That example is both fascinating and reassuring Marc. Thanks for sharing.
What income are they drawing from it?
That example is both fascinating and reassuring Marc. Thanks for sharing.You are of course correct. I wasn't focusing on the exact mathematics more the practical principles.
We like to paint pictures to illustrate the points. This is a real client's ARF account over the last 5 years. The original capital is the red line showing the annual distributions coming off each year and the blue line is the account value. Working perfectly...
Best options for short term liquidity is still State Savings I recently updated my analysis here
How Do I Get The Best Return On My Savings? - Everlake
We strongly advocate that longer-term investments should be arranged via pensions and stock-market linked investment accounts.globalwealth.ie
to reflect the new less attractive, but still relatively good (compared to the bank) terms
Longer-term taxable investment accounts are best managed with a pure equity portfolio of non-EU ETFs and dial down the risk in the pension to accounts to compensate
In Search of the Perfect Investment Portfolio - Everlake
Many investors find it difficult to achieve returns offered by the markets due to a misunderstanding of investment risk, costs and taxes.globalwealth.ie
The account is under €2m and the investor under age 71 so 4% is the imputed distribution rising to 5% for no good reason (other than to soak more income tax) at age 71That example is both fascinating and reassuring Marc. Thanks for sharing.
What income are they drawing from it?
I would be interested in understanding your thinking here.Longer-term taxable investment accounts are best managed with a pure equity portfolio of non-EU ETFs and dial down the risk in the pension accounts to compensate
Why not?You're hardly going to retire at age 50?
What you're looking to do is possible but there will be a fair bit of paperwork involved.
That's how it could be done. I don't anything about your personal circumstances to comment about whether or not it should be done. I'd have a concern about your being heavily reliant on rental income and property.
- Transfer the PRB into the SSAS.
- Wind up the SSAS and transfer it and the PRSA into a self-administered PRSA (if the existing PRSA is not already a self-administered PRSA).
- Everything will then be in a PRSA. Retire this PRSA, withdraw 25% as a tax-free lump sum and leave the balance as a Vested PRSA. You will need to start drawing a 4% annual income from the Vested PRSA from the year you turn 61.
Regards,
Liam
www.FergA.com
Apologies about resurrecting old thread but is point 3 on taxable lump sum correct? I thought your lump sum would have to qualify to get 200k tax free and next 300k at 20%, I.e a salary of 333k needed to qualify for whats suggested in point 3.There are no zero cost and zero tax options so you need to make a comparison between some different scenarios all of which could leave a financial benefit.
1) pay in and obtain the 40% tax relief. Defer the pension to age 75. If you die before you reach age 75 your spouse or civil partner receives the whole value of the fund tax free. No income tax, no capital gains tax, no CAT and no penalty tax if you exceed the lifetime €2m allowance.
Conclusion: life insurance with tax relief on the premium
2) gross roll up.
Let’s say you invest in equities and the return is say 7.2%pa net of charges to keep the maths easy.
Now let’s say a fund held directly also pays 7.2% net of charges but is subject to personal tax.
Your pre-tax €10k will be worth €20k in 10 years time.
Whereas if you invest the net income that’s going to be about €5000 which if you invest today you will have €10 in the fund (rule of 72)
You will then lose a further 41% in exit tax so €2,050 in tax. Net position €7,950 vs €20,000.
So let’s assume that you always have a marginal rate of tax of 50% and that you’ve used up all your lump sum entitlement. Taking that €20,000 as a lump sum fully taxable at your highest marginal rate is still going to leave you with a net €10,000 compared to €7,950.
In effect you received an interest free loan from Revenue and the difference is the gain on the income tax deferred.
If you invest in something that’s subject to CGT you will be taxed at 33%
If you pay income tax you will lose your marginal rate of tax (up to 55%)
So a pension gives you gross roll up relative to any other option you will have a larger gross fund in the future and the longer you leave it the more this will compound in your favour.
3) taxable lump sum
Even if you have a pension fund of €800k and can use up the tax free lump sum the next €300,000 of lump sums is only taxable at 20%
4) not all of your pension is taxable.
Imagine you have an ARF with €1m and you are forced to take an income of 5% which is subject to income tax at your marginal rate of 40% plus USC
In this example ; 95% of your ARF is not subject to tax. See earlier argument about gross roll up.
Assume your ARF grows every year so the value rises back to €1m.
Effectively your ARF hasn’t paid any tax it’s constantly deferred. You are only paying income tax on the income distribution not the original tax deferred capital.
When you die your spouse or civil partner inherits the ARF then adult children inherit at a rate of 30% which doesn’t count towards the CAT thresholds so these are also available.
Had you held those assets personally and the CAT thresholds had been used up then the kids would pay an additional 3% tax €30,000 tax saved
5) match withdrawals with medical expenses
Imagine you have an ARF with a million and in your 70s you incur €100k of medical expenses. That year you should take a larger withdrawal from the ARF partially to meet those expenses but partly because you can claim 20%tax back on medical expenses. That’s a €20 grand tax rebate
Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie
Thanks so point 3 was incorrect or missing qualifying info, can't just automatically get 20% tax on 300k after tax free 200k. Lot of confusion at work with older lads, alot under the impression anything after 200k tax free was taxed at 20% for next 300k.If you have a DC fund of €800k, your lump sum can be calculated as:
- 25% ( so €200k)
Or
- up to 150% of Final Salary (assuming you have at least 20 years service)
If the 150% is higher than €200k, any excess is taxable at 20%. And if you opt for the 150% route you must then buy an Annuity with the balance.
I don’t see why - it looks correct to me.Thanks so point 3 was incorrect
It reads as if no qualifying needed to get 20% tax on 300k after initial tax free 200k. You would need salary of 333k or dc fund of 2 million.I don’t see why - it looks correct to me.
No, if you’ve fund of €1.6m, for example, you can take 25%, €400k, as a lump sum - €200k tax-free, €200k taxed @20%.It reads as if no qualifying needed to get 20% tax on 300k after initial tax free 200k. You would need salary of 333k or dc fund of 2 million.
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