Questions on Buy out bond: lump sum withdrawal, AMRF/ARF, imputed distribution

David_Dublin said:
Two questions
  • Can you take numerous tax free lump sums up to the max? i.e. could I take out 80k in 2 years to pay off some of the mortgage? And then leave the rest in the BOB until age 61? At which point my understanding is imputed distribution kicks in.
  • Looks like the TFLS from 200k to 500k is taxed at only 20%. Do "most people" take that withdrawal, or is it complex to work out when this would be advantageous? Presume it is to do with minimising tax while ensuring you have income to support lifestyle.
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You get one go at the lump sum from your pension. If you have multiple policies, you can draw down your lump sum at multiple times. If you have one policy, you get one go at the lump sum.

Everyone takes the maximum lump sum and pays 20% tax if over €200,000. Otherwise, the remainder will most likely be liable to income tax at 20% plus USC and PRSI if withdrawn before age 65.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks @Steven Barrett - that makes a massive difference to me so. I would definitely not want to use the max "tax efficient" TFLS withdrawal of 500k at age 50 to get my hands on 150k. It would leave my pension value halved, and I would have no use of the remaining 350k - I'd be re-investing where presumably any gains would be subject to CGT.

The alternative would be to "only" take out the 150k when/if I need it, and then to just accept being unable to take out the other 350k at favourable tax rate. Or the closer I get to retirement age, the more likely it is that I will take out the full 500k.

What do most people do with the 500k? As in, as you say, people generally take it out to benefit from the tax efficiency of it - if they have no immediate need for it, what do they do with it?
 
If you retire your BOB at 50, you could take the 25% lump sum and invest the balance in an ARF.

Deemed distributions on an ARF don't kick in until the year you reach 61.

Mind you, I would query whether it is wise to spend €400k on house renovations given your circumstances.
 
I have teased out some of the arguments for taking a lump sum from a pension at 50 in this post

globalwealth.ie

Can I Access My Pension Early? - Everlake

Taking retirement benefits early is only suitable for a limited number of people and circumstances
globalwealth.ie globalwealth.ie

I think it makes perfect sense to use lump sums at 50 to repay debt rather than switch via a lifestyle strategy to low expected return bonds and this is particularly true if the surplus income is then directed towards additional pension provision via AVCs
 
Sarenco said:
If you retire your BOB at 50, you could take the 25% lump sum and invest the balance in an ARF.

Deemed distributions on an ARF don't kick in until the year you reach 61.

Mind you, I would query whether it is wise to spend €400k on house renovations given your circumstances.
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What circumstances @Sarenco? My current mortgage is about 10% LTV and I have excess savings over spend month on month, I have a good job and decent salary. I have no other debt and I have 250k in cash savings. And I have a pretty strong pension for late forties.
 
David_Dublin said:
What circumstances @Sarenco?
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Well, you seem to be concerned about your ability to comfortably service an additional mortgage of €150k.

€400k is a pretty big budget for a house renovation - do you really need to spend that much?
 
David_Dublin said:
Thanks @Steven Barrett - that makes a massive difference to me so. I would definitely not want to use the max "tax efficient" TFLS withdrawal of 500k at age 50 to get my hands on 150k. It would leave my pension value halved, and I would have no use of the remaining 350k - I'd be re-investing where presumably any gains would be subject to CGT.
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In order to get 500K you need a fund value of €2m (25%) so you fund value would not be halved. it would be down to 3/4 and a healthy €1.5m

something is not adding up here.
 
Sarenco said:
Well, you seem to be concerned about your ability to comfortably service an additional mortgage of €150k.

€400k is a pretty big budget for a house renovation - do you really need to spend that much?
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Extra outgoing of 900 a month is what I want to give due attention to. I'm not overly concerned, I guess we have always lived conservatively from a finances perspective, and we've always had lots of savings. So this is a bit of a big step - current mortgage is < 900. I just want to be all over any possible rainy day options. I still feel this will be do-able with existing salary, but am doing analysis of spending to validate.

We've been around the houses (excuse the pun) on the house renovations. It may not be as much as 400k but after all is done it probably won't be too far off. We have to spend a fair bit to address issues with the house - heating, insulation, wiring, damp. We could probably spend 200k to address issues plus small extension. I'd prefer to spend more and get some wow stuff. But I guess "no" is the actual answer - we don't need to spend so much.
 
50andOut said:
In order to get 500K you need a fund value of €2m (25%) so you fund value would not be halved. it would be down to 3/4 and a healthy €1.5m

something is not adding up here.
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Sorry, that's my maths.....I neglected to limit the TFLS to 25% of the fund value. So it would be 250k max based on current fund value (1m)
 
David_Dublin said:
I just want to be all over any possible rainy day options.
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Ah, understood.

You could retire the BOB and drawdown the 25% lumpsum to partly fund the renovation costs and/or to clear your remaining mortgage.

I would agree with @Marc that it makes more sense to avoid or clear debt rather than transferring any of your pension assets to bonds/cash.

The only drawbacks with retiring your BOB early is that you will lose a period of tax-free growth and imputed distributions from the ARF will kick in at 61 when you may still be working (i.e. the distributions will be taxed at your marginal rate).
 
Sarenco said:
Ah, understood.

You could retire the BOB and drawdown the 25% lumpsum to partly fund the renovation costs and/or to clear your remaining mortgage.

I would agree with @Marc that it makes more sense to avoid or clear debt rather than transferring any of your pension assets to bonds/cash.

The only drawbacks with retiring your BOB early is that you will lose a period of tax-free growth and imputed distributions from the ARF will kick in at 61 when you may still be working (i.e. the distributions will be taxed at your marginal rate).
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Thanks for the input. I'd be loathe to retire it early, would be very much the last resort.
 
Marc said:
I have teased out some of the arguments for taking a lump sum from a pension at 50 in this post

globalwealth.ie

Can I Access My Pension Early? - Everlake

Taking retirement benefits early is only suitable for a limited number of people and circumstances
globalwealth.ie globalwealth.ie

I think it makes perfect sense to use lump sums at 50 to repay debt rather than switch via a lifestyle strategy to low expected return bonds and this is particularly true if the surplus income is then directed towards additional pension provision via AVCs
Click to expand...
.
 
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LDFerguson said:
The BOB will have the same Normal Retirement Age as the pension scheme where the fund came from. But you can decide to retire it at any age from age 50 - 70.

As a general rule, yes it's best to defer drawing down taxable income that you don't need, until you need it.



Yes, as the funds within the BOB grow in a tax-free environment, then it's best to leave drawing them down for as long as you can.

BUT

If your fund is of a size that you may be at or near the €200,000 upper limit for the tax-free lump, there is an argument in favour of drawing it as soon as you can - politics! There are certain political parties who favour and have proposed a reduction in the maximum tax-free lump sum from €200,000. So the argument would be to take the tax-free lump sum while you can get it tax-free. That's a speculative position, which you might or might not agree with.



As with any financial product, especially one which may involve a sizeable sum of money, shop around. Things to look out for: -

  • Some BOB products have early exit charges after 3 or 5 years. Others don't.
  • Compare other charges also, e.g. allocation rate in the first year and annual charge on fund.
  • Some funds have the possibility of a delay on exits, e.g. property funds. Most don't.
  • As with any investment, make sure that the chosen fund(s) for the BOB fit properly into your overall portfolio of investments (within and without your pension funds) and are suitable for your risk profile and needs. Self-administered BOBs are available if that was of interest - allowing you to choose your own shares, ETFs and/or property as investments within the BOB.
Regards,

Liam
www.ferga.com
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Liam,

I have a small PRB in the UK that arose because my employer scheme was wound up 15-16 years ago. I have been told I have no options to access it earlier than 65, is this true?
 
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