Early encashment of funds from PAO at 50

[The Inquisitor]

Hi,

I have two pension pots, and funds coming from a PAO as follows:

Pension A) PRB from pension with current employer: current value = 300k

• My employer was bought out by another company in 2019, so I transferred the pension funds up to then into a PRB.

Pension B) DC Pension with current employer: current value = 40k

• My pension plan with my current employer (same company) since the company was bought out

Pension C) Funds coming in from PAO: current value = 160k

• Incoming fund transfer from a divorce PAO, targeted for a PRB

Total = €500k


As I am buying a house, I need to get as much as is possible from it when I turn 50 in 3 years time to pay down a mortgage, leaving me with the rest of my pension funds for retirement. I’m sure there are those who understandably say I shouldn’t do that, but I need somewhere to live.

I’ve been advised to put the Pension C funds from a PAO into a PRB when it arrives.

My understanding is that Pension A and Pension B can’t be touched as long as I am with my current employer, and that I only have Pension C to play with. I assume that I will still be with the same employer when I turn 50.

Questions:

1 – I would like to get a 25% tax free lump sum when I am 50. Can I get a 25% tax free lump sum of the "Total" amount from Pension C pot, or only 25% of the value in Pension C? i.e. can I get 125k tax free from the Pension C pot, or only 40k from the Pension C pot

2 – I believe that I can encash the balance of Pension C when I turn 50, and that it will be taxed. How much tax will I pay?

3 – What is the best product to buy to put Pension C into when it arrives? I’m advised a PRB is adequate. Are there ones without encashment charges?

4 – Assuming that I can only get a 25% tax free lump sum (ie 40k) from Pension C , and not Pension A and Pension B… In the future when I retire, I will still be able to get a 25% tax free lump sum from Pensions A and Pension B?


Thanks

 

[AAAContributor]

I would like to get a 25% tax free lump sum when I am 50

What age is your ex?

I think the principle is that the PAO beneficiary (you) can generally access the benefits in the new arrangement into which the transfer value has been paid (the PRB - Pot C), at the earliest time the member (your ex - over whose benefits the PAO was made) can access his or her benefits in the arrangement from which the transfer value was paid.

i.e. John and Marie have divorced. Marie obtained a PAO over part of John’s benefits in a DC occupational pension scheme, and then opted to take a transfer value to her own PRB. Marie can access her PRB’s benefits from John’s 50th birthday (the earliest date John could potentially take his benefits in his scheme), even if this is earlier than her 50th birthday.

Can I get a 25% tax free lump sum of the "Total" amount from Pension C pot, or only 25% of the value in Pension C?

25% of Pot C only.

I believe that I can encash the balance of Pension C when I turn 50, and that it will be taxed. How much tax will I pay?

The balance of Pot C (€120k) will be subject to income tax (at your marginal rate), USC & PRSI.

What is the best product to buy to put Pension C into when it arrives? I’m advised a PRB is adequate. Are there ones without encashment charges?

Yes. Shop around.

In the future when I retire, I will still be able to get a 25% tax free lump sum from Pensions A and Pension B?

As you will have previously accessed a tax free lump sum of €40k and the lifetime limit is €200k at present, you have €160k of remaining limit available. The 25% lump sum on Pot A & B in the aggregate is €85k (€340k x 25%), so assuming the limit isn't axed, this €85k is well within your remaining limit and should be payable tax free.

The above information is to the best of my knowledge....

 

[The Inquisitor]

Thanks for your feedback!

Re: "The balance of Pot C (€120k) will be subject to income tax (at your marginal rate), USC & PRSI."

I was looking on Revenue.ie at: https://www.revenue.ie/en/jobs-and-pensions/pension/private/retirement-lump-sums.aspx

where it states

"You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%)."

Does this mean that the balance of Pot C (€120k) is taxable at the 20% rate rather than the marginal rate at 40%? Or have I misread it.

 

[TRS30]

I would get a good pension's adviser to look into accessing of pension A.

Had a similar situation however a colleague got advise and was about to access pension A while still employed.

 

[The Inquisitor]

I would get a good pension's adviser to look into accessing of pension A.

Had a similar situation however a colleague got advise and was about to access pension A while still employed.

When I converted Pension A from a DC Occupational Pension to a PRB (actually a BOB) which was wound up with the company was sold, I was advised that I would be able to take a 25% tax free lump sum from it when I reached 50 as the old company no longer exists. But the advice that I have received since then now informs me that I cant. I don't understand why the change in advice tbh.

 

[Fortune]

Thanks for your feedback!

Re: "The balance of Pot C (€120k) will be subject to income tax (at your marginal rate), USC & PRSI."

I was looking on Revenue.ie at: https://www.revenue.ie/en/jobs-and-pensions/pension/private/retirement-lump-sums.aspx

where it states

"You can receive a tax free lifetime limit of €200,000 on retirement lump sums from all sources. The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%)."

Does this mean that the balance of Pot C (€120k) is taxable at the 20% rate rather than the marginal rate at 40%? Or have I misread it.

Completely misread it.

 

[Fortune]

When I converted Pension A from a DC Occupational Pension to a PRB (actually a BOB) which was wound up with the company was sold, I was advised that I would be able to take a 25% tax free lump sum from it when I reached 50 as the old company no longer exists. But the advice that I have received since then now informs me that I cant. I don't understand why the change in advice tbh.

Depends on the actual circumstances. If you were TUPE'd to the new employer then continuous service applies and you can't access pension A without leaving your employer.

 

[AAAContributor]

Does this mean that the balance of Pot C (€120k) is taxable at the 20% rate rather than the marginal rate at 40%? Or have I misread it.

You have misread it but your interpretation is very common.

If you read through the worked examples in Appendix I of the Revenue Pensions Manual: Taxation of Retirement Lump Sums it might become clearer.

The taxation @ 20% relates specifically to the lump sum entitlement amount.

Your lump sum entitlement amount (€40k) on pension pot C does not come close to entering the range of €200k - €500k. If it did, any amount falling within that range would be taxed at 20%. The taxation of the €120k is a different matter. The €120k is not the lump sum entitlement amount (even though you are taking it as a 'lump amount' - just to confuse things!).

Note: There is another lump sum calculation method known as 'salary/service' that may result in a higher lump sum entitlement that could in theory allow 100% of the pot to be taken as a lump sum if the service was long enough, the remuneration of your former spouse high enough, and the relevant % under the PAO large enough - probably remote though. When you crystallize your benefits, both calculation methods will be presented to you, and you can independently choose how to take your benefits. You could elect for the 25% calculation and your spouse the salary/service calculation.

Lump sum entitlements can be calculated in different ways as explained above but if we keep it simple and assume the lump sum entitlement is 25%, then the taxation rules you refer to relate to the 25% piece only, and not the other 75%.

So, in your case:
- the lump sum entitlement = €40k,
- As €40k < €200k, the €40k is all tax free,
- The balance remaining of €120k is then taxed under PAYE as if it were regular salary income,
- €160k of your €200k tax free limit is available for future tax free lump sum receivables, and
- You still have the 20% band of €200k - €500k available to you if your other pensions went to the moon.

If you had a pension pot of €800,000:
- the 25% lump sum entitlement = €200,000,
- therefore the €200k is tax free,
- the balance if encashed is taxed under PAYE as if it were regular salary income.

If you had a pension pot of €2,000,000:
- the 25% lump sum entitlement = €500,000,
- €200k of the lump sum is tax free, and
- 20% tax is paid on the balance of the lump sum (€300k),
- leaving you with a net lump sum after tax of €440k.

 

[The Inquisitor]

Thanks folks for your clear responses, fyi I believe my employment was TUPE'd

 

[TRS30]

When I converted Pension A from a DC Occupational Pension to a PRB (actually a BOB) which was wound up with the company was sold, I was advised that I would be able to take a 25% tax free lump sum from it when I reached 50 as the old company no longer exists. But the advice that I have received since then now informs me that I cant. I don't understand why the change in advice tbh.

Every situation is different. We didn't TUPE over (have previously so aware of HR steps) however contract T&C were honoured etc. Not exactly sure legally how it was done. However, we were told by new company pension provider that we could not access old fund from previous employer separately from new pension.
One of my colleagues (59) queried this with an independent third party FA and was told this was incorrect and has since accessed his old pension (in a PRB).

 

[The Inquisitor]

OK thats interesting to know. I will check this out.