SCSB = 3rd secret of Fatima

R

rogeroleary

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I've been around a long time and have seen many many redundancy situations over the years and for all of that I've never heard anyone acutally be able to explain how SCSB works. I always hear "it depends on this and depends on that" or else "it can be interpreted quite liberally or quite generously", for such a critical point in a persos career I always amazed that no one seems to know the answer. Most commonly it seems to boil down to this:

upload_2017-3-11_15-0-52.png
So my question is how can one calculate the "Present value of the tax free lump sum received / receivable from the Pension Plan" (even trying to say that bamboozles me :eek:).

Maybe someone can help if I give sample numbers :
  • Average pay over last 3 years = 90k p.a.
  • Service = 18 years
  • Redundancy pay of 5 weeks per year of service
  • Current pension pot = 500k
  • Age = 58
  • Have not received any redundancy in last 10 years so assume increased exemption of €10k would apply?
  • Wish to retain right to to tax free pension cash
  • Family dog = wheaten terrier (hopefully that is not needed for the calculation :p)
Any help with this would be much appreciated,

Rog
 
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Most people can't compute the NPV of the tax free lump sum.

An actuary produces the figure for the pension provider who give it to you.

A very amature estimate might be that the fund would grow at 3% and that inflation would eat away it at 1%.

So you have 7 years to go. So the fund might grow to circa €600,000, 25% of that is €150,000 discounted at 1% for 7 years is €140,000

So 90,000 x 18/15 - 140,000 = 0
 
Joe's right:

€90k x (18/15) = €108k

€108k - €140k (using Joe's work) = Nil

The actuary calculates the Net Present Value of the tax-free pension lump sum by extrapolating its likely future value and then discounting that back to account for inflation.
 
Thanks gents that certainly takes some of the mystery out of it. So, in a case of a company offering 5 weeks per year of service with the profile I outlined in the original post it looks like the redundancy would be something like this?:

90k with 18 yrs @ 5 weeks per year = €155,769

Allowable deductions
Initial tax free allowance = €10160
+ €765 & 18 years = €13770
+ increased exemption = €10000* * is this impacted by present value of tax free lump sum also? and if so how would it work in this example?
+ statutory redundancy = €21600 (18 years @ 2 weeks per year @ max of €600)
+ SCSB = ZERO ? based on Joe & Gordons earlier feedback
-------
Total tax free allowance = €55530
-----------
Taxable €100238 @ 48% = €48114 (48% = tax + USC)

Net payment €155769-€48114 = €107655

Is that roughly correct? Seems like a lot of tax ie. > 30%? Can that be lessened / reduced or clawed back (for example if not working for 1-2 years)?

Many thanks,
Rog
 
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Note also that if pension pot is a PRSA, that is not considered an occupational pension. So there would be no deduction for pension lump sum in such case

So assuming it is a Dc scheme, the SCSB deduction for PV lump sum would be roughly:

Lump sum under years of service rule = 3/80 x 18 x 90k = 61k,
PV roughly 46k after discounted at say 4% average for 7 yrs.

So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory.

You can still take your 25% lump sum even though this is not used in the pv calculation. Revenue may close this loophole in the future though.
 
Interesting if the €500k had been built up over more than 18 years would that increase the Lump sum?
 
Thank you very much guys, this is very enlightening. A couple of points based on you rcomments:

  • Yes this is a DC scheme
  • Yes the 5 weeks includes statutory
  • The 500k is mostly made up of current employment ie. 18 years but also includes about 50k from previous employment (7 year prior to current)
Joe R - I note your comment "So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory." Based on all the above what do you reckon is the total tax free amount please? Is it 62k + 55k? as per below?

upload_2017-3-11_20-10-58.png

Thanks again guys for all your help,


Rog
 
Meaning a lump sum of €84k. Call it €60k discounted back.

So €108k less (say) €60k = €48k

Statutory is always tax-free, so €22k tax-free.

So around €70k tax-free.
 
rogeroleary said:
Thank you very much guys, this is very enlightening. A couple of points based on you rcomments:

  • Yes this is a DC scheme
  • Yes the 5 weeks includes statutory
  • The 500k is mostly made up of current employment ie. 18 years but also includes about 50k from previous employment (7 year prior to current)
Joe R - I note your comment "So SCSB tax free amount would be 108k - 46 = 62k. Then add your statutory tax free amount. It's not clear from your post if the 5 weeks includes statutory." Based on all the above what do you reckon is the total tax free amount please? Is it 62k + 55k? as per below?

View attachment 1841

Thanks again guys for all your help,


Rog
Click to expand...
Total tax free will be 62 + 22 = 84.
The SCSB route gives you the best result so the other exemptions are not used. They can only be increased up to the SCSB, you don't get all 3 added together.
If company is willing to pay for untaken holidays then you should maximise these and it will increase your 3 year average salary to bump up the scsb. Pay in lieu of notice if available can also be used for this purpose.
 
Thanks very much Joe - this has been very helpful. One last question - is top slicing relief still around these days in the event someone does not work in the year or so following redundancy? Sounds like the exposure to tax & USC would be 71k @ 40% and 8% USC so might be nice to get some of that back if a job didn't come along.

Rog
 
rogeroleary said:
Thanks very much Joe - this has been very helpful. One last question - is top slicing relief still around these days in the event someone does not work in the year or so following redundancy? Sounds like the exposure to tax & USC would be 71k @ 40% and 8% USC so might be nice to get some of that back if a job didn't come along.

Rog
Click to expand...
No, top slicing is finished. If you have access to cash you could make an avc contribution to your pension before your leave date, that would be quite tax efficient as your fund is below the 200k tax free limit. So you would get 40% relief (subject to the usual limits) and then would be taking 25% of that out tax free when you start your pension.
 
Hi Joe,

For the average pay calculation for SCSB, what is included in this?

Thanks
 
Hubert said:
Hi Joe,

For the average pay calculation for SCSB, what is included in this?

Thanks
Click to expand...
Gross pay before pension deductions including bik and taxable sw for the 36 months before leave date. Also include any paid holiday pay or pay in lieu of notice if applicable.
 
JoeRoberts said:
Gross pay before pension deductions including bik and taxable sw for the 36 months before leave date. Also include any paid holiday pay or pay in lieu of notice if applicable.
Click to expand...

I didn't think taxable social welfare could be included as it is not an emolument of the office or employment to which the lump sum refers.
 
that's clear thanks. to bump up the 3 year average, could you include any income from share options (not big but every little helps) if you managed to exercise them before, or as part of the settlement i.e. exercise them just before you do the deal with the employer?
 
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