Waive or retain right to pension lump sum?

P

purplemonkey

Registered User
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3
Hi there, I have accepted an offer of redundancy and have been given two options as follows:

Option A - Retain right to lump sum from pensionOption B - Waive right to lump sum from pension
Ex-gratia payment€86,973€86,973
Less tax-free exemption€72,227€84,902
Taxable Amount€14,747€2,071
Tax (40%)€5,899€828
USC (8%)€1,180€166
Total Tax Deducted€7,079€994

'Tax-free cash from pension scheme at normal retirement age' is listed as €64,170
'Present value of tax-free cash from pension scheme' is listed as €12,676

There seems to be a c. €6k net benefit to taking Option B but is the sensible thing to do to choose Option A? Is it a straightforward decision to choose Option A or does age etc. come into it when making a decision? I am late thirties with hopefully a reasonable prospect of securing similiar employment. I have been working with the company for 13 years and have not previously availed of redundancy. Is it worth getting the view of a financial advisor? Would appreciate any advice or insights you could give me.

Thanks
purplemonkey
 
It’s a tricky enough area, but here goes...

‘A’ gets you €80k

‘B’ gets you €86k

In order to get that extra €6k, you’re being asked to waive a tax-free payment estimated at €64k, albeit way down the line.

Most people would choose ‘A’.

There is nuance though; because you’ve less than 15 years’ service, you could choose ‘B’, take the higher payment, and then transfer your pension benefits to a PRSA. Assuming that the scheme isn’t winding-up, you’d have to pay an actuary for a nonsensical piece of work called a “Statement of Benefit Comparison” which would cost around €1,500. But once in a PRSA, your pension benefits effectively “forget” that you waived your lump sum rights and you get the second tax-free payment.

Having said that, the net benefits are marginal here, plus the rules could change, so personally I’d choose ‘A’.
 
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Gordon - In my case the the pensions scheme will be wound up as the company is closing. So I will have an option of taking a PRSA (because i have less than 15 years service) or a buyout bond. Is it only the PRSA where waiving the lump sum will be "forgotten" or is that also the case for the buyout bond?

Do you have a link where these rules are set out?
 
It only applies to PRSAs. It's in the PRSA legislation if you can find it. But it is there and allowed. There are constantly rumours that the revenue will close this loophole, so I wouldn't delay if you are thinking of doing it.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
currently in the middle of the same process, and would appreciate any guidance on the following:

1. Calculation of the SCSB - is it compulsory to sign the waiver for the pension lump sum to avail of SCSB?. If you do not sign the waiver, is your only other option the basic exemption?.
2. Transfer pension benefits to a PRSA - is this at the sole discretion of the employee, or can the employer and/or pension company veto the request?. Also, the above comments mention a period of less than 15 year's service - if your period of service exceeds 15 years, can you not avail of this option?

Thanks.
 
Great to find this thread. I am in a similar situation. Made redundant in 2009 during crash, didn't take advice and opted for max redundancy driven by fear (i.e.my age and financial situation). I am 65 and can now draw down my pension (400k) but may not be eligible for tax free lump sum. Would appreciate any direction in the area of PRSA.
 
Hi Steven
Do you know if revenue has closed this loophole?
 
Thanks for your reply. Can you recommend someone to look at my pension and my finances to give me advice?
 
Legislation states that The employee may elect to irrevocably waive their right to receive this tax free lump sum from their pension at retirement. This "loophole " of moving to PRSA does not prohibit the revenue from retrospectively taxing the redundancy payment. I'm not saying revenue have but it is potentially a consideration
 
The "loop hole" approach

Pros in this case:
  1. 6k bigger redundancy payment
  2. 64k tax free lump sum at retirement
Cons:
  1. Higher charges in PRSA? (considering setup/transfer/legal costs, plus on-going charges vs existing pension scheme)
  2. Chance of retrospective action by Revenue negating the benefit of the approach
6k isn't to be sniffed at. How much more in fees would you end up paying for the PRSA between now and retirement, vs leaving it where it is. That figure would need to be subtracted from the 6k to arrive at the true benefit of the approach.
 
A friend of mine did this a few years back, and imo the key comparison to look at is this I.e. how much extra in charges will you pay

if you are over 50 you should be able to put the prsa immediately into an ARF which should facilitate lower fees, my friend pays 40bps On their ARF (100% allocation rate initially)
 
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