Recycled Pension

Sunny

Frequent Poster
Messages
3,538
Hi,

If I have a buy out bond of and at age 50 I decide to cash it out and take the 25% tax free, can I use proceeds from the 25% to feed another pension fund up to my age limits and get tax relief? I know there are restrictions in the UK but I can't find anything in Ireland.
 

SBarrett

Frequent Poster
Messages
3,128
If you are in receipt of earned income, you can make a pension contribution up to the limits of that earned income. The payments are supposed to come from that earned income but I have never seen the revenue seek out the source of the income. It's quite easy to say you are living off the tax free lump sum and putting your earned income into the pension.


Steven
www.bluewaterfp.ie
 

Nicetoknow

Registered User
Messages
24
I don't get why this would be tax efficient but would like to understand :)

Let's say I cash in my directors pension at 50 and have a cash lump sum of 30000...and I have 100000 paye yearly income where i can max out my tax relief by putting 30% of paye income into a DC pension, what benefit would it be to me to use my lunp sum to put 30,000 back into a pension? Is it so that my investment can grow tax free?

Thanks!
 

Sunny

Frequent Poster
Messages
3,538
I don't get why this would be tax efficient but would like to understand :)

Let's say I cash in my directors pension at 50 and have a cash lump sum of 30000...and I have 100000 paye yearly income where i can max out my tax relief by putting 30% of paye income into a DC pension, what benefit would it be to me to use my lunp sum to put 30,000 back into a pension? Is it so that my investment can grow tax free?

Thanks!
You will get tax relief on the 30k that you just received tax free and that you have already got relief on previously. So your 30k is actually worth 42k. (40% relief) There are restrictions in the UK so stop it. I think they adjust the relief limits to stop large lump sum investments if you cash in a pension. But as Stephen says, obviously not here. I have someone that wants to invest 120k lump sum from a retirement bond back into a pension over 3-4 years and was wondering if they were allowed.
 

LDFerguson

Frequent Poster
Messages
4,053
You will get tax relief on the 30k that you just received tax free and that you have already got relief on previously. So your 30k is actually worth 42k. (40% relief) There are restrictions in the UK so stop it. I think they adjust the relief limits to stop large lump sum investments if you cash in a pension. But as Stephen says, obviously not here. I have someone that wants to invest 120k lump sum from a retirement bond back into a pension over 3-4 years and was wondering if they were allowed.
Although I don't know the circumstances of the individual concerned, I don't think it's quite as black and white as you think that this is definitely a good idea. Off the top of my head, here's a few things to be considered...

  • If the €120,000 lump sum is 25% of the fund, then that means that s/he will need to reinvest the other €360,000. I'll assume that an annuity at age 50 would not be attractive to them, so then they will end up with €63,500 in an AMRF and €296,500 in an ARF. From the year they turn 61 they'll be forced to take an annual, taxed withdrawal from the ARF. If they're still earning a salary then, this might not suit them as it would be taxed at their marginal rate.
  • From your figures above, I'm guesstimating that this person is earning a salary of >€100,000 per year. From the perspective of funding their retirement, would it not be preferable that they make contributions from their salary, avail of he tax relief limits and then have both the Buy-Out Bond and current scheme funds to enjoy at retirement?
  • In a similar vein, if I look at the fundamental reason for pension funds - to provide money for you when you retire - then I'm just not convinced that cannibalising one fund to pay for another works. If s/he leaves the Buy-Out Bond alone and we ignore any future fund growth, s/he will have a lump sum from it of €120,000 at retirement and €360,000 to provide a pension. If s/he recycles the €120,000 lump sum now, while s/he'll get tax relief on the contributions over 3 - 4 years, that means that s/he will have used up scope to make any additional contributions for the next 3-4 years. And when s/he eventually retires, only 25% of that €120,000 will be available as a lump sum again and the balance may be taxable.
As I say, the specific circumstances of the individual may render the above arguments irrelevant, but I suppose that my point is that this wouldn't be a certain winner for everyone.

Cheers,

Liam
www.ferga.com
 
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