# tax free lump sum / pension contribution on redundancy



## Brian (14 Nov 2002)

Hi folks,

I have recently been made redundant and will be receiving a generous pay out, (paid gross as opposed to net). I know I can receive some of this tax free, but I would like to know the following: I have no company pension but would like to start a pension and put some of my redundancy payment into it. Can I do this and avail of the tax benefits?

Thanks,
Brian


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## Big Brother (14 Nov 2002)

*Redundancy*

Yes - theres loads of planning you can do

(1) you con make a pension contribution to an RAC (personal pension) but watch for the technicality that says the source of the income must exist at the point of making the contribution ie start the pension now before you leave thus leaving you scope to whack in a bigger sum when the ex-gratia payment comes through (which will be after you leave). The max contribtion will be 15 to 30% x earinings based on your age 

(2) Will your employer set up a scheme for you using part of the redundance thus allowing you to make AVC's backdated for up to 10 years? the max contribution this way can be higher than 30%. Even better you can make this (potentially) massive contribution, claim relief a t the higher rates for the years in question and then take a refund of contributions less tax at 20% thus saving the difference in tax (eg 43%-20%=22% saving for this year)

(3) In relation to the exgratia payment I presume some will be taxable - you'll come across SCSB / Basis Exemption formulae that will allow you to maximise the tax free element but in addition get someone to advise you on Top Slicing Relief - cream on the cake type of relief!!

Take advice of a tax / pensions consultant - it may cost but it will be well worth it


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## Brian (14 Nov 2002)

*redundancy*

Thanks BigBrother,

It certainly sounds like I can set up a pension to save some money as well as plan for the distant future.
The company doesn't have a pension scheme in place at present. Does it cost much to set up a company pension scheme in comparison to a personal pension scheme? Any idea what ballpark figures might be?

Thanks again.


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## Alex (14 Nov 2002)

*Re: Redundancy*



> watch for the technicality that says the source of the income must exist at the point of making the contribution ie start the pension now before you leave thus leaving you scope to whack in a bigger sum when the ex-gratia payment comes through (which will be after you leave).



I don't understand.  If the source of income must exist at the point of making the contribution, why will setting up a pension scheme now help when he can't actually make the contribution until the source of income no longer exists?


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## Big Brother (14 Nov 2002)

*RAC contribution*

Alex

FA01 changed the rules here - you can continue to make RAC payments AFTER the source has ceased IF you made RAC payments from relevant earnings when the source existed

Brian

Its virtually impossible to put a general figure on the cost of setting up a scheme (personal or otherwise) - you are really paying for the advice - the soluiton ie the scheme is incidental really. In reality the cost of setting up a €1m scheme as a €1000 scheme - the same work is involved. The difference will be the advice underlying the €1m /€1000 figures. This assumes of course you are looking for fee based advice. Caveat Emptor if you go on a commission basis.


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## Brian (15 Nov 2002)

*Redundancy*

Thanks Big Brother,

So the charges depend on the level of advice.
When you say take the advice of a tax / pensions consultant, do you mean a tax specialist or a pension broker or someone else? Who is best positioned to provide such advice?

By the way, yes I do intent going the fee, as opposed to commission, route.

Thanks,
Brian


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## Big Brother (15 Nov 2002)

*Who to go to*

Brian

Given your situation - redundancy - I think that some tax based practice would be your best bet. They would give you the 'one stop shop' service. You should clarify thier authorisation from the Central Bank to see what type of pensions advice you're going to get. A RAIPI / Authorised Advisor status is fine.


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## Homer (7 Oct 2003)

Hi Brian

If part of your redundancy payment is going to be taxable, you could ask your employer to set up a pension plan for you and put some of the money they were going to pay as a redundancy payment into the pension plan.

I'm not sure the Revenue would be happy if this were done as a direct trade off, but you could agree with your employer to accept a lower redundancy package in recognition of the fact that they are providing a pension for you.  Provided you do not have a contactual right to a higher redundancy payment, this should be alright from a Revenue viewpoint.

The advantage of this approach is that it would allow you to kick start your pension in a tax efficient manner, without having to worry about the age related limits applying under a personal pension or PRSA.  Whether it will confer any significant advantage to you is dependent on your exact circumstances - age, salary, service, etc.

Regards
Homer


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