tax rate you pay on arf

liam bourke

Registered User
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14
what is the tax rate you pay on arfs


for example you have a pension fund of 400k
at retirement at 65 years of age, you take 25 % tax free which is 100k
the remaining 300k you use as an arf

what is the tax rate you pay on withdrawing from the 300k on a yearly basis.
 

LDFerguson

Registered User
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4,269
Let's say you withdraw 4% of the ARF or €12,000. You will be taxed as if you earned that €12,000. If that's the only income you have that year, it would be exempt from Income Tax. If you have other taxable sources of income, then the €12,000 would be treated as just another source of income.
 

Truffade

Registered User
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64
hi LD

a couple of questions to borrow your extensive knowledge please:
Let's imagine the ARF is 1 million and you are withdrawing at 4% a year - 40k.
You also are in receipt of the standard state OAP - 12.9k
So total income of 52.9k

  1. Do you pay tax on the full 52.9k?Or just on the 40k
  2. Do you pay all forms of tax, i.e. PAYE, PRSI and USC
  3. How is this tax collected? Do you have to submit a return or is it somehow deducted at source?
I am asking as I feel somewhat allergic to building up a large pension pot if I am going to then pay comparitively large income taxes in my retirement!

thanks

Truffade
 

jpd

Registered User
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2,642
1. Yes, your taxable income is the full 52.9K
2. No, PAYE and USC yes, PRSI no - over 65s are exempt from PRSI
3. It is deducted at source by the ARF manager - nothing is deducted from the State pension.

If your only income is 52.9K then your tax will be around 11,000
 

liam bourke

Registered User
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14
Let's say you withdraw 4% of the ARF or €12,000. You will be taxed as if you earned that €12,000. If that's the only income you have that year, it would be exempt from Income Tax. If you have other taxable sources of income, then the €12,000 would be treated as just another source of income.

So at 65 say you retire you take out the 25% tax free (100k).Do you start taking out the arf then also at 65?
But what is the tax rate on the 12,000euro...it is very unclear on the web about this...
is there a threshold before you arre charged tax on the arf?
 

LDFerguson

Registered User
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4,269
@Truffade

I see that @jpd has answered your queries above.

If there is a Truffaude Spouse, then as a couple you would need to be bringing in pensions of over €70,000 per year before you'd even hit the higher 40% tax rate in retirement. Anything below that would be taxed at 20%, less your Tax Credits. You'll also be able to withdraw 25% of your fund as a lump sum, with the first €200,000 being tax free.

If I assume that you are paying tax at 40% now, then you're receiving 40% tax relief on your contributions.

To use your example of the €1 million fund, the first €250,000 would be paid as a lump sum. €200,000 would be tax-free and the remaining €50,000 would be taxed at 20%. So you'd pay tax of €10,000 on your lump sum of €250,000. That's an effective tax rate of 4% on that quarter of your pension fund.

If the remaining 75% of your fund is going to be taxed at 20%, less your Tax Credits, then overall you'd be paying an effective tax rate of less than 15% on your pension fund (plus levies), having received 40% tax relief on contributions.

Regards,

Liam
www.ferga.com
 

jpd

Registered User
Messages
2,642
Income doesn't work like that - if you are retired then in very simple terms
  1. You add up all your income from whatever source - state pension, ARF payments/withdrawals, dividends from shares, etc
  2. The first € 35,000 is taxed at 20% - couples get € 44,000 at 20% but on their joint income
  3. The balance is taxed at 40%
  4. The total of these two is the gross tax due
  5. You get a number of tax credits eg personal credit, married couple credit, age credit depending on your personal circumstances
  6. These credits reduce the gross tax to the tax due
It is slightly more complicated but not a lot

The ARF manager will get a tax certificate from the Revenue each year telling them how much tax and PRSI to deduct given your personal circumstances. This will take into account the State pension which you receive without tax being deducted
 

LDFerguson

Registered User
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4,269
So at 65 say you retire you take out the 25% tax free (100k).Do you start taking out the arf then also at 65?

If your retirement choice is to start an ARF, then you do that at the same time as you withdraw the lump sum. If you're 65 when you set up the ARF then you should start taking an income from the ARF straight away, to avoid possible double taxation.

But what is the tax rate on the 12,000euro...it is very unclear on the web about this...
is there a threshold before you arre charged tax on the arf?

Have a look at this explanation of how Income Tax works. https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/how_your_tax_is_calculated.html
 

50andOut

Registered User
Messages
150
Hi

The below article makes for interesting reading when looking at effective tax rates:


So assuming you are higher taxpayer :

40% tax relief on the way in
TAX free Growth
25% drawdown with the first 200k tax free and the remainder at 20%
The remaining ARF Payments being drawdown at a max of 23% Effective rate as per the above article

Its a no brainer to not maximize your contributions and attain the highest pot possible.

50+0
 

liam bourke

Registered User
Messages
14
If your retirement choice is to start an ARF, then you do that at the same time as you withdraw the lump sum. If you're 65 when you set up the ARF then you should start taking an income from the ARF straight away, to avoid possible double taxation.



Have a look at this explanation of how Income Tax works. https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/how_your_tax_is_calculated.html

ok so you pay roughly 20% percent tax on your arf every year if you had an arf value of 300.


Obviously you pay more tax when the state pension kicks in at 68...
I have attached an excel file of what i think the tax you would pay over the lifetime of an arf....
i reckon on a 400k pension lump sum, you are saving only 14 percent (54,000euro) if you live to the end of your private pension!
Let me know what you think
 

Attachments

  • Pension.xlsx
    12.5 KB · Views: 20

LDFerguson

Registered User
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4,269
Your tax figures are far too high in this spreadsheet.

  • If your only income is €12,000 you'll pay no tax whatsoever. So the tax figures in the first three rows should be zeros.
  • If your total income is €24,912 you'll pay a total of €1,437.
  • If your total income is €27,912 you'll pay a total of €2,037.
If you put the correct figures into your spreadsheet it changes the picture considerably.

I've assumed a single person, aged 65 and today's tax/USC etc. I haven't accounted for the reduction is USC at age 70, so the real figures will be better again.
 

Protocol

Registered User
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3,559
You seem to ignore tax credits in your Excel?

Also note that after age 65, tax exemptions exist.

People can earn up to 18k/36k tax-free.
 

liam bourke

Registered User
Messages
14
Your tax figures are far too high in this spreadsheet.

  • If your only income is €12,000 you'll pay no tax whatsoever. So the tax figures in the first three rows should be zeros.
  • If your total income is €24,912 you'll pay a total of €1,437.
  • If your total income is €27,912 you'll pay a total of €2,037.
If you put the correct figures into your spreadsheet it changes the picture considerably.

I've assumed a single person, aged 65 and today's tax/USC etc. I haven't accounted for the reduction is USC at age 70, so the real figures will be better again.

How are you getting a figure of 1437 tax on a total income of 24912?
 

liam bourke

Registered User
Messages
14
How are you getting a figure of 1437 tax on a total income of 24912?
€24,912 x 20% = €4,982 - Tax Credits €3,545 = €1,437


ok, so going by that calculation...i reckon on a 400k pension lump sum, you are saving about 25 percent (100,000euro) if you live to the end of your private pension!would that be about right? your private pension fund runs out by the age of 85/86
Excel file attached.
 

Attachments

  • Pension Fund.xlsx
    12.6 KB · Views: 11

LDFerguson

Registered User
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4,269
ok, so going by that calculation...i reckon on a 400k pension lump sum, you are saving about 25 percent (100,000euro) if you live to the end of your private pension!would that be about right? your private pension fund runs out by the age of 85/86
Excel file attached.

In your summary you are assuming that it would cost you €260,000 to accumulate €400,000 if you avail of 40% tax relief along the way. That should be €240,000.

Your spreadsheet assumes that there will be no growth whatsoever on the pension funds, either before or after retirement.
 

liam bourke

Registered User
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14
I also assume there wont be any lossses.
Roughly over the course of a pension how much growth do you expect to see?10%?
i reckon, you really dont get any benefit on the pension until the 78
So until that age you are getting back what you put in?Am i right?
 

Attachments

  • Pension Fund.xlsx
    12.6 KB · Views: 7

LDFerguson

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4,269
Roughly over the course of a pension how much growth do you expect to see?10%?

That depends on the type of fund and the specific fund(s) you choose. The choice depends on your personal preferences, capacity for risk, appetite for risk, personal financial circumstances etc.
 
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