Many people see the ability to withdraw a pension tax-free lump at retirement as a key motivator for contributing to a pension.

Below we have answered some of the questions people ask surrounding pension tax-free lump sums and how the process works

Although there are many benefits to pensions such as tax relief on contributions and tax-free growth, the tax-free lump sum is often seen as the jewel in the crown.

pension tax free lump sum

As we approach retirement, many of us may have either some bucket list items we would like to tick off, or, just want to treat ourselves.

Withdrawing your pension tax-free lump sum often allows you to do so.

What is a tax-free lump sum?

To help encourage people to think long-term about their future, the government allows you to withdraw a percentage of your pension tax-free at retirement. 

However, there are certain limitations in place with regard to the amount but we’ll look at that in detail further on.

As you contribute to your pension arrangement, a major incentive to many is knowing you will likely be eligible to withdraw 25% tax-free at retirement.

It is worth noting that this will be dependent on scheme rules and if you take redundancy at some point this also may affect your eligibility. If you have taken redundancy and are unsure, it may be worth stopping and discussing your situation with an advisor.

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What is the maximum tax-free lump sum pension in Ireland?

There are certain limits as to how much you can receive tax-free from your pension. As of January 2011, the maximum tax-free retirement lump sum is €200,000.

This tax-free threshold is also a lifetime limit and will include all retirement lump sums paid to an individual from December 7th, 2005 onwards.

Looking at ‘real-life’ examples is often helpful in these situations. Below we break down some different scenarios.

 

Name Pension Fund Value 25% Tax-Free Lump Sum Remainder 
Patrick €435,000 €108,750 €326,250
Pauline €244,000 €61,000 €179,000
Conor €350,000 €87,500 €262,500
Damien 545,000 €136,250 €408,750
Anne €134,000 €33,500 €100,500

Above we can see different examples and how the pension tax-free lump sum will come into play. We have illustrated how much your 25% tax-free lump sum is worth and what would remain in your pension.

The remainder will then go into an Approved Retirement Fund (ARF) or an Annuity.

What is an Approved Retirement Fund (ARF)?

An Approved Retirement Fund, or ARF as they are commonly known, is a post-retirement vehicle. All this means is that it allows you to invest your pension after you have taken your lump sum.

You will have various fund choices and investment options available so the best course of action is usually to chat with an advisor. From here you can assess all potential options.

ARFs are also flexible and should you have the funds and wish to do so, you may buy a property through your ARF.

What is an Annuity?

An Annuity provides you with a different option. Rather than having a certain amount in your pension, it provides you with a regular income for life.

The rate of regular income you regularly receive will depend on how much was in your pension. This is an attractive option for those who are risk-averse. 

It is worth noting that should you choose an Annuity this decision cannot be reversed so take time before deciding.

Tax on a pension lump sum over 200,000

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%.

Lump-Sum Amount Tax Rate
Up to €200,000 0%
€200,001- €500,000 20%
Over €500,000 Taxpayers Marginal Rate

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.

What is the Standard Fund Threshold?

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.

Are all pension arrangements eligible for a tax-free lump sum?

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.

Pension Arrangement Eligible for 25% Tax-Free Sum
Personal Pension Yes
Defined Contribution  Yes
Executive Pension  Yes
Personal Retirement Bond Yes
Defined Benefit Pension  (DB) Yes (in certain circumstances)
AVC-Employee DB Pension No

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.

What is an Enhanced Transfer Value?

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.

Enhanced Transfer Value - Explained
Enhanced Transfer Value - Example mobile

As we can see from the above, the Enhanced Transfer Value offer will be more than the current transfer value. This is to help entice members to consider this option.

You may be eligible for an Enhanced Transfer Value offer if:

  • You are a current employee where the scheme has ceased to accrue future service benefits, or
  • You are a deferred member. This includes former employees who are not in receipt of benefits.

In some cases, employers may offer current employees the opportunity to to transfer to a Defined Contribution (DC) arrangement.

Should I accept my Enhanced Transfer Value (ETV) offer?

This is a question you will need to spend some time considering. Enlisting the help of an advisor is also crucial. There will likely be many variables and aspects to be considered.

Unfortunately, there is no one size fits all answer when it comes to pension planning. Although accepting an Enhanced Transfer Value does offer some advantages and not just the additional monetary amount. These benefits include:

There are also some reasons not to transfer your benefits. It is for this reason we offer a complimentary consultation for those looking to assess all options.

If you are looking for more in-depth information on this area, we have covered this in our blog, ‘Should I accept my Enhanced Transfer Value?

 

What is the 1.5 x salary rule?

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.

At what age can I access my pension tax-free lump sum?

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.

Pension Type Age you can access benefits from
Defined Benefit (Occupational) 50
Defined Contribution (Occupational) 50
Personal Pension 60
Personal Retirement Savings Account (PRSA) 60
Executive Pension 50

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. 

Pension tax-free lump sum at 50

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.

 

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How long does it take to get my tax-free lump sum?

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.

pension tax free lump sum

How much does it cost to access my tax-free lump sum?

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.

Do I need to retire to access my tax-free lump sum?

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.

Does redundancy affect my tax-free lump sum?

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.

Does the State Pension affect your private pension tax-free lump sum?

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.

Irish state pension options

State Pension (Contributory)

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.

State Pension (Non-Contributory)

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.

Does transferring your pension abroad affect your tax-free lump sum?

The ease of travel means we move around now more than ever before. Whether it be for work or other reasons many of us have lived in different countries at some stage.

We are also seeing many people emigrate and reside in a country that is not their native country. During your working life you may have built up a pension back home and are considering your options.

While it is possible to transfer Irish pensions abroad, there are various rules and stipulations. The Pensions Authority have published guidelines on pension transfers outside the State.

Legislation states particular arrangements are transferable while others cannot. IORPS created a legislative basis for transfers of certain pension arrangements within the EU.

Pension Type Transfer available within the EU
PRSA’s Yes
Occupational Pension Schemes Yes
Personal Pensions No
Buy Out Bonds No
Approved Retirement Funds (ARFs) No

However, Revenue has stated transfer will only be permitted for an overseas transfer for specific reasons and not for the purpose of circumventing pension legislation.

In Ireland, many people spend time and work in the UK over a number of years. Often they then come home to settle in Ireland whilst having pension benefits in the UK.

If you are in a similar position and would like to discuss transferring your UK pension to Ireland, feel free to contact us. This may be an option in certain circumstances so it is worth having a conversation.

What is the average tax-free lump sum pay out in Ireland?

It is difficult to calculate exactly what the average tax-free lump sum in Ireland would be. However, we could look at the average pension in Ireland figures and get a ballpark figure from here.

We know the average pension in Ireland is approximately €90,000. Therefore, the average lump sum should be roughly 25% of this figure. Of course we should take these figures with a pinch of salt as they are guesstimate.

Average Pension in Ireland 25% Tax-Free Lump Sum
€90,000 €22,500

Of course many people will have substantially larger pensions than the above. If you are wondering where you are compared to others, feel free to check out our how much do I need to retire in Ireland blog.

Can you use your tax-free lump-sum to buy property?

Yes. Although using your tax-free lump sum to buy property would mean you are buying it with cash rather than through a pension.

Therefore, it would be treated as a standard property investment. On the other hand, if you use your pension to purchase property you can enjoy several benefits.

benefits of buying a property through your pension fund

We have broken this down in detail in our blog and discussed what pensions are eligible to purchase property along with the process below.

Pension Property Process

  1. Assess your pension arrangement and your eligibility
  2. Discuss potential options with your advisor
  3. Find a suitable property you wish to purchase
  4. Choose a solicitor to arrange the legal documentation
  5. Your application will be processed
  6. Ensuring your solicitor  has arranged the relevant documentation and transfer of funds
  7. Begin receiving the tax-efficient income from your investment property

Things to consider before taking a tax free lump sum

As you approach retirement, you will likely begin to assess your options in more detail. Hopefully a tax-free lump sum will be part of your retirement process.

Some elements to consider will be the lifetime limit of €200,000 we discussed. It is important to take a holistic view of your situation.

Although your pension will likely be one of your largest assets, it is only one piece of the puzzle. You should take time and plan out a roadmap of how you would like your retirement to look.

Will your bills and outgoings be retiring when you do? If not, this is something that will need to be considered.

A helpful process to gauge where you might be further down the line is cash flow modelling. This allows you to forecast income and expenditure giving you the ability to spot any potential gaps or exposure to risk.

It is particularly important as you approach retirement due to the fact your main source of income will likely stop. We offer a complimentary consultation should this be something you are interested in.

We hope this article has provided some clarity regarding the pension tax-free lump sum process and how it works. If you are still unsure if you are eligible or want to chat through some options, feel free to contact our team.

We understand this stuff can be difficult to digest the first time of reading. 

Thanks for reading! 

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*This blog should be used for information only and not taken as financial advice.

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