal scaling factor. So we have:

SCSB = CurrentSalary*22.5/15 - CurrentValueOf{FinalSalary*1.5}
= CurrentSalary*22.5/15 - K*(FinalSalary*1.5), where K<1
= CurrentSalary*22.5/15 - K*(CurrentSalary*(1/K)*1.5),
= 0

So it seems that even for 22.5 years service the SCSB is worthless and similarly it is hard to see how the current value of 1.5xFinalSalary will ever be < 10k, so the 'Increased allowance' is also worthless.

So, to recap on my questions
1. At what rate is the 'current value' of a future lump sum calculated ?
2. Is my pension just unusually generous (allowing tax-free 1.5x FinalSalary lump sum upon retirement) ? Or is this normal ?
3. If this is normal, does it mean that the Increased Allowance is generally worthless and that the SCSB only has value for service longer than 22.5 years ? Or have I misunderstood something?
4. And finally, my calculations assume that my final salary will be some reasonable increase relative to my current salary but in fact I have no way of knowing what it might be, it is unlikely that I will find a job that pays as well as my current one if I am let go and => my FinalSalary from a different job could be significalty lower than projecting based on the salary trend in my current job. How is this usually calculated for tax purposes ?

Thanks,

Usjes
 

Hasn't this been answered already for you on Boards?

You don't seem to understand how your occupational pension scheme works - this 1.5 x salary figure you're referring to will be determined at the time you take your redundancy package.

You'll be leaving the scheme, they're no longer going to be giving you 1.5 times anything - they'll work out actuarially what the amount you're entitled to at retirement age is (e.g. 22.5/40 x 1.5 x something), and what pension you'll get at that time (22.5/40 x something), which logically means they'll also work out what the present value of those future amounts are. Anyway to try to answer your questions specifically, to stop you from further proliferating the web with duplicate threads...

1. At what rate is the 'current value' of a future lump sum calculated ? Actuarially, by Mercer or whoever the pension boffins are - nothing to do with Revenue.

2. Is my pension just unusually generous (allowing tax-free 1.5x FinalSalary lump sum upon retirement) ? Or is this normal ? Seriously? You don't understand the value (and controversy) around defined benefit schemes? There are virtually no DB schemes still open to new entrants in the private sector, and in the public sector the terms are being made less generous for new entrants.

3. If this is normal, does it mean that the Increased Allowance is generally worthless and that the SCSB only has value for service longer than 22.5 years ? Or have I misunderstood something?Yes, your maths is wrong because you've misunderstood what exactly you'll be receiving in the future, it'll be the present value (i.e. a fraction) of a max of some fraction of your current salary - so a fraction of a fraction of your current salary is a smaller fraction of current salary. So on the left hand side of the equation you have 22.5/15 or 1.5, and on the other side you have a fraction of a fraction of 1

4. And finally, my calculations assume that my final salary will be some reasonable increase relative to my current salary but in fact I have no way of knowing what it might be, it is unlikely that I will find a job that pays as well as my current one if I am let go and => my FinalSalary from a different job could be significalty lower than projecting based on the salary trend in my current job. How is this usually calculated for tax purposes ?Again you don't seem to understand at all how occupational pension schemes work. The "final salary" is the final salary you earn whenever you finish up as an employee - that is upon redundancy in your case. Why would that scheme be going to give you a pension that is related to your final salary after 10 - 15 - 20 years working elsewhere?! For tax purposes, as I explained at 1. above, it's calculated actuarially based on the salary you're on when you exit the company.

Somebody who has a better understanding of the actual workings of DB schemes might chip in, but from the perspective of "how can this formula ever be a positive number" I think I've addressed your question...
 
If you use 4% discount per year from the date of exit to normal retirement age for the scheme ( probably 65) you won't be too far off.

Once you leave the scheme, your deferred pension (i.e. the annual pension you have earned to that date) will be revalued each year until payment, in line with an inflation rate specified by the Dept of SW - I think this is your confusion about future salary increases after leaving. This will not impact your lump sum though.

This is all a very confusing area for many people in DB schemes so no harm asking questions again.
 

Hi Mandlebrot,

Thanks for your reply but you seem to have made some incorrect assumptions, the major one being that I have a DB scheme, my scheme is just a bog-standard (DC I guess) scheme, where I contribute, my empolyer contributes on my behalf and this money is used to buy units in standard pension investments for my retirement. As this money is tax-free going in to the pot the revenue naturally impose conditions on its taxation when I retire and my understanding is that one of the conditions is that I have the option of taking 1.5x my final salary tax-free upon retirement and invest the remainder in an annuity or whatever. Anyway, this is a hypothetical tax-free sum, if the investments go horribly wrong my final pot might not even equal 1.5x finalSalary when I am retiring.

So, my original questions remain, how is the current value of this hypothetical future tax-free lumpsum calculated ? Does this change seeing as my scheme is not DB ?
[Mandlebrot]: Actuarially, by Mercer or whoever the pension boffins are - nothing to do with Revenue.
I'm afraid I dont agree. I will submit a tax return and revenue will do their own calculations and may challenge my figures (as they have done in the past) therefore they MUST have a way of calculating this, and I have no interest in arguing with them in court or elsewhere which is why I would like revenue to specify precisely how this calculation is done rather than the silly imprecise phrases like:
The present day value at the date of leaving employment of any tax-free lump sum which may be receivable from the pension scheme in the future

[Mandlebrot]: Why would that scheme be going to give you a pension that is related to your final salary after 10 - 15 - 20 years working elsewhere?!
Because it is my money, and those are the rules of the pension. The pension is legally entirely separate from my employer to prevent them raiding it should they run into financial difficulty or any other such shenanigans. My employer's only connection to the pension is that they have agreed to make contributions on my behalf.

So, does this extra info, change anything ? Or is the consensus that, for tax purposes, the current value of a lump-sum which may be receivable in future is:
1.5*currentSalary*(45-yearsToRetirement)/45

This assumes that the scaling factor for the rate at which my salary would increase roughly cancels the scaling factor use to calculate the 'current value' of this potential future payment ?
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Hi Joe,

As with my reply to Mandlebrot, my scheme is NOT a DB scheme, it is just a standard DC scheme which may, depending on the markets, have grown to enable me to take 1.5*futureSalary (whatever that is defined to be ?) tax free when I am 65, so I would like to know how to calculate the SCSB this evaluates to for the purposes of taxing any redundancy lump sum I receive.

Thanks,

Usjes.
 
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