Change of mind on retirement gratuity

Friday

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A neighbour of mine has retired over the last few weeks. When talking to him recently he said he had taken his pension in full and had decided not to take a retirement gratuity. I told him I felt this was a mistake as the tax free treatment of the gratuity made this more attractive than the net pension after tax he would have foregone. He has approached his employer to see if he can change his original choice. They will not accommodate him and say his original choice cannot be amended.

He was able to tell me that his employer had not bought an annuity but were paying his pension directly. This would seem to me to make it easier for them to accommodate him.

Is there any way he can now take a gratuity?
 
"I told him I felt this was a mistake as the tax free treatment of the gratuity made this more attractive than the net pension after tax he would have foregone."

That was a big statement Friday.

If your neighbour were to die in the near future, I would agree with you. But if he lives for a good number of years then he may have chosen the correct option.
I did exactly as your neighbour did , and I am happy with my decision.

Had he specific plans for the money ? What age is he ?.

Rgds
Billo
 
But if he lives for a good number of years then he may have chosen the correct option.
How so? Correct me if I'm wrong but surely if you put the tax-free lump sum straight into an investment fund, you'll only be paying 23% on the growth and 0% of the capital when you take money out of it. If you leave the money in your general fund you'll be paying income tax on any benefit you get from it.

This should especially be the case if they're in the 42% bracket, but would still work even if you were in the 20% band.
 
To follow up, I knocked up something in Excel to test my idea out and if the lump sum would be greater than around €80k, then it would seem to be advantagous to take the lump sum and invest it. Obviously I had to make a number of simplying assumptions but I still think the point holds.
 
HI Friday, forgive me if I'm incorrect, but I thought a DB scheme would normally buy an annuity which would pay the ongoing pension, ie, the company would hand over €x,000s to an insurance company for the said annuity - rather than pay the pension out of everyday cash (as your post seems to imply).
When a retired employee, I would much prefer the certainty of the former, against the latter (if the company gets into difficulty).

As regards lump sums, it's a case of doing the figures and guessing health profile and family/partner circumstances, structuring the deal to avail of the max €33,000 pa income for retirees before tax net kicks in.
K
 
I don't know much about DB schemes. Does the normal 25% tax free lump sum option definitely apply to DB as it does to DC schemes?
 
Hi Clubman, Yes is the answer on 25%. But with some DB schemes, it can be 1.5 times finishing year ( or average of final three years) GROSS payment, not basic salary. I'm not sure if the 25pc rule supercedes above, because I can imagine circumstances where above would mean you could take more than 25pc in tax free cash payment.
There used to be a 10-year rule where you could 'back pay' and use up missed AVC allowances. But McCreevy shut it down when smart civil servant types put all of their last two/three years' salary into AVCs (to use up 10-year rule) - to collect it tax free almost immediately on retirement. Nice one. Now restricted to presnet year (use it or lose it)
Maybe other posters can enlighten on the 25pc conundrum as raised above?
K
 
Thanks kirvos - DB schemes seem awfully complicated/arcane to me and being of only academic interest to me personally I have never really learned much about them.
 
Thanks for response.

However, can I bring the thread back to the 'change of mind' point as this issue is quite urgent if he wants to back remedial action.

Can he now change is mind?

Rgds
 
If it's a DB scheme, you will have to check with the scheme rules. The scheme trustee's should be able to provide these. Each scheme has it's own rules so it is difficult to answer the question.

I suspect that once you have made your decision, the trustees will have made the necessary investment changes to accomodate the payment of your future pension. This could make it difficult and probably costly be go back and undo them.
 
Friday,
"Is there any way he can now take a gratuity?"

How much is the gratuity ?
How much does the pension reduce by taking the gratuity ?
What is the age of the retired person ?

Rgds
Billo
 
Hi Billo,

Afraid, I don't have that level of detail.

However, the issue here is whether he has the option to rescind his original instruction or not.

Rgds
Friday
 
Friday said:
Afraid, I don't have that level of detail.
How were you able to comment thus so?
Friday said:
I told him I felt this was a mistake as the tax free treatment of the gratuity made this more attractive than the net pension after tax he would have foregone.
:confused:
 
Billo/Clubman

I didn't ask how much his gratuity was as he didn't offer that information.

However, I understood that the pension he would have given up was about 10% of the gratuity amount. He has been with his employer for over 30 years and would be mid-management level. I'd reckon his gratuity would have been in excess of €100k. He is 65 year old.

There are pros and cons to each option. Personally, I'd take the gratuity....and yes, I've done the figures.

Rgds
 
I'm slightly off topic here, but I must point out that the 25% rule does not generally apply to DB or DC schemes. It applies to PRSAs, personal pensions and proprietory directors (5% shareholdoing) in occupational schemes only.
 
I know, that's the reason I posted! That part of the previous answer was incorrect. Think of it this way, in a DB scheme no individual has a fund to take 25% of - their benefit is paid from the overall scheme fund.
 
Fair enough. Can you point to authoritative information on this issue by any chance? Just so that we can all be clear about that point. Thanks.
 
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