# SCSB = 3rd secret of Fatima



## rogeroleary (11 Mar 2017)

I've been around a long time and have seen many many redundancy situations over the years and for all of that I've never heard anyone acutally be able to explain how SCSB works. I always hear "it depends on this and depends on that" or else "it can be interpreted quite liberally or quite generously", for such a critical point in a persos career I always amazed that no one seems to know the answer. Most commonly it seems to boil down to this:


So my question is how can one calculate the "Present value of the tax free lump sum received / receivable from the Pension Plan" (even trying to say that bamboozles me ).

*Maybe someone can help if I give sample numbers :*

Average pay over last 3 years = 90k p.a.
Service = 18 years
Redundancy pay of 5 weeks per year of service
Current pension pot = 500k
Age = 58
Have not received any redundancy in last 10 years so assume increased exemption of €10k would apply?
Wish to retain right to to tax free pension cash
Family dog = wheaten terrier (hopefully that is not needed for the calculation )
Any help with this would be much appreciated,

Rog


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## Joe_90 (11 Mar 2017)

Most people can't compute the NPV of the tax free lump sum.

An actuary produces the figure for the pension provider who give it to you. 

 A very amature estimate might be that the fund would grow at 3% and that inflation would eat away it at 1%.  

So you have 7 years to go.  So the fund might grow to circa €600,000, 25% of that is €150,000 discounted at 1% for 7 years is €140,000

So 90,000 x 18/15 - 140,000 = 0


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## Gordon Gekko (11 Mar 2017)

Joe's right:

€90k x (18/15) = €108k

€108k - €140k (using Joe's work) = Nil

The actuary calculates the Net Present Value of the tax-free pension lump sum by extrapolating its likely future value and then discounting that back to account for inflation.


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## rogeroleary (11 Mar 2017)

Thanks gents that certainly takes some of the mystery out of it. So, in a case of a company offering 5 weeks per year of service with the profile I outlined in the original post it looks like the redundancy would be something like this?:

90k with 18 yrs @ 5 weeks per year      =  €155,769

*Allowable deductions*
Initial tax free allowance = €10160
+ €765 & 18 years          = €13770
+ increased exemption   = €10000*                                        * is this impacted by present value of tax free lump sum also? and if so how would it work in this example?
+ statutory redundancy  = €21600                                          (18 years @ 2 weeks per year @ max of €600)
+ SCSB                          = ZERO  ?                                          based on Joe & Gordons earlier feedback
                                         -------
*Total tax free allowance     *                 = €55530
                                                              -----------
Taxable               €100238 @ 48%       =       €48114                    (48% = tax + USC)

*Net payment  €155769-€48114      =      €107655         *

Is that roughly correct? Seems like a lot of tax ie. > 30%? Can that be lessened / reduced or clawed back (for example if not working for 1-2 years)?

Many thanks,
Rog


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## JoeRoberts (11 Mar 2017)

The PV as calculated by the actuary uses the same method and discount rates as set out by dept. of social welfare for calculating transfer values. These changed in January 2017.

http://www.pensionsauthority.ie/en/...the_Pensions_Act_1990_Version_2_Oct_2016_.pdf.

So, project forward to find pension at retirement age. Then discount back to today.  The discount rate is 6% up to age 55 then reduces gradually until 65.


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## JoeRoberts (11 Mar 2017)

Joe_90 said:


> , 25% of that is €150,000 discounted at 1% for 7 years is €140,000



For the PV, the lump sum will be based on years of service rule rather than the 25%.


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## JoeRoberts (11 Mar 2017)

Note also that if pension pot is a PRSA, that is not considered an occupational pension. So there would be no deduction for pension lump sum in such case

So assuming it is a Dc scheme, the SCSB deduction for PV lump sum would be roughly:

Lump sum under years of service rule = 3/80 x 18 x 90k = 61k,
PV roughly 46k after discounted at say 4% average for 7 yrs.

So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory.

*You can still take your 25% lump sum even though this is not used in the pv calculation*. Revenue may close this loophole in the future though.


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## Joe_90 (11 Mar 2017)

Interesting if the €500k had been built up over more than 18 years would that increase the Lump sum?


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## rogeroleary (11 Mar 2017)

Thank you very much guys, this is very enlightening. A couple of points based on you rcomments:


Yes this *is a DC scheme*
Yes the 5 weeks *includes* statutory
The *500k* is mostly made up of current employment ie. 18 years but *also includes about 50k from previous employment* (7 year prior to current)
Joe* R *- I note your comment "_So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory_." Based on all the above what do you reckon is the total tax free amount please? Is it 62k + 55k? as per below? 



Thanks again guys for all your help,


Rog


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## Gordon Gekko (11 Mar 2017)

Would it not be 3/80 x *25 *x €90k?


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## Gordon Gekko (11 Mar 2017)

Meaning a lump sum of €84k. Call it €60k discounted back.

So €108k less (say) €60k = €48k

Statutory is always tax-free, so €22k tax-free.

So around €70k tax-free.


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## JoeRoberts (11 Mar 2017)

Gordon Gekko said:


> Would it not be 3/80 x *25 *x €90k?


As I understand it he is looking at redundancy now with 18yrs service


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## Gordon Gekko (11 Mar 2017)

You're right.


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## JoeRoberts (11 Mar 2017)

rogeroleary said:


> Thank you very much guys, this is very enlightening. A couple of points based on you rcomments:
> 
> 
> Yes this *is a DC scheme*
> ...


Total tax free will be 62 + 22 = 84.
The SCSB route gives you the best result so the other exemptions are not used. They can only be increased up to the SCSB, you don't get all 3 added together.
If company is willing to pay for untaken holidays then you should maximise these and it will increase your 3 year average salary to bump up the scsb. Pay in lieu of notice if available can also be used for this purpose.


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## rogeroleary (12 Mar 2017)

Thanks very much Joe - this has been very helpful. One last question - is top slicing relief still around these days in the event someone does not work in the year or so following redundancy? Sounds like the exposure to tax & USC would be 71k @ 40% and 8% USC so might be nice to get some of that back if a job didn't come along.

Rog


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## JoeRoberts (12 Mar 2017)

rogeroleary said:


> Thanks very much Joe - this has been very helpful. One last question - is top slicing relief still around these days in the event someone does not work in the year or so following redundancy? Sounds like the exposure to tax & USC would be 71k @ 40% and 8% USC so might be nice to get some of that back if a job didn't come along.
> 
> Rog


No, top slicing is finished. If you have access to cash you could make an avc contribution to your pension before your leave date, that would be quite tax efficient as your fund is below the 200k tax free limit. So you would get 40% relief (subject to the usual limits) and then would be taking 25% of that out tax free when you start your pension.


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## Hubert (14 Apr 2017)

Hi Joe,

For the average pay calculation for SCSB, what is included in this?

Thanks


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## JoeRoberts (16 Apr 2017)

Hubert said:


> Hi Joe,
> 
> For the average pay calculation for SCSB, what is included in this?
> 
> Thanks


Gross pay before pension deductions including bik and taxable sw for the 36 months before leave date. Also include any paid holiday pay or pay in lieu of notice if applicable.


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## Sophrosyne (16 Apr 2017)

JoeRoberts said:


> Gross pay before pension deductions including bik and taxable sw for the 36 months before leave date. Also include any paid holiday pay or pay in lieu of notice if applicable.



I didn't think taxable social welfare could be included as it is not an emolument of the office or employment to which the lump sum refers.


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## Hubert (17 Apr 2017)

that's clear thanks. to bump up the 3 year average, could you include any income from share options (not big but every little helps) if you managed to exercise them before, or as part of the settlement i.e. exercise them just before you do the deal with the employer?


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## Gordon Gekko (17 Apr 2017)

Yes, absolutely. Share options are included in the calculation.


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## JoeRoberts (17 Apr 2017)

Sophrosyne said:


> I didn't think taxable social welfare could be included as it is not an emolument of the office or employment to which the lump sum refers.


Well I got it in writing from Revenue that it is included. Particularly relates to maternity benefit and illness benefit.


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## Sophrosyne (18 Apr 2017)

Joe,

Could you clarify exactly what Revenue advised?

Was it that _all _taxable social welfare benefits could be included as remuneration for the last 3 years of service in computing the SCSB?


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## Gordon Gekko (18 Apr 2017)

Sophrosyne said:


> Joe,
> 
> Could you clarify exactly what Revenue advised?
> 
> Was it that _all _taxable social welfare benefits could be included as remuneration for the last 3 years of service in computing the SCSB?



No...it's social welfare that's linked to the employment. e.g. Maternity benefit, sick pay, etc.


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## JoeRoberts (18 Apr 2017)

From Revenue

_In relation to average pay over the previous 36 months for a SCSB calculation, SCSB is determined on the average for one year of the holder’s emoluments of the office or employment for the last three years of service before the relevant date. Section 993 of the TCA, 1997, defines "emoluments" as anything assessable to Income Tax under Schedule E, and references to payments of emoluments include references to payments on account of emoluments. 
_
I guess it is covered under the payments _on account of employment_. They specifically confirmed MB and IB in the note.


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