# Size of Tax free lump sum on retirement



## Usjes (13 Jun 2014)

Hi, 

I am a member of a defined contrib. pension and we have presentations from the pension provider roughly once a year and they generally say that, upon retirement, you are entitled to a tax-free lumpsum of 1.5 x (Your Final Salary). Digging deeper it seems that in fact the entitlement is to (3xYearsOfService/80)x(Final Salary), so if you served a full 40 years this would simplify to the 1.5xFinal Salary that is generally quoted. What I would like to know is:
Who specifies this entitlement; is it part of the terms of the pension scheme or is it a rule laid down by revenue ? Does anyone know ? I would like to see the precise detail of the entitlement but I am not sure who I should be chasing, revenue or the pension providers ? 

Thanks,

Usjes.


----------



## LDFerguson (13 Jun 2014)

Revenue set the rules for maximum tax-free lump sums and 3/80 x salary x years of service is one of a number of methods.  Other methods are detailed here.  [broken link removed]

Assuming that your scheme has amended its rules to accommodate changes brought in by Finance Act 2011, then you can also calculate your lump sum as 25% of the overall fund.


----------



## Usjes (14 Jun 2014)

LDFerguson said:


> Revenue set the rules for maximum tax-free lump sums and 3/80 x salary x years of service is one of a number of methods.  Other methods are detailed here.  [broken link removed]
> 
> Assuming that your scheme has amended its rules to accommodate changes brought in by Finance Act 2011, then you can also calculate your lump sum as 25% of the overall fund.



Thanks LDFerguson,

This is very useful. Do you know how I can access the full document ? I can see all the individual chapters by changing the digits in the link you supplied and chapter 1 indicates that all terms in italics are defined in Appendix 1. I cant figure out the correct link to access Appendix 1 though. 
Specifically I am looking for the definition of the term _final remuneration. _I am being made redundant but am many years from retirement age so I am trying to figure out what final remuneration means in this context. It could be the remuneration at the date I get made redundant, or if I find another job and hold it till retirement it could be the remuneration from that job when I hit retirement age, or I suppose it could be something else? Hopefully the definition in Appendix 1 will clarify. So does anyone know how I can access it ? 

Thanks, 

Usjes.


----------



## mandelbrot (14 Jun 2014)

Usjes said:


> Thanks LDFerguson,
> 
> This is very useful. Do you know how I can access the full document ? I can see all the individual chapters by changing the digits in the link you supplied and chapter 1 indicates that all terms in italics are defined in Appendix 1. I cant figure out the correct link to access Appendix 1 though.
> Specifically I am looking for the definition of the term _final remuneration. _I am being made redundant but am many years from retirement age so I am trying to figure out what final remuneration means in this context. It could be the remuneration at the date I get made redundant, or if I find another job and hold it till retirement it could be the remuneration from that job when I hit retirement age, or I suppose it could be something else? Hopefully the definition in Appendix 1 will clarify. So does anyone know how I can access it ?
> ...



http://www.revenue.ie/en/about/foi/s16/templates/pensions/


----------



## LDFerguson (16 Jun 2014)

Usjes said:


> Thanks LDFerguson,
> 
> This is very useful. Do you know how I can access the full document ? I can see all the individual chapters by changing the digits in the link you supplied and chapter 1 indicates that all terms in italics are defined in Appendix 1. I cant figure out the correct link to access Appendix 1 though.
> Specifically I am looking for the definition of the term _final remuneration. _I am being made redundant but am many years from retirement age so I am trying to figure out what final remuneration means in this context. It could be the remuneration at the date I get made redundant, or if I find another job and hold it till retirement it could be the remuneration from that job when I hit retirement age, or I suppose it could be something else? Hopefully the definition in Appendix 1 will clarify. So does anyone know how I can access it ?
> ...



It's the remuneration from the job you're leaving, indexed for inflation until you retire.  A reduction in maximum benefits is applied to account for the number of years' ACTUAL service relative to the number of years' POTENTIAL service.  

The pension scheme broker should be able to calculate your entitlement to a lump sum now, which would only be adjusted for inflation.  The calculation methods are complex and varied and I wouldn't recommend DIY.


----------



## Usjes (16 Jun 2014)

LDFerguson said:


> It's the remuneration from the job you're leaving, indexed for inflation until you retire.  A reduction in maximum benefits is applied to account for the number of years' ACTUAL service relative to the number of years' POTENTIAL service.
> 
> The pension scheme broker should be able to calculate your entitlement to a lump sum now, which would only be adjusted for inflation.  The calculation methods are complex and varied and I wouldn't recommend DIY.



Hi LDFerguson, 

Thanks for that explanation, it is specifically this indexing that I am interested in.  My problem is that I am getting confilicting infromation from the pension provider and from revenue. The pension provider is indexing the salary from my redundancy date to my normal retirement date as you have suggested, however revenue said on the phone that this should not be done. Reading the specifics of the manual I am inclined to agree with revenue. Specifically, Appendix 1 defines:

_Final Remuneration may be computed on one of the following bases, viz:
(i)(a)Basic remuneration over *any* twelve month period of the five years preceding the relevant date (i.e. the date of retirement, leaving service or death, as the case may be),
etc

_So, it seems in my case '_relevant date' _means the date of leaving service (as I am being made redundant rather than retiring). It then continues:

_Provided that_
_(ii)Whenever final remuneration is calculated by reference to a year or years other than the 12 months ending with the relevant date, each such year's remuneration may be increased in proportion to the increase in the cost of living from the last day of *that* year *up to the relevant date *referred to as "dynamised" final remuneration. _

So, unless the term 'relevant date' has changed its meaning between these to paragraphs (which would be ridiculously confusing). It seems to me that the indexing should only be applied if I my final remuneration is calculated over a 12month period which did not consist of the 12months up to the date at which I am being let go. For example, if I elect, as is allowed in Section(i)(a), to use my basic remuneration over redundancyDate-4years to redundancyDate-3years, then the resultant value should be indexed for the cost of living increase from redundancyDate-3years to redundancyDate, not from redundancyDate to retirementDate.

Does this make sense or have I mis-interpreted something ? 

Thanks, 

Usjes.


----------



## LDFerguson (16 Jun 2014)

Let's simplify it a little bit.  For the purpose of this example, I'm going to assume that...


Redundancy date is 2014
You had a higher salary (including allowable elements e.g. BIK and bonuses) in 2012 than in 2014
Your retirement date is 2020

In this example it's in your best interests and permissible for you to use your salary in 2012 rather than your salary in 2014, as 2012 was the higher salary.  

You're permitted to use indexation (a) from 2012 to 2014 and also (b) from 2014 to 2020 to arrive at the final figure in 2020.


----------



## Usjes (17 Jun 2014)

LDFerguson said:


> Let's simplify it a little bit.  For the purpose of this example, I'm going to assume that...
> 
> 
> Redundancy date is 2014
> ...



Hi LDFerguson, 

Thanks for your reply. I do understand the difference between your two cases and it is case (b) that is being applied by my pension provider and it may be correct but I still dont see anything in the revenue pension manual that allows for this. By my reading only case (a) is allowed. Seeing as it is me who is ultimately liable for any errors in the tax calculations I would like to have access to a verifiable reference that states explicitly that this is allowed. Do you know if the revenue pension manual is the final authority on this subject or is it revenue's interpretation of some legislation that I could look up ? If not then I guess I will have to accept that this is just 'how it is done' despite my misgivings. 

Thanks, 

Usjes.


----------



## LDFerguson (17 Jun 2014)

You're right that the Revenue Pensions Manual is a practice manual as distinct from being the law.  The main pieces of law that govern such schemes are the Pensions Act 1990 and the Taxes Consolidation Act 1997.  These are both sprawling pieces of legislation and I'd have to spend a long time trawling through them to pinpoint the specific sections that relate to your query.


----------



## Usjes (16 Jul 2014)

*uplifted scale vs. 3 80ths per year service ?*

After a break I have been looking into this further and I wonder if anyone knows the rationale behind the 'uplifted scale' calculations ? 
As far as I knew the tax-free lump sum entitlement at NRA was:
3/80 * YearsOfService * FinalRemuneration
So for a full 40 years of service you could get the max value  1.5*FinalRemuneration.
Digging through the revenue manual though it seems there is the alternative 'uplifted scale' calculation which gives a more generous tax-free lump sum.
It is clear from the form of the 3/80 formula that the intent is that the amount you are entitled to is proportional to the amount of service but the uplifted scale appears to undermine this by allowing the same lump sum for much shorter service (so you can get 1.5xFinalRemuneration in only 20 years).
So it seems to me that the original method (3/80) is now redundant as the 'uplifted scale' will always give you an allowance that is _greater_ or equal.
So does anyone know how the 'uplifted scale' allowance arose ? 
Is it a new allowance that has effectively superceded the old 3 80ths calc, or has it always existed ?
Or is the uplifted scale calculation only allowed under certain circumstances? If so what are these ?

I do see that if you started your pension very late (45 say) the uplifted scale would be very helpful, but my point is that why have the two methods? Revenue could just specify the uplifted scale method with its _existing_ proviso that you can never exceed 1.5xFinalRemuneration and then this one rule would cover both the case of people who started late and those who started their pension at 25.

So if anyone has any insight into this I would love to hear it.

Thanks,

Usjes


----------



## LDFerguson (16 Jul 2014)

The 3/80 scale ignores any other pension benefits you may have.  When using the uplifted scale you must take other pension benefits (excluding State pensions) into account and reduce the maximum benefits by the others.


----------



## Usjes (16 Jul 2014)

LDFerguson said:


> The 3/80 scale ignores any other pension benefits you may have.  When using the uplifted scale you must take other pension benefits (excluding State pensions) into account and reduce the maximum benefits by the others.



Yes, I had noticed the clause that the uplifted scale value was decreased by any 'retained benefits' to ensure the total lump sum never exceeded 1.5*FinalSalary, but I assumed that similar applied to the 3/80 method ie. it is capped at 40 years service. Do you mean to say that if you had 7 years service in one pension and then 40 in another that then by the 3/80 method you could take a tax free lump sum > 1.5x final salary via the 3/80 method (ie 3*47/80*FinalRemuneration) ? 
Basically I am asking if anyone can construct a scenario where the 3/80 method gives you a value in excess of the 'uplifted scale' method because if not then it seems that the 30/80 method is redundant. And I am trying to understand why revenue would include a redundant method.


----------



## mandelbrot (16 Jul 2014)

Apples and oranges there - the 7 years' service gets you 7 x 3/80ths of X, the 40 years' service gets you 40 x 3/80ths of Y. You don't get 47 x 3/80ths of anything!


----------



## LDFerguson (17 Jul 2014)

Usjes said:


> Basically I am asking if anyone can construct a scenario where the 3/80 method gives you a value in excess of the 'uplifted scale' method because if not then it seems that the 30/80 method is redundant. And I am trying to understand why revenue would include a redundant method.



You worked for 20 years in high-paying job A with a DB pension scheme.  You then started job B that paid far less.  In calculating your benefits from Job B using the Uplifted Scale, your big pension from Job A might wipe out your smaller benefits from Job B.


----------



## Usjes (17 Jul 2014)

LDFerguson said:


> You worked for 20 years in high-paying job A with a DB pension scheme.  You then started job B that paid far less.  In calculating your benefits from Job B using the Uplifted Scale, your big pension from Job A might wipe out your smaller benefits from Job B.



Thanks for the example LDFeguson, very interesting, so does this mean that if you had the same salary ('S' say) in jobs A and B and worked for 20 years in each you could get a final tax free lump sum of 2.25xS by using the uplifted scale to calculate your entitlement from JobA and the 3/80 to calc for JobB ?


----------

