Can I top up the tax free lump sum I get from a DB pension?

I took a redundancy package from my company over 10 years ago. I am also in receipt of a deferred pension due to start next year. It is a defined benefit scheme.

When I took my redundancy package I put about €30k from my redundancy, the maximum allowed at the time, to top up my pension.

This was put in a separate scheme, defined contribution, and not part of the defined benefit package.

Because I did not work the maximum years with my company my DB pension has been reduced in line with the number of years worked. I will be getting less than half my salary amount in pension.

I can take a tax free lump sum amount from my defined benefit pension. Can I also take a tax free lump sum from my separate defined contribution pension?

Can I top up my tax free lump sums to two thirds of my pensions because I am only getting less than 50% from my DB pension?

When you took redundancy, presumably you did not waive your right to a tax free lump sum to get higher redundancy tax relief ?

By the sounds of it you made an AVC contribution as part of your DB plan.

So you can take a tax free lump sum of up to 1.5 times your "final salary" depending on years of service. ( There are a number of ways to calculate your final salary but it will most likely be higher than your pensionable salary which probably has the state pension offset). Your scheme trustees will need to allow you take what is called the Revenue max tax free sum rather than the scheme max which is probably based on pensionable salary. So ask for this in your options statement which you should get 8 weeks before your retirement date.

By taking the lump sum you reduce your annual pension but you can mitigate this reduction by using the AVC fund.

The €30k you contributed is still part of the scheme, you do not get a separate tax free lump sum from it. You may use it to pay for your lump sum so the pension you receive from the DB scheme isn't reduced (or by as much). You can also transfer it to an A(M)RF and have your lump sum paid from the main DB benefit.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

JoeRoberts said:

When you took redundancy, presumably you did not waive your right to a tax free lump sum to get higher redundancy tax relief ?

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From memory I got the maximum relief of tax at the time.

Thanks Joe & Stephen. Can I ask. I am being asked by my pension provider if I have received any lump sums from any other source since 2005. Does this mean that if I received a redundancy package before 2005 it is not counted in any calculations of my tax free lump sum that will be due from my deferred pension next year?

Any ideas why the lump sum payment that I made on leaving my company was initially put in to my defined benefit work pension and then taken out and put in a separate defined contribution? Are AVC'S normally treated this way?

Bronco Lane said:

From memory I got the maximum relief of tax at the time.

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You need to go back and check your redundancy documentation. Did you sign a waiver document, giving up your right to a tax free lump sum? If you did, then you cannot get a TFLS from this scheme on retirement. To get the maximum tax relief on redundancy you would have done this waiver . But then, if you did, I don't see why you put 30k into the AVC. Presumably you got advice to do the AVC so they would also have said to keep the tax free option open ( i.e. don't sign a waiver).

Thanks Joe. I honestly can't remember what I signed. There was no advice given at the time by the company that I worked for. I can't imagine that I would have signed anything at the time giving up my right to a tax free lump sum.

I am a bit confused by your post above when you say "To get the maximum tax relief on redundancy you would have done this waiver". Should it not read that "to get the maximum tax relief on redundancy you would NOT have done this waiver"?

My redundancy package was about €120k. I got this around the year 2001, I am not sure if there was a tax free threshold available at that time. However I did pay some tax on it.

The tax free lump sum from my coming deferred work pension is about €48k. (This is separate to the €30k AVC that I put in to my pension at the time of my redundancy.)

When added together, my redundancy of €120k, taken in 2001 plus my tax free lump sum of €48k due next year from my work pension are below the current €200k tax free threshold.

Am I correct in assuming therefore that I can take my lump sum payment from my pension, free of tax?

My redundancy payment was 16 years ago. Do I even have to refer to this as it is so long ago?

Bronco Lane said:

I am a bit confused by your post above when you say "To get the maximum tax relief on redundancy you would have done this waiver". Should it not read that "to get the maximum tax relief on redundancy you would NOT have done this waiver"?

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No. The tax free allowance from your redundancy is reduced by the present value of a future lump sum. If you waived ( gave up) your right to a future TFLS you would have maxed your redundancy tax free allowance.

Redundancy is not added to a pension TFLS for the 200k.

Reading your post again, someone, presumably the pension administrators are offering you the TFLS so you must have kept the option open ( not waived it) or else they don't have it marked on their records ( I know a few cases of this, can also happen when the fund changes administrators). If its the former, you didn't max your redundancy tax free limit in 2001 which is good news now.

You can take TFLS from pension up to the limits as in my 1st post. If the administrators have calculated it as 48k, then that's it.

JoeRoberts said:

The tax free allowance from your redundancy is reduced by the present value of a future lump sum

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I am having difficulty understanding this sentence. Maybe it's just me but could someone explain it in simpler language?

If a person got a redundancy years ago, how would anyone have known at the time what future lump sum they would be getting, let alone the then "present" value of it?

I got a redundancy a few years back and nobody spoke to me about any future lump sums that I might get. So did someone calculate that I would be getting a pension from my employers in future years and reduce my tax free allowance from my redundancy at the time?

Based on years service and salary, they can work out the value of the lump sum payable. Then using assumptions, they work back the value of the lump sum at retirement to what it is worth in today's money.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)