Pension Tax-Free Lump Sum Ireland

Any part of your pension lump sum that exceeds €200,000 is the ‘excess lump sum’.  

Any excess of this €200,000 is subject to tax in two stages. Once you pass the €200,000 threshold, the tax rate is 20% until you reach €500,000. Anything over €500,000 will be taxed at your marginal rate.

The marginal rate refers to whichever income tax bracket you fall into. This may be 20% or 40%.

The above table shows how these thresholds come into effect. It is worth noting again that the above are lifetime limits and can be from a combination of different pensions you may have.

The Standard Fund Threshold (STF) is a limit on the total value of pensions that an individual can draw from tax-relieved pension arrangements. It is basically a lifetime limit of the total amount you can have across single or multiple pension arrangements.

As of January 2014, the Standard Fund Threshold limit (STF)  is €2 million. If the aggregate value of your pension exceeds €2 million, it is possible to apply for a Personal Fund Threshold (PFT) in some circumstances.

If applicable, you should apply for a Personal Fund Threshold (PFT) in advance of your retirement. If you feel you may be in such a position it is worth consulting with an advisor to assess your options.

No. Many pension arrangements will be eligible but it will depend on what type of arrangement you have.

Below is a breakdown of different pension arrangements and their eligibility for a tax-free sum.

If you are unsure regarding the eligibility of your specific pension scheme, consult an advisor and assess your options.

With regard to a Defined Contribution (DC) pension, this will be dependent on the specific scheme rules.

Also, in some cases, current or past members of Defined Benefit (DB) schemes may be offered an Enhanced Transfer Value. We explain the process of Enhanced Transfer Values in more detail below.

An Enhanced Transfer Value (ETV) is offered to members as a once-off opportunity to transfer the value of their pension fund.

This is on enhanced terms, meaning the monetary amount offered may be increased as an incentive.

The member has the option to agree to this amount and transfer their pension arrangement. Furthermore, the ETV exercise grants the company and trustees an opportunity to de-risk the current pension scheme.

This rule may be applicable if you have a pension as part of an occupational pension scheme. Often it will be in Defined Benefit Pension (DB) schemes.

If eligible, you may be able to withdraw tax-free cash equal to a maximum of one and a half times your final salary. The actual amount you receive will depend on how long you worked in that job and your salary at retirement.

This is usually an option if you have worked for the company for a minimum of 20 years.

The age at which you can access your pension benefits will be scheme dependent. The age will vary depending on your pension arrangement. 

Below we break down the different scheme types and from what age you can access benefits.

In some cases of severe ill-health, you may be able to access benefits early.

Take time to speak with an advisor if you are considering accessing your benefits early. Your pension is only one aspect of the financial planning process.

Discuss your individual and long-term planning with your advisor before making any decisions. 

With some pension arrangements, you will be able to access benefits from age 50. This is often the case in occupational pension schemes where a member has left service.

Once you have satisfied the conditions, you may transfer your benefits to a Buy-Out-Bond. From here, most are eligible to access 25% of your benefits tax-free.

If you would like to discuss eligibility and potentially accessing your benefits from age 50, contact our team.

As with most things pension-related, they take time. Withdrawing your tax-free lump sum at retirement is no different.

Completing the paperwork is often the process that takes the longest. Once you have decided on a course of action, you will likely wait 8-10 weeks before receiving your tax-free lump sum.

There is no universal answer with regard to a timeline but your advisor will keep in contact with the relevant life company and provide regular updates.

In Ireland, most financial advisors choose to be paid by the life insurance company that owns the product. This is done on a commission basis and your ‘Key Information Documents’ should give you an indication of the commission they are earning.

Transparency is important in this industry so feel free to discuss commissions or fees and charges with your advisor. 

One element to keep an eye on is the allocation rate. An increased allocation rate and reduced charges could be an option. However, approach this with caution as the increased allocation rate may also coincide with increased fund value and therefore a larger annual management fee.

Any advisor worth their salt will be happy to go through their commission structure in detail so do not be afraid to ask the question.

Your specific pension arrangement will decide on how exactly you can access your benefits. For example, if you are part of an Occupational Pension Scheme and are looking to access your benefits from age 50, you must have left that employment.

As a general rule, you must be at least age 60 to access your PRSA. However, you can access it from age 50 if you are an employee and leaving service.

You will not have to retire from working life indefinitely after accessing your private pension. You will be free to seek employment and continue as a normal PAYE worker.

However, accessing benefits early is not encouraged without consulting the help of an advisor. There can be implications associated with early pension withdrawals.

In some cases it will. As we look at in more detail below, often people waive their right to their tax-free lump sum at a later date when taking redundancy payments.

If you were made redundant or perhaps might be in the future, it would be wise to speak to an advisor and assess your options.

There are many variables when it comes to termination payments being tax-free and how this may affect a pension lump sum at a later date.

When leaving employment, certain payments are usually not liable to income tax. These include:

• Statutory Redundancy – This will be calculated by an actuary. As a general rule of thumb it is often two weeks per year plus one week where an employee has worked for that employer for a minimum of two years.
• Ex Gratia payments– This is a payment made by the employer on behalf of the employee due to injury or disability which causes the termination of an employment. (Up to a lifetime limit of €200,000)

When leaving employment, there are also pension tax-free lump sums that may be considered. These also have a lifetime tax-free limit of  €200,000.

This will depend on which type of State Pension you are applying for. Below we break down the two different aspects of the State Pension.

Should you fall into this category and have the necessary PRSI contributions, you will not be means-tested. Therefore, should you receive a tax-free lump sum, it will not matter.

The State Pension Non-Contributory is different as it is means-tested. You will  be assessed under the following:

• Cash income (including from work)
• Value of capital (savings, investments, cash or property)
• Income from any property

This means any tax-free lump sum you have received may be in your bank account as cash and will have an affect on eligibility.