Winding up a company and paying proprietary director a retirement lump-sum?

Brendan Burgess

Brendan Burgess

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I am trying to get my head around this for a director who is winding up their company and retiring. When the creditors are paid, they will have cash in the company.

I have told him to get professional advice, but I want to do a plan for him to get advice/second opinion on.

Lump sum payments

This page explains lump sum payments
www.revenue.ie www.revenue.ie

Standard Capital Superannuation Benefit (SCSB)
SCSB is an additional relief your employee may be entitled to. It benefits employees with high earnings and long service. SCSB is calculated at 1/15 of the average annual pay for the last 36 months in employment. This is multiplied by the number of full years of service. Any tax free lump sums received are subtracted from this benefit.

Salary: €120k
1/15th: €8k
Length of service: 40 years
SCSB: €320k

They have €800k in their pension fund.

So they take €120k tax free from their pension fund.

The SCSB is reduced by the €120k

So their company can pay them €200k tax-free as a retirement gratuity.

Is that calculation correct?

Brendan
 
Hi Brendan,

No, the €320k is reduced by the €200k (i.e. 25%) tax-free lump-sum that can come out of the pension.

So, in the absence of further planning, the person would look to take €120k out as an ex-gratia termination payment.

You’d also need to look at the scope for the payment to be deductible against profits rather than coming out of reserves.

And the proceeds of the wind-up might be subject to Entrepreneur Relief or Retirement Relief.

Gordon
 
Great thanks.

So it's the amount payable from the pension as distinct from the amount paid.

So is the €120k tax-free and the €200k from the pension is tax-free?

If he didn't have a pension fund, would the €320k SCSB be tax-free, or it there a €200k limit on it?

Brendan
 
My understanding is that there is an overall limit of €200k on each of the lump sums.

So if, in the example shown above, the member had €480k in their pension fund, their pension lump sum would be 25% of €480k = €120k and their SCSB would be €320k minus €120k = €200k as a tax free termination payment, giving an overall tax free total of €320k.

But if their pension fund was only (say) €400k, their maximum pension lump sum would be 25% of €400k = €100k and their SCSB would be €320k minus €100k = €220k, but the maximum tax free limit of €200k would apply to this termination payment, giving an overall tax free total of €300k.
 
Correct, the max is €200k from each. Also, it’s the Net Present Value of the lump sum as calculated by the pension provider.

i.e. Average Earnings x Years/15 - NPV

But at retirement age, the NPV should be the same
 
So, in the example given by Brendan, the member could choose to take only €120k from their €800k pension fund, ARF/AMRF the remaining €680k and receive €200k tax free termination payment.
 
No. He’d get a tax-free termination payment of €120k, get a tax-free retirement lump sum of €200k, and then ARF/AMRF €600k.
 
But, if he’s drawing down his benefits straight away, could he not choose to take a lower lump sum from his pension fund? My understanding is that 25% is the maximum amount that can be taken as a lump sum (assuming a service and salary related figure does not give a higher result) but there is no requirement to take the maximum.
 
Can I try to clarify the points at issue here.


1) Gordon says: where the company can pay an SCSB retirement payment of €320k, they reduce this by the €200k which they could get from the pension fund, so they get €120k tax free SCSB and €200k pension fund.

Result:
Retirement lump sum: €120k
Pension lump sum: €200k
ARF €600k

2) Homer, you say that when a person is getting a lump-sum from the company and retiring at the same time, they can waive part of their pension tax free lump sum. So, they would waive €120k of it, and still get the maximum €200k tax-free retirement payment. Then their €200k from the pension fund tax-free would be reduced by the €120k.

Result:
Retirement lump sum:€200k
pension lump sum: €120k
ARF: €680k





Brendan
 
Brendan, that agrees with my understanding of the position. But you are not correct in saying that the member waives €120k of their lump sum entitlement. They are taking €120k and 'waiving' €80k of their maximum lump sum entitlement.

Also, I don't think 'waive' is the correct term to use where a member is actually retiring. Members can waive their rights to a future pension lump sum when they are leaving service but not yet drawing down their retirement benefits. This is often done in order to maximise their SCSB and minimise the tax they are paying on their severance/termination payment. But any such waiver has to be irrevocable and has to be on an 'all or nothing' basis. The Revenue will not accept a partial waiver in such circumstances.
 
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