Cashing whole buy-out bond at age 50

[Crow Paddy]

I got a buyout bond a few years ago due to my former employer winding up their pension scheme. I'm now working with a different company with its own scheme.

The question is about cashing the buyout bond early (at age 50), and specifically, converting it completely to cash. In other words taking the 25% lump sum tax-free and also the remaining part which would be subject to income tax, rather than buying an annuity with it. The reason I want to do this is to pay off debt and fund kids in college, but also because the bond would be worth very little as an annuity.

My understanding is you can do this, if you can show a guaranteed income of 12K for the rest of your life. The thing is I wouldn't be retired from my current job. So, I'd still be working, but the pension fund from the current job would amount to a pension annuity over that limit, at normal retirement date. So, would that meet the criteria?

 

[wideawake01]

Hi Crow Paddy

I had a discussion with a pension advisor this morning. He said that the guaranteed income you need must be in receipt, and not prospective. I understand it that if funds allow, placing 119,800 into an AMRF would allow you to free up any balance as taxable cash should you wish.
I am not knowledgeable of pensions and am merely relaying to you as I understood it.

 

[LDFerguson]

My understanding is you can do this, if you can show a guaranteed income of 12K for the rest of your life. The thing is I wouldn't be retired from my current job. So, I'd still be working, but the pension fund from the current job would amount to a pension annuity over that limit, at normal retirement date. So, would that meet the criteria?

The limit is now €18,000 per year and as wideawake01 says, you must have it now if you want to draw down your fund as taxable cash now.

You could take your 25% tax-free cash from the Buy-Out Bond now and, if the balance of the fund is less than €119,800, re-invest the balance in an Approved Minimum Retirement Fund (AMRF). You'd have no access to this AMRF until such time as you have a guaranteed lifetime income of 1.5 x State pension (currenrly €18,000) and then you could draw it down, but at least you'd have the 25% cash now.

If the balance is >€119,800, you can invest in an AMRF and draw the excess as taxable cash now.

Liam D. Ferguson

 

[Crow Paddy]

That's what I was afraid of. Unfortunately, I wouldn't be retired from the job that has the >€119,800 pension pot. The buyout bond is much smaller (< 40 K) and 25% of it won't make much dent in the debts and costs I need to deal with now. It's frustrating to have that money almost in your grasp, but not quite.

In any case, the situation wouldn't arise for a couple of years. I'd be curious to know what are the chances these kind of rules might be relaxed a bit given the current financial situation for a lot of people. Impossible to answer I know.

Thanks for taking the trouble to answer the query!

 

[LDFerguson]

In any case, the situation wouldn't arise for a couple of years. I'd be curious to know what are the chances these kind of rules might be relaxed a bit given the current financial situation for a lot of people. Impossible to answer I know.

There has been some discussion of allowing early acess to pension funds, perhaps in certain circumstances such as mortgage arrears. Michael Noonan doesn't seem keen.

 

[elcato]

You could take your 25% tax-free cash from the Buy-Out Bond now and, if the balance of the fund is less than €119,800, re-invest the balance in an Approved Minimum Retirement Fund (AMRF). You'd have no access to this AMRF until such time as you have a guaranteed lifetime income of 1.5 x State pension (currenrly €18,000) and then you could draw it down, but at least you'd have the 25% cash now.

Is this accross the board ? I have a BOB which I could technically access next year. If I cash in the lump sum is tax free ? No offence to the pension industry but it seems if someone can access 25% tax free now it should be jumped at.

 

[Crow Paddy]

There has been some discussion of allowing early acess to pension funds, perhaps in certain circumstances such as mortgage arrears.

I can understand the tax argument - hardly that difficult to sort out. But some of the other arguments are unconvincing. It seems all the more absurd to fret about this given the elephant in the room of debt levels and consequent calls for "forgiveness" surely a far more radical notion.

Surely, a simple change would be to allow someone where an annuity would be below a certain level, and consequently not likely to enhance quality of life, to just take that as a taxed lump sum.

Also, for people aged 50, and are still earning, there should be some flexibility in that situation too. What was the point in allowing retirement benefits at aged 50 in the first place??

 

[LDFerguson]

Is this accross the board ? I have a BOB which I could technically access next year. If I cash in the lump sum is tax free ? No offence to the pension industry but it seems if someone can access 25% tax free now it should be jumped at.

Short answer. Yes.

Longer answer. Finance Act 2011 extended the ARF/AMRF options to all DC pension scheme members. Previously these options were only available in Occupational Pension Schemes to proprietary directors and in respect of AVCs. There is some debate even now as to whether a BOB qualifies as a DC scheme in its own right or whether access to the ARF/AMRF options is 100% dependent on the rules of the scheme from which the BOB fund was transferred. I know different BOB providers are taking different views.

Regardless of that, even under the old rules pre-Finance Act 2011 you would have had an entitlement to a lump sum at retirement.

 

[LDFerguson]

Surely, a simple change would be to allow someone where an annuity would be below a certain level, and consequently not likely to enhance quality of life, to just take that as a taxed lump sum.

As it happens, I agree fully with the idea of allowing some access to pension funds early, which would be taxed and only in a very limited set of circumstances, subect to fairly strict policing. If someone is struggling now, what good is it to them to know that they have a lovely pension coming up in 20 years' time? There's also the argument that allowing access now would give the Exchequer some extra taxes now.

There are rules in place for small funds allowing full access, known as "trivial pension" rules. With some exceptions, broadly the rules are that if a person has pensions funds (from ALL pension schemes) totalling less than €20,000 or an annuity of less than €330 per year, they will be allowed full access, subject to tax.