Would it ever be prudent not to take 25% tax free lump sum from pension

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Mommabearof3

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Just wondering if is practice to not take the tax free 200K and 50K @ 20% when drawing down a pension. I am 55 maxing out contributions but have an average sized combined DC and AVC PRSA pots of approx 500K. With another ten years left they will hopefully grow but realistically it will never be substantial.

My question is this I am a simple person no desire for fast cars or fancy holidays the simple things like dog walks and family for food are what float my boat. In this regard would I be better forgoing the lump sum? I have savings of 120K spread between Raisin and others and will inherit from elderly parents hopefully in the distant future but realistically probably not. Taking into account management charges and paying a small amount more in terms of personal tax is there ever something people do and if so is it a financially sound proposition?

I am saving as much as I can and am just trying to future plan towards retirement. My better half has even less in his pot but is doing likewise with his contributions. We are trying to see if there are other ways of managing a small/medium pot. I also have an other defined contribution small pot currently estimated at 9K annually. I like the idea that our pensions may still have an opportunity to increase and obviously market depending may not etc. I just wondered will a potential growth be offset by increased taxes and charges. Is this a way of managing medium sized pension funds without depleting them when we do not have any desire for immediate cash?
 
Some good questions there and likely to be a scenario faced by many who are actively thinking about near term retirement plans while there is still time to exercise options.

For your title question I bought an annuity with my pension pot and looked at both options, ie take the lump sum or not. In the case of an annuity it was quite simple to work out that it was better for me to take the TFLS rather than having a higher level of taxed income. I expect to be above the 40% income tax level by the time all pension incomes are paying out which was another factor in taking tax free cash. Hope that helps with your ruminations.
 
I've just been looking at this scenario also. I decided to take the TFLS 100000 and the remainder as an annuity of approx 35000 pa. If I hadn't taken the lump sum, my pension would have been 40000pa. What I plan to do is drip feed my TFLS 100,000 into my spending as and when I need it.

I should say the above are not the actual figures.
 
You are misunderstanding the use of the lump sum payment. It is not specifically to spend on big purchases. It is a quarter of your retirement fund that you pay zero tax on. They just give it to you to manage yourself.

I have been a financial advisor for 25 years and I have never come across a situation where someone waived their right to tax free money in favour of taxed money.

Even if some of your fund is taxed at 20%, if you have it in an ARF/ annuity, you will most likely be paying 20% income tax and USC. If you are under 66 (or have deferred the State pension) and have an ARF, you will also be paying PRSI.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Fortune said:
By not taking the lump sum, you are paying tax that you don't need to pay.
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I wondered if by taking the TFLS if I was going to have to try and find something to do with it. If I was over 65 then no dirt but we were just talking and we felt it was another hassle. I support I will have to research the tax aspect in so far as a jointly assessed couple and what we can earn before pr
Maybe I am missing something my point was that I will have a lump sum I don't need and then have to manage where to put it. I am not at all familiar with investments. Is there never a case where leaving it in and growth would outweigh the benefits of taking it out? With being jointly assessed and taking the obligatory 4% from an ARF ever prove a sensible option?

I just wondered if it is something that is ever done thanks for your response and feedback folks/
 
Are you able to split that 25% over a number of years?
Eg take 5% per year for 5 years, giving the opportunity for the fund to hopefully grow
 

That’s really interesting but it also reflects a much larger sum in the pot. My query was also how to manage a small pot to try and make it work for us somewhat.
 
I have an
AndroidMan said:
Are you able to split that 25% over a number of years?
Eg take 5% per year for 5 years, giving the opportunity for the fund to hopefully grow
Click to expand...

I haven’t a a notion to be honest but definitely worth checking. If as a couple jointly assessed we are at the 20% tax rate or close to it I just wondered if it would ever make sense in terms of the growth of the fund and it being a small fund to not take 25% of the thing and significantly reduce it. If the figures were higher and we were paying more tax I can see how it would never make sense.

I guess I am just trying to get my ducks in a row and plan considering all options.
 
You know what the tax treatment is now for taking the lump sum.

You don't know exactly what it will be come drawdown time.

Something to consider.
 
odyssey06 said:
You know what the tax treatment is now for taking the lump sum.

You don't know exactly what it will be come drawdown time.

Something to consider.
Click to expand...

Very true and not something I considered at all. Everything may become redundant and with the state pension underfunded and possible government policy changes it is all speculation my end.
 
Essentially it boils down to access to capital. For simplicity let's say your pot reaches €1m and you have a TFLS of €240k. This is your money to do as you please so your choices are:

a) keep it outside the pension and retain access to the full capital amount
b) put it back inside the pension where you lose access to the capital and will pay tax on withdrawal

You say you don't need it but for argument sake, something major happens in your life the week after you make the decision and you need to spend €200k on your home. With option a above, its simple and you have the cash. With option b, you need to withdraw €400k to get your €200k net.

So I don't think it ever makes sense to put it back into the pension

You have 10 years to educate yourself on what to do with it but a few obvious options are:
a) keep all or a percentage of it in lower interest but safe deposits
b) spend it on things to future proof your retirement like home improvements
c) enjoy some of it or else what was the point accumulating it
d) loan it to your children if they are in need of it
e) find a fee based financial advisor that can invest it in a straighthforward product with higher risk
 

Thank you for taking the time to respond and I agree and see that I need to become more financially astute in terms of investment strategies/options.
I also agree that future proofing the house makes sense albeit that as we become empty nesters we may even downsize with interesting threads on that topic already existing.
As I reflect I recognise inherited frugal tendencies from leaving school in the 80’s on to further education but siblings emigrated with little or no prospects of employment here. I was one of the many groups who paid double figure interest on mortgages but unlike my children if we worked hard and saved it was more easily achievable.
I have adult children who I have supported thought undergrads and masters but who worry about the difficulty of getting on the housing ladder all the same. That said if they had to wait another ten years it will probably be too late however if we know we are getting that money then would be able to used savings to give them a hand out now.
Lastly it has become very clear to me to keep chugging with savings and loading up the pension and then professional advice will definitely be required.
 
You don't need to worry about this until the time comes.

The decision at that stage might be "Take 25% now or leave it in the pension fund and take it out later"

But as Steven points out, it is always tax-efficient to take money out tax-free rather than subject to tax.

Brendan
 
Let’s say there’s €800k behind a wall. You’re offered a one-off opportunity to take €200k of it completely tax-free. Otherwise all of the money stays behind the wall and any future withdrawals are taxable. I can’t envisage any reasonable scenario where it would make sense to refuse the tax-free cash.
 

Fair enough the ladybird version as it were it appears that leaving it in the pot is foolhardy… and while I am sensible and live frugally both myself and my other half have worked hard for what we have I certainly have no desire to pay any more tax than is absolutely necessary.
 
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