Early retirement pension queries

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Flybytheseat

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332
Hi
I'm planning to take early retirement on my 63rd birthday (May 2031) and am looking for advice in how to do it in a tax efficient manner and to continue to get credits for social insurance stamps to build up my contributory state pension from 66.

My main DC fund should be in the region of €1.6M by that time and I have two much smaller AVC DC funds from previous employment with €24K and €30K respectively. I also have a small DB pension from 65 of €3.7K p.a.

For the Irish contributory pension, if I continue to pay stamps to 65, I will have 78% TCA (or average weeks per year of 35). I will also be entitled to a partial German state pension of circa €5k p.a. from the age of 67.

I have a mortgage which is fixed at a low interest rate (2.15%) for another 3.5 years and runs until I'm 68. When the fixed period expires the remaining debt on the mortgage will be about €160K which I would like to pay off with Tax Free Lump Sums (TFLS) if possible.

I reckon I can live comfortably on €45K per annum in retirement and would like if possible to keep my pension income just below the higher rate (40%) tax band. Hopefully this will leave a nice sum in my ARF when I die to pass on to my 3 children. I'm divorced and my ex is well catered for with pension adjustment orders (the above figures are net after the PAOS), house etc.. By 63 I will be free of all my spousal & child maintenance, college fees commitments etc..

My specific questions are:
1. Can I access Tax Free Lump Sums from any of the DC funds in 3.5 years to pay off my mortgage (once the low interest fix period expires) without setting up ARFs and getting into the 4% draw down requirement while I'm still working ?
2. Should I retire the two small DC funds 1Jan2032 and take the TFLS and use the rest for income until I retire my main DC fund at 65 ? I'm reluctant to retire this main fund earlier due to the 4% ARF drawdown requirement ? How do I best ensure that I get stamps / credits for social insurance from 63-65 ?
3. Will I be entitled to any social welfare payments from 63-65 such as Jobseekers Benefit (JB) or the benefit payment for people who retire at 65 ? If so can I also get credits for SI for these ?
4. I'm also considering taking a larger lumpsum than €200K (maybe €400K) as I've read the 2nd €200K is taxable at 20%. Is this second lumpsum trench subject to PRSI and USC ? The reason I would take the larger lump sum is to shrink my ARF fund to avoid the 4% draw down per annum being taxed at 40%.
 
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Hi answers below in bold
My specific questions are:
1. Can I access Tax Free Lump Sums from any of the DC funds in 3.5 years to pay off my mortgage (once the low interest fix period expires) without setting up ARFs and getting into the 4% draw down requirement while I'm still working ? No if you access the tax free amounts post age 61 then you ARF annual drawdown must start
2. Should I retire the two small DC funds 1Jan2032 and take the TFLS and use the rest for income until I retire my main DC fund at 65 ? I'm reluctant to retire this main fund earlier due to the 4% ARF drawdown requirement ? How to I best ensure that I get stamps / credits for social insurance from 63-65 ? Yes you should be able to retire the two smaller DC scheme separately from the main DC scheme. Are you certain that you will need additional credits for a full pension as there are two ways of assessing this?
3. Will I be entitled to any social welfare payments from 63-65 such as Jobseekers or the benefit payment for people who retire at 65 ? If so can I also get credits for SI for these ? yes you should be entitled to jobseekers benefit
4. I'm also considering taking a larger lumpsum than €200K (maybe €400K) as I've read the 2nd €200K is taxable at 20%. Is this second lumpsum trench subject to PRSI and USC ? The reason I would take the larger lump sum is to shrink my ARF fund to avoid the 4% draw down per annum being taxed at 40%. Yes this would be recommended 25% of all pension lump sums will give you €200k tax free and €213k taxed at 20% which is far superior to being taxed at your marginal tax rate plus USC etc on ARF drawdown.
 
In terms of the Irish State Pension, by the time you reach age 66 (assuming the retirement age remains at 66), the calculation model for the State Pension is likely to be 1/40th for each year of PRSI contributions ie the Total Contribution Approach.
 
Flybytheseat said:
How to I best ensure that I get stamps / credits for social insurance from 63-65 ?
3. Will I be entitled to any social welfare payments from 63-65 such as Jobseekers or the benefit payment for people who retire at 65 ? If so can I also get credits for SI for these ?
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It is a condition for JB that the applicant is both available for, and looking for, work. However, at 63 it is likely you will be granted it. But it lasts for 9 months only. After that you could apply for Jobseekers Allowance but you would be refused on the means test. Assuming you are granted JB you will automatically get PRSI credits with it and you should be able to continue to sign for credits afterwards, even though you won't get any JA.
As an alternative you could maintain your PRSI record with voluntary contributions. Bear in mind for State Pension purposes it is your record up to 31st Dec in the year you turn 65 that counts.
You should be eligible for the over-65 payment. But all of this is per current criteria and things may have changed in 8-10 years.
 
North Star said:
Hi answers below in bold
My specific questions are:
1. Can I access Tax Free Lump Sums from any of the DC funds in 3.5 years to pay off my mortgage (once the low interest fix period expires) without setting up ARFs and getting into the 4% draw down requirement while I'm still working ? No if you access the tax free amounts post age 61 then you ARF annual drawdown must start
2. Should I retire the two small DC funds 1Jan2032 and take the TFLS and use the rest for income until I retire my main DC fund at 65 ? I'm reluctant to retire this main fund earlier due to the 4% ARF drawdown requirement ? How to I best ensure that I get stamps / credits for social insurance from 63-65 ? Yes you should be able to retire the two smaller DC scheme separately from the main DC scheme. Are you certain that you will need additional credits for a full pension as there are two ways of assessing this?
3. Will I be entitled to any social welfare payments from 63-65 such as Jobseekers or the benefit payment for people who retire at 65 ? If so can I also get credits for SI for these ? yes you should be entitled to jobseekers benefit
4. I'm also considering taking a larger lumpsum than €200K (maybe €400K) as I've read the 2nd €200K is taxable at 20%. Is this second lumpsum trench subject to PRSI and USC ? The reason I would take the larger lump sum is to shrink my ARF fund to avoid the 4% draw down per annum being taxed at 40%. Yes this would be recommended 25% of all pension lump sums will give you €200k tax free and €213k taxed at 20% which is far superior to being taxed at your marginal tax rate plus USC etc on ARF drawdown.
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Thanks North Star & Conan:
1. Assume same applies if I try to access TFLS in my fifties (i.e. ARF drawdown starts at 61) ?
2. Good to know. As Conan said most of my state pension will be TCA approach so every additional stamp will increase my TCA by a small percentage.
3. Great - Jobseekers runs for 9 months only I think ? Would I have to start that straight after I retire or could I leave starting it until the following tax year ? What do I need to do to qualify for the benefit payment for 65 year olds ?
4. Brilliant & thanks. Good to get that reassurance that its the right approach.
 
Flybytheseat said:
I'm planning to take early retirement on my 63rd birthday (May 2031)
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Flybytheseat said:
What do I need to do to qualify for the benefit payment for 65 year olds ?
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If you work up until your 63rd birthday in May and get PRSI credits afterwards (concurrent with JB) you will meet the criteria as currently laid down. You would probably qualify even without the credited contributions although the criteria for this are a bit confusing: https://www.gov.ie/en/publication/65561-benefit-payment-for-65-year-olds/

Edit: As pointed out by @S class below, you would need 39 contributions in that year at least 13 of which are paid. So working until May would not be enough without subsequent credits to make up the 39.
 
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Given your desire to minimise drawdowns, I wonder would it make sense to transfer the main DC pension to two PRSAs and leave one alone until your 75th birthday?
 
Sarenco said:
Given your desire to minimise drawdowns, I wonder would it make sense to transfer the main DC pension to two PRSAs and leave one alone until your 75th birthday?
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That sounds like a very good idea and worth investigating so thank you. Presumably I would do this in the month I stop work ? Would I need two PRSAs or just one ? I'd keep the main DC pension/ARF with €700K (should keep my draw downs below the higher tax rate), take €400K in lump sums and transfer the balance into one new PRSA.
 
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I’m not sure about the precise choreography but perhaps one of our resident brokers will chime in.
 
To defer drawdown you can transfer all the DC benefits to several PRSAs, once you have left employment. Then you choose to draw down the benefits on one/some or all of the PRSAs when it suits. Once you have taken the tax free cash amount from a PRSA it becomes a vested PRSA and works like an ARF i.e. you still have to take the annual income. This gives you the most flexibility re timing your tax free amount and ARF/vested PRSA annual drawdowns.
 
Early Riser said:
If you work up until your 63rd birthday in May and get PRSI credits afterwards (concurrent with JB) you will meet the criteria as currently laid down. You would probably qualify even without the credited contributions although the criteria for this are a bit confusing: https://www.gov.ie/en/publication/65561-benefit-payment-for-65-year-olds/
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The critical requirement for the 65s benefit is having at least 39 prsi contributions in the year of your 63rd birthday. If a person works until May of that year, they will need extra contributions to reach the 39 level. So they would require extra contributions (credits).
 
S class said:
The critical requirement for the 65s benefit is having at least 39 prsi contributions in the year of your 63rd birthday. If a person works until May of that year, they will need extra contributions to reach the 39 level. So they would require extra contributions (credits).
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Thanks - you are correct. I find the alternative contribution conditions very confusing (as set out). I have edited my post.
 
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North Star said:
To defer drawdown you can transfer all the DC benefits to several PRSAs, once you have left employment. Then you choose to draw down the benefits on one/some or all of the PRSAs when it suits. Once you have taken the tax free cash amount from a PRSA it becomes a vested PRSA and works like an ARF i.e. you still have to take the annual income. This gives you the most flexibility re timing your tax free amount and ARF/vested PRSA annual drawdowns.
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Thanks North Star - most useful

S class said:
The critical requirement for the 65s benefit is having at least 39 prsi contributions in the year of your 63rd birthday. If a person works until May of that year, they will need extra contributions to reach the 39 level. So they would require extra contributions (credits).
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If only I was 4 months younger and born end of September. As Freud said most of your problems can be blamed on your parents.
 
Just thinking about the option on retirement of transferring my occupational DC pension of €1.6M into multiple PRSAs on early retirement to avoid being taxed at the 40% rate. Would another option be to retire the occupational DC scheme, take the €413K lump sum put the balance into an ARF and then open a PRSA and continue to make tax relieved contributions from the deemed disposal ARF income into the PRSA up to the age of 75 ? This would allow me earlier access to the lump sums (all at 63) but still provide the benefit of keeping my income out of the highest marginal rate and the ARF might have lower charges than a PRSA. Or would this increase my PRSI (up to 66) and USC taxes ? Would it be more beneficial to transfer an initial lump sump from the Occupational DC scheme into the PRSA and keep the ARF value at €600K so that all deemed disposal income is at the standard 20% rate.
 
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Why do you want to take the full lump sum at 63? Beyond paying off your mortgage, what are you going to do with the balance?

I would have thought you would be better off leaving the balance invested in a tax-free environment until you actually need the money.

Also, bear in mind that you don’t actually know what the value of your pension will be at the time you retire.
 
Flybytheseat said:
I reckon I can live comfortably on €45K per annum in retirement and would like if possible to keep my pension income just below the higher rate (40%) tax band. Hopefully this will leave a nice sum in my ARF when I die to pass on to my 3 children.
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I see nothing wrong with your plan here. You will have a large ARF which you are unlikely to exhaust in lifetime.

I know you want to minimise tax but money has a time value and your kids might benefit from the funds earlier in their life.

I would consider giving them €3k a year to benefit from the small gifts exemption even if that €3k is taxed at 40%. That's more than the residual ARF which is taxed at 30% as part of your estate but for your kids the funds may well be more useful when they are younger.
 
Thanks for the replies. A lot to consider. I've also read that an AMRF has certain advantages over a vested PRSA as the investment can accumulate tax free in an AMRF without being subjected to imputed distribution which is not the case in a vested PRSA. On retirement at 63 from my main DC fund (say€1.6M) can I take a €400K lump sum and then purchase an AMRF with say €550K of my total fund on retirement and put the balance of €650K in a normal ARF ? Are AMRFs now a thing of the past ?
 
Flybytheseat said:
Thanks for the replies. A lot to consider. I've also read that an AMRF has certain advantages over a vested PRSA as the investment can accumulate tax free in an AMRF without being subjected to imputed distribution which is not the case in a vested PRSA. On retirement at 63 from my main DC fund (say€1.6M) can I take a €400K lump sum and then purchase an AMRF with say €550K of my total fund on retirement and put the balance of €650K in a normal ARF ? Are AMRFs now a thing of the past ?
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AMRFs are gone. But even when they were there, the max investment was €63k. Once you access the 25% retirement lump sum, you must invest the balance. Into an ARF or buy an Annuity.
You could however invest your D.C. into a few different PRSAs and then access them (25% lump sum +75% ARF/Annuity) gradually over a few years.
 
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