Cashing in a retirement bond. What tax rate applies?

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Beachcomber

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I have a retirement bond worth approximately €100k with Zurich. As I am over 50 I know I can take a 25% tax free amount (confirmed by Zurich). Options for balance of the bond include moving to an ARF or cashed out subject to tax.
I’m a 52% marginal rate tax payer.
What tax rate would apply to the remaining 75% of the bond if I chose to liquidate it in its entirety? Thanks
 
There's a second method of calculating your tax-free lump sum (aside from 25% of fund). It's based on your salary and service with the original employer where the retirement bond came from. Occasionally it works out that you can get a higher tax-free lump sum using this method. For example, if this calculation resulted in a tax-free lump sum of €100,000 or more, happy days - you take the lot out tax-free. It doesn't often work out so neatly, except in a minority of cases, but it's worth exploring just to make sure. Ask your broker to calculate your lump sum using the "salary and service" method.

Assuming that 25% is the better lump sum option for you and you take the other 75% as taxable cash, the 75% will be taxed as if you earned it, so you'll be hit at your marginal rates of Income Tax, USC and PRSI.

For this reason, it's advisable to leave withdrawing the 75% until you've actually retired from work. You can draw your 25% tax-free now and use an ARF to defer drawing anything from the remaining 75% until the year in which you turn 61.
 
Dave Vanian said:
There's a second method of calculating your tax-free lump sum (aside from 25% of fund). It's based on your salary and service with the original employer where the retirement bond came from. Occasionally it works out that you can get a higher tax-free lump sum using this method. For example, if this calculation resulted in a tax-free lump sum of €100,000 or more, happy days - you take the lot out tax-free. It doesn't often work out so neatly, except in a minority of cases, but it's worth exploring just to make sure. Ask your broker to calculate your lump sum using the "salary and service" method.

Assuming that 25% is the better lump sum option for you and you take the other 75% as taxable cash, the 75% will be taxed as if you earned it, so you'll be hit at your marginal rates of Income Tax, USC and PRSI.

For this reason, it's advisable to leave withdrawing the 75% until you've actually retired from work. You can draw your 25% tax-free now and use an ARF to defer drawing anything from the remaining 75% until the year in which you turn 61.
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Thanks Dave. Very informative.
 
I am in a similar situation to Beachcomber - on the 75% taxable cash piece, is it not the case that this excess (75%) lump sum above the tax free 25% is considered a ’standard chargeable amount‘ and therefore taxable at 20% if one chooses to liquidate the retirement bond on its entirety (see Revenue attachment below)?

Would appreciate any clarity you can give.
 

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Billy75 said:
I am in a similar situation to Beachcomber - on the 75% taxable cash piece, is it not the case that this excess (75%) lump sum above the tax free 25% is considered a ’standard chargeable amount‘ and therefore taxable at 20% if one chooses to liquidate the retirement bond on its entirety (see Revenue attachment below)?

Would appreciate any clarity you can give.
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No - the lump sum referred to in that chapter is only the 25%. If the 25% happens to be greater than €200,000 then the piece from €200,001 to €500,000 is taxed at 20%.

The 75% is taxed as if it was earned income.
 
Understood - thanks; so the pot would have to be greater than 800k to avail of the 20% rate (up to 500k)?

Would you be able to provide more colour on the ‘salary and service’ methodology? For example, where the retirement bond emanates from a wound-up DC scheme and the employment with the company lasted 7.5 years with a final salary of c.100k.

Finally, does anyone have a view on the economics of actually paying the 52% marginal rate on the 75% encashment to pay down c.20 year mortgage debt that could have an interest rate as high as 4.5-5% once the existing fixed rate rolls off?
 
Billy75 said:
Understood - thanks; so the pot would have to be greater than 800k to avail of the 20% rate (up to 500k)?
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Yes.

Billy75 said:
Would you be able to provide more colour on the ‘salary and service’ methodology? For example, where the retirement bond emanates from a wound-up DC scheme and the employment with the company lasted 7.5 years with a final salary of c.100k.
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Bit of work involved in that. Revenue Pensions Manual sets out the formulae. https://www.revenue.ie/en/tax-professionals/tdm/pensions/index.aspx You want Chapters 7 and 9.

Billy75 said:
Finally, does anyone have a view on the economics of actually paying the 52% marginal rate on the 75% encashment to pay down c.20 year mortgage debt that could have an interest rate as high as 4.5-5% once the existing fixed rate rolls off?
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How many years left on the mortgage? Also - if you don't do this, are you likely to be paying tax at the high rate on your pensions in retirement anyway?
 
Dave Vanian said:
How many years left on the mortgage? Also - if you don't do this, are you likely to be paying tax at the high rate on your pensions in retirement anyway?
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c.18 years left on the mortgage (300k)…..will be paying a high rate of tax on my pensions in retirement

current position is:

(a) retirement bond pension accessible at 50: 400k

(b) current occupational pension accessible at age 65 and likely to be close to the prevailing SFT of 2m at that point.

What would you recommend?
 
I'm often reluctant to advise that anyone cracks open their pension fund before they need it in retirement and I despair when I see online ads suggesting that people do just that. One of my reasons is that many people will be paying low rate tax in retirement. So if you retire a pension fund while you're still working, you'll pay high rate tax on the lot when your salary is counted. But if you wait until you retire, you'll pay less tax.

You might be an exception.

If your current pension scheme is likely to be in the ballpark of €2 million then you'll definitely be paying high rate tax. So even if you hang on to the retirement bond until after retirement, it will still be high rate taxed. Therefore no great advantage to holding on, from an Income Tax perspective.

Pay off the mortgage = guaranteed return on money of 4.5 - 5% per year with no charges. Pension fund might do better than this and is a tax-free investment environment. But it might not.

If this was the real world, I'd be looking at a full fact find with details of all your financial circumstances. But on the basis of the information you've given, I think this idea looks like a good one.
 
Thank you - that’s very helpful.

I did a comparison of the after-tax encashment amount used to pay down a portion of the mortgage (18 years left from age 50) vErasmus keeping the full amount invested until NRA (15 years from age 50):

300k x (1-52%) = 144k annuity mortgage pay down (with 18 years left to maturity) = interest savings of c.75k assuming 5% rate

vs leave fully invested as is (S&P)

300k x (1 + 1%)^15 (term to NRA) = 348k less tax @52% = 167k.

so it would seem that even assuming an anaemic CAGR (i.e. 1% p.a. above), it makes sense not to use the non tax-free lump sum portion of the retirement bond to pay down the debt.

I do realise that the S&P could have a negative return over the term and/or that rates could be higher than 5% but seems like a reasonable bet at this point……..

Unless I’m missing something fundamental which I may well be?
 
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