Hi,
I am trying to figure out the tax-free allowances that may be applicable to a redundancy lump sum if I am made redundant. I have read the revenue leaflet
(http://www.revenue.ie/en/tax/it/leaflets/it21.html#section4) but I am still unsure. Specifically it seems to me that the Increased exemption and SCSB are completely worthless except in the most extreme or contrived cases so I am wondering if I have misunderstood. Specifically the SCSB is:
CurrentSalary*YearsOfService/15 - CurrentValueOfFuturePensionLumpSum
But this prompts the questions:
1. What is the 'current value' of a pension lump sum which may be receiveable in the future. I guess it is the value that when compounded over the years from now to retirement equals the amount receivable upon retirement. Is this correct ? What is the compounding rate that is used, where is this rate specified ?
2. My pension allows me, upon retirement to receive 1.5xFinalSalary lump sum tax free. Is this 1.5x normal or is it unusually generous? I ask because it seems to render the SCSB worthless.
For example, say I have 22.5 years service then
SCSB = CurrentSalary*22.5/15 - CurrentValueOf{FinalSalary*1.5}
But if the CurrentValue of the future payment is calculated by a compounding factor it seems logical that the projected FinalSalary would be calculated by a roughly reciprocal scaling factor. So we have:
SCSB = CurrentSalary*22.5/15 - CurrentValueOf{FinalSalary*1.5}
= CurrentSalary*22.5/15 - K*(FinalSalary*1.5), where K<1
= CurrentSalary*22.5/15 - K*(CurrentSalary*(1/K)*1.5),
= 0
So it seems that even for 22.5 years service the SCSB is worthless and similarly it is hard to see how the current value of 1.5xFinalSalary will ever be < 10k, so the 'Increased allowance' is also worthless.
So, to recap on my questions
1. At what rate is the 'current value' of a future lump sum calculated ?
2. Is my pension just unusually generous (allowing tax-free 1.5x FinalSalary lump sum upon retirement) ? Or is this normal ?
3. If this is normal, does it mean that the Increased Allowance is generally worthless and that the SCSB only has value for service longer than 22.5 years ? Or have I misunderstood something?
4. And finally, my calculations assume that my final salary will be some reasonable increase relative to my current salary but in fact I have no way of knowing what it might be, it is unlikely that I will find a job that pays as well as my current one if I am let go and => my FinalSalary from a different job could be significalty lower than projecting based on the salary trend in my current job. How is this usually calculated for tax purposes ?
Thanks,
Usjes
I am trying to figure out the tax-free allowances that may be applicable to a redundancy lump sum if I am made redundant. I have read the revenue leaflet
(http://www.revenue.ie/en/tax/it/leaflets/it21.html#section4) but I am still unsure. Specifically it seems to me that the Increased exemption and SCSB are completely worthless except in the most extreme or contrived cases so I am wondering if I have misunderstood. Specifically the SCSB is:
CurrentSalary*YearsOfService/15 - CurrentValueOfFuturePensionLumpSum
But this prompts the questions:
1. What is the 'current value' of a pension lump sum which may be receiveable in the future. I guess it is the value that when compounded over the years from now to retirement equals the amount receivable upon retirement. Is this correct ? What is the compounding rate that is used, where is this rate specified ?
2. My pension allows me, upon retirement to receive 1.5xFinalSalary lump sum tax free. Is this 1.5x normal or is it unusually generous? I ask because it seems to render the SCSB worthless.
For example, say I have 22.5 years service then
SCSB = CurrentSalary*22.5/15 - CurrentValueOf{FinalSalary*1.5}
But if the CurrentValue of the future payment is calculated by a compounding factor it seems logical that the projected FinalSalary would be calculated by a roughly reciprocal scaling factor. So we have:
SCSB = CurrentSalary*22.5/15 - CurrentValueOf{FinalSalary*1.5}
= CurrentSalary*22.5/15 - K*(FinalSalary*1.5), where K<1
= CurrentSalary*22.5/15 - K*(CurrentSalary*(1/K)*1.5),
= 0
So it seems that even for 22.5 years service the SCSB is worthless and similarly it is hard to see how the current value of 1.5xFinalSalary will ever be < 10k, so the 'Increased allowance' is also worthless.
So, to recap on my questions
1. At what rate is the 'current value' of a future lump sum calculated ?
2. Is my pension just unusually generous (allowing tax-free 1.5x FinalSalary lump sum upon retirement) ? Or is this normal ?
3. If this is normal, does it mean that the Increased Allowance is generally worthless and that the SCSB only has value for service longer than 22.5 years ? Or have I misunderstood something?
4. And finally, my calculations assume that my final salary will be some reasonable increase relative to my current salary but in fact I have no way of knowing what it might be, it is unlikely that I will find a job that pays as well as my current one if I am let go and => my FinalSalary from a different job could be significalty lower than projecting based on the salary trend in my current job. How is this usually calculated for tax purposes ?
Thanks,
Usjes