Should people be allowed draw down their pension at 50?

[SoylentGreen]

In practice, early retirement is virtually always permitted in the case of a DC scheme as each member's entitlements are ring-fenced and have no bearing on the scheme as a whole.

It's only a DB scheme where early retirements can have an impact on the scheme as a whole and will often be disallowed in the current climate.

That's interesting. I am in a DB scheme. I contacted the trustees at age 60 and they said that they were not allowing anyone draw down an early retirement pension. When I left the organisation that I was working in I made a lump sum contribution to my pension. I have been told by Mercer that this is being treated as a DC contribution.
Is it possible for an individual to draw down the DC portion of their pension early and leave the DB portion until normal retirement date?

 

[marathonic]

OK, so for the sake of arguement, let's say that the ACME pension scheme is a DB scheme, and Mr A is a member of the DB scheme.

Why should the state give Mr B a tax break to save for his 50-65 years that is not available to Mr A?

I think the key point here is what Gerry Canning appears to be getting at in post # 19. It all depends on what is promised when the person first joined the pension.

In your theoretical scenario above involving Mr A and Mr B, the two people would have known exactly what the terms of the pension scheme, which is only part of an overall benefits package, were before they joined.

For this reason, Mr A agreed to a benefits package that didn't allow early retirement but, as it's a DB scheme, is likely to result in a higher overall payment when he eventually gets to claim benefits from the scheme (as is the case with most DB schemes).

People need to assess the overall package offered by an employer when entering the workplace. This includes things like salary, healthcare, gym memebership and other perks as well as the pension itself.

If Mr A initially agreed to a benefits package that doesn't include early retirement and Mr B agreed to one that does, potentially sacrificing one of the other benefits to secure a potential early retirement, then I would consider it in absolutely no way unfair whatsoever that Mr B can retire earlier than Mr A.

I would consider it VERY unfair if the government now turned around and changed the rules for either of these two hypothetical people.

 

[RainyDay]

I think the key point here is what Gerry Canning appears to be getting at in post # 19. It all depends on what is promised when the person first joined the pension.

In your theoretical scenario above involving Mr A and Mr B, the two people would have known exactly what the terms of the pension scheme, which is only part of an overall benefits package, were before they joined.

For this reason, Mr A agreed to a benefits package that didn't allow early retirement but, as it's a DB scheme, is likely to result in a higher overall payment when he eventually gets to claim benefits from the scheme (as is the case with most DB schemes).

People need to assess the overall package offered by an employer when entering the workplace. This includes things like salary, healthcare, gym memebership and other perks as well as the pension itself.

If Mr A initially agreed to a benefits package that doesn't include early retirement and Mr B agreed to one that does, potentially sacrificing one of the other benefits to secure a potential early retirement, then I would consider it in absolutely no way unfair whatsoever that Mr B can retire earlier than Mr A.

I would consider it VERY unfair if the government now turned around and changed the rules for either of these two hypothetical people.

You have a point, but really, how many people in their 20s even think about pensions, let alone look at early retirement options?

But regardless, let's say I take your point, and let's say we don't change things for current employees, but we do change things for future employees

So then, why would we want to give a tax break to people who are now entering the workplace in order to provide for their 50-65 years?

 

[marathonic]

You have a point, but really, how many people in their 20s even think about pensions, let alone look at early retirement options?

I totally agree with this. Most people only look at the headline salary. For example, in my twenties, when I started my current job, I didn't even consider the healthcare plan as one of the benefits. Now that I'm reaching an age where I'd consider taking out a plan if my employer didn't provide one, I realise how much of a benefit it is. With the pension being so far away, the benefit is likely ignored for a lot longer by a lot of people.

This is more to do with financial education as opposed to flaws within the system.

But regardless, let's say I take your point, and let's say we don't change things for current employees, but we do change things for future employees

So then, why would we want to give a tax break to people who are now entering the workplace in order to provide for their 50-65 years?

I see your point here. 50 is a very young age to be able to take retirement benefits. Whether it would benefit the exchequer to increase this remains to be since, especially in a high-unemployment environment.

For example, if someone decides to completely retire at 50 today, that person will no longer be getting tax relief on pension contributions and will most likely be paying tax on pension income.

Their employer is likely to take on 1 or more employees to replace that person. The end result of this is likely to be less employees in receipt of benefits.

Basically, the permission to take pension benefits at 50 offers flexibility to the general public but the removal of this benefit may not provide benefits to the country as a whole - so why remove it?

 

[RainyDay]

I see your point here. 50 is a very young age to be able to take retirement benefits. Whether it would benefit the exchequer to increase this remains to be since, especially in a high-unemployment environment.

For example, if someone decides to completely retire at 50 today, that person will no longer be getting tax relief on pension contributions and will most likely be paying tax on pension income.

Their employer is likely to take on 1 or more employees to replace that person. The end result of this is likely to be less employees in receipt of benefits.

Basically, the permission to take pension benefits at 50 offers flexibility to the general public but the removal of this benefit may not provide benefits to the country as a whole - so why remove it?

Just to clarify, my concern is about people who take 'retirement' at 50, draw down a pension built up with tax free contributions, and then continue to work in another job. So they continue to get tax relief on further pension contributions, while benefiting from the tax free lump sum and tax free fund that they built up.

This isn't a 'bona fide' retirement to me. It's just a nice tax break available to some people between 50-65, but not to everybody.

Why would we want such a system?

 

[Clohass]

Just to clarify, my concern is about people who take 'retirement' at 50, draw down a pension built up with tax free contributions, and then continue to work in another job. So they continue to get tax relief on further pension contributions, while benefiting from the tax free lump sum and tax free fund that they built up.

This isn't a 'bona fide' retirement to me. It's just a nice tax break available to some people between 50-65, but not to everybody.

Why would we want such a system?

Personally I don't see why this needs to change. If at 50 a person has built up a pension pot over decades, in the process tying up their savings and suffering investment losses as well as tax free gains then if they wish to draw this down and pay tax and PRSI and USC on this drawdown, (having paid USC and PRSI on the way in also so therefore taxed here on the double I understand) then perhaps they feel they wish to work part time in a less challenging role or take a risk on starting a small business with the security of a regular income then I think they should have that choice, having forgone income and provided for their retirement out of their own earnings in addition to paying for a Non-Contrib pension along the way.

 

[RainyDay]

perhaps they feel they wish to work part time in a less challenging role or take a risk on starting a small business

And how about if they don't work part time and don't start a small business. How about they move to a different employer, doing pretty much the same job for the same salary as they did before. Do they deserve a tax break then?

 

[marathonic]

And how about if they don't work part time and don't start a small business. How about they move to a different employer, doing pretty much the same job for the same salary as they did before. Do they deserve a tax break then?

I don't see a problem here. They'd be paying higher rate tax as well as USC and PRSI on the pension income. More revenue for the state.

 

[RainyDay]

I don't see a problem here. They'd be paying higher rate tax as well as USC and PRSI on the pension income. More revenue for the state.

No, less Revenue for the State than if they hadn't gotten the tax break on their pension investments.

That's the problem here. They are getting a tax break on their pension contributions, but it is not being used for a bone fide pension. It is being used as long term savings.

 

[marathonic]

No, less Revenue for the State than if they hadn't gotten the tax break on their pension investments.

That's the problem here. They are getting a tax break on their pension contributions, but it is not being used for a bone fide pension. It is being used as long term savings.

That's debatable. Someone that put 100 euro into a pension a few years ago would probably have got relief at the higher rate. The funds would have grown tax-free within the pension, but that's irrelevant to the government because the benefit of this growth wasn't provided by the government, it was a return for the risk entered into by the pension holder.

They'll have paid the pension levy on these funds over the past few years and when they take an income, with the introduction of the USC, will pay this as well as the higher rate tax on what, in theory, should be a higher amount of euros. The USC wouldn't have been payable if they'd not invested in their pension during past decades.

I honestly don't see how the government take in less tax from someone who gets higher-rate tax relief on the way in, pays an annual pension levy and pays higher-rate tax as well as USC and PRSI on the way out.

 

[LDFerguson]

No, less Revenue for the State than if they hadn't gotten the tax break on their pension investments.

That's the problem here. They are getting a tax break on their pension contributions, but it is not being used for a bone fide pension. It is being used as long term savings.

This is the point. For most people, there is no tax break in this situation. They do it because they want to, for personal reasons.

• They got 41% tax relief on their pension contributions. They're paying 41% tax on their pension PLUS the USC because they've got separate taxable earnings. Bonus for the Government.
• They got tax-free roll-up of investment funds while accumulating their pension, like everyone does who has a pension fund. They have retired their funds now so they're not getting this any more. Bonus #2 for the Government.

And before you ask - just because there is no tax break, I wouldn't want to see this facility banned by law. If it's not generating any extra money for the Exchequer, then why bother banning it? It suits some people to have the flexibility.

I can access my (non-pension) cash savings any time I want from my bank. I don't get any tax benefit whether I withdraw my deposits now or in 5 years time. But just because I don't get any tax benefit from this, that still doesn't mean that the Government should impose a law saying I can't access my savings for a few years.

 

[oysterman]

That's the problem here. They are getting a tax break on their pension contributions, but it is not being used for a bone fide pension. It is being used as long term savings.

(my underlining of rainyday's text)

I'm not quite understanding the point above...surely there is no distinction between pension and long-term savings?

I can see why, at first glance, somebody drawing down a pension from one job in his/her fifties while working in another may look as if they are getting away with something. Liam and others have dealt quite excellently with the argument that the state is missing out on some tax revenue so I don't need to re-visit that.

In addition there is the significant social benefit that many early retirees are likely to withdraw from full-time engagement in the labour market which should free up opportunities for younger workers. Senior workers struggling on long after their sell-by dates are likely to prove to be a significant source of frustration and lost opportunity in the future as the government seeks to lengthen people's working lives. Getting them out of line management jobs in corporations and the public service as soon as we can will help society; 'early' pension drawdown may facilitate that.

And of course there are both private and social benefits in smoothing the transition into happy semi-retirement as opposed to unhappy and unhealthy unnecessarily prolonged working lives.​

 

[RainyDay]

That's debatable. Someone that put 100 euro into a pension a few years ago would probably have got relief at the higher rate. The funds would have grown tax-free within the pension, but that's irrelevant to the government because the benefit of this growth wasn't provided by the government, it was a return for the risk entered into by the pension holder.

The tax-free growth is far from irrelevant. It is not available to people who did not have the 'early retirement' option. So it is a tax break, available to some people, but not to others, for no good reason other than 'age'.

The USC wouldn't have been payable if they'd not invested in their pension during past decades.

But they would have payed USC on the original income - right?

I honestly don't see how the government take in less tax from someone who gets higher-rate tax relief on the way in, pays an annual pension levy and pays higher-rate tax as well as USC and PRSI on the way out.

So if there is no tax saving to the individual, why do you think so many people avail of this option (and get so upset when it's removal is mooted)? And what about the tax-free lump sum?

This is the point. For most people, there is no tax break in this situation. They do it because they want to, for personal reasons.

• They got 41% tax relief on their pension contributions. They're paying 41% tax on their pension PLUS the USC because they've got separate taxable earnings. Bonus for the Government.
• They got tax-free roll-up of investment funds while accumulating their pension, like everyone does who has a pension fund. They have retired their funds now so they're not getting this any more. Bonus #2 for the Government.

And before you ask - just because there is no tax break, I wouldn't want to see this facility banned by law. If it's not generating any extra money for the Exchequer, then why bother banning it? It suits some people to have the flexibility.

I can access my (non-pension) cash savings any time I want from my bank. I don't get any tax benefit whether I withdraw my deposits now or in 5 years time. But just because I don't get any tax benefit from this, that still doesn't mean that the Government should impose a law saying I can't access my savings for a few years.

I'm not sure I'm quite getting your point. I never suggested banning any particular action by law. I suggested removal of the tax break. People would still be welcome to manage their savings/investments as they choose. They just wouldn't get a tax break.

And I don't see your point about flexibility. Surely putting money into a pension fund is the ultimate in inflexibility. People wouldn't be doing this if there wasn't a particular benefit for them.

It's also not true to say that they're not availing of pension tax relief anymore, as they could continue to invest in pensions from their other employment.

(my underlining of rainyday's text)

I'm not quite understanding the point above...surely there is no distinction between pension and long-term savings?

​

The distinction is the tax break.

And of course there are both private and social benefits in smoothing the transition into happy semi-retirement as opposed to unhappy and unhealthy unnecessarily prolonged working lives.

(my underlining of rainyday's text)

In addition there is the significant social benefit that many early retirees are likely to withdraw from full-time engagement in the labour market which should free up opportunities for younger workers.​

If this were the case, I wouldn't have a huge problem with the scheme. My problem is with those who avail of the early retirement tax break, and then continue to work, in a different job - so there is no additional opportunity for younger workers.

Senior workers struggling on long after their sell-by dates are likely to prove to be a significant source of frustration and lost opportunity in the future as the government seeks to lengthen people's working lives. Getting them out of line management jobs in corporations and the public service as soon as we can will help society; 'early' pension drawdown may facilitate that.

More than a little ageist there, no? I can well understand that some people will choose to wind down and work less as they get older. But I really don't want to encourage a situation where anyone over 50 is suddenly seen as disposable item to be dumped out at the earliest opportunity.

Perhaps I'm going to have to run some numbers....​

 

[marathonic]

The tax-free growth is far from irrelevant. It is not available to people who did not have the 'early retirement' option. So it is a tax break, available to some people, but not to others, for no good reason other than 'age'.

The tax free growth IS available to people who don't have the early retirement option. What makes you think it isn't? If you see the tax-free growth as such a big tax break provided by the government, why aren't you arguing that people should be retiring early so that they no longer avail of this tax break as opposed to continuing to receive the 'tax break' right up until state retirement age?

But they would have payed USC on the original income - right?

Under current rules, yes. The point I was trying to make, which is no longer applicable, is that the people that you seem to hold a grudge against is those who can now retire early after having built up a significant pension pot over decades gone by. Most of their contributions, right up until 2012, would not have been subjected to USC if they'd taken the income instead.

So if there is no tax saving to the individual, why do you think so many people avail of this option (and get so upset when it's removal is mooted)? And what about the tax-free lump sum?

Of course there is a tax saving to the individual, regardless of whether there is an early retirement option or not. My point is that there isn't likely to be any additional tax revenue to the government if they removed the option. People get upset when it's removal is mooted because it removes flexibility, not tax savings. If it was all about tax savings, people would want to continue to contribute so as to continue to reduce their annual tax bill.

I would highly recommend that you do run the numbers and post them up here. I'm pretty sure there's no benefit to the government of increasing the minimum age at which you can draw benefits. Of course, coming up with accurate figures would be very difficult because you'd really need to include the potential reduction of the number of social welfare recipients as well as the tax intake from the young people replacing the newly retired.

I assume that whatever scheme you are in doesn't allow early retirement?

 

[LDFerguson]

So if there is no tax saving to the individual, why do you think so many people avail of this option (and get so upset when it's removal is mooted)?

Because they want to change their work pattern as they get older.

My problem is with those who avail of the early retirement tax break, and then continue to work, in a different job - so there is no additional opportunity for younger workers.

(1) Again - you're referring to a non-existent "early retirement tax break". There is no such thing as an early retirement tax break. There is a tax break available to encourage every taxable worker in the country to save towards their pension. As has been shown in several posts above, in a lot of cases people retiring early but working elsewhere pay additional taxes to do this, but are happy to do so as a lifestyle choice. So just in case my point isn't clear - there is no such thing as an early retirement tax break.

(2) Someone who takes early retirement is hardly likely to go back into a full-time job working the same hours and earning the same pay as they were previously. That wouldn't make any sense, either financially or personally. So there is very definitely an opportunity created for other workers.

As a separate point, personally I have a lot of sympathy for people who are in insolvent Defined Benefit pension schemes and for whom the early retirement option has been suspended, through no fault of their own. There are a lot of issues around Defined Benefit pension schemes being poorly managed (by the pensions industry, the investment industry and/or the employers) and the rules applying to such schemes and their wind-up being inequitable. But just because one group of workers has its benefits impaired by the poor decisions of the past, the focus should be on how best to fix their problems rather than taking away the flexibility of everyone outside the DB arena just so that they match.

 

[LDFerguson]

And what about the tax-free lump sum?

If someone takes early retirement, their tax-free lump sum will always be smaller than if they stay to Normal Retirement Age. So by making this choice, they're paying more tax than if they didn't.

 

[RainyDay]

(2) Someone who takes early retirement is hardly likely to go back into a full-time job working the same hours and earning the same pay as they were previously. That wouldn't make any sense, either financially or personally. So there is very definitely an opportunity created for other workers.

Sorry, but that's just not true. I know three people in my circle who have done exactly this, taken early retirement, and continued to work full-time. One Garda Inspector moved in a security management role in the private sector, one senior researcher who moved into a research role in an NGO, and one civil servant in a technical role who moved to a private sector practice. In one of these case, I know for a fact that they earning MORE than their pre-retirement role. I don't know the detail of the others, but I would strongly suspect that they are earning at least the same as before.

(1) Again - you're referring to a non-existent "early retirement tax break". There is no such thing as an early retirement tax break. There is a tax break available to encourage every taxable worker in the country to save towards their pension. As has been shown in several posts above, in a lot of cases people retiring early but working elsewhere pay additional taxes to do this, but are happy to do so as a lifestyle choice. So just in case my point isn't clear - there is no such thing as an early retirement tax break.

So, let's look at Mr X and Mr Y this time, both working in similar jobs, earning similar salaries, making similar pension contributions.

Mr X takes early retirement at 50, draws down his pension and lump sum, then moves to a different employer, doing the same job as before, earning the same salary, making the same pension contribution as before.

Mr Y doesn't take early retirement, and works until he is 65, then draws down his pension and tax free lump sum.

Both live on until age 75.

Are you saying that over their lifetimes, Mr X and Mr Y will pay the same tax, assuming all other things are equal?

 

[Sophrosyne]

All other things being equal, Mr X will pay more tax and make more pension contributions than Mr Y.

Mr Y, will at any time, have only one taxable income source; Mr X, post-retirement, will have two.

In his lifetime, Mr Y will make pension contributions in respect of just one employment; Mr X will make contributions in respect of two.

 

[marathonic]

This is an argument that I doubt you'll be able to win. The people who continue to work whilst claiming pension benefits will be paying a significant amount of tax. This is especially true if they continue to work in a high-paying job that pushes them into the higher-rate tax bracket before the pension income is taken into consideration.

Just because you know of a small number of people who claim pension benefits whilst working in a highly paid job doesn't mean that they are doing the financially responsible thing. In fact, the government would probably love if more of us done this - it would mean that more of the money currently held in pension funds would be subjected to higher rate tax than what would be if people continued to work until state pension age (and continued to receive higher rate tax relief on pension contributions).

The only people that can take advantage of the system a little are those who increase contributions whilst approaching retirement getting higher rate tax relief - in the knowledge that they'll be paying lower rate tax, or no tax, in retirement. However, you don't appear to be arguing against this and at least they'll be less reliant on the state in retirement.

If I'm not mistaken, one of your arguments is that these people take a pension income whilst working a high paid job and continuing to make pension contributions. What would be the sense in this? They'd be paying higher rate tax and USC on the income they take from the pension and receiving the same relief on pension contributions. The net effect would be negligible on the exchequer.

 

[RainyDay]

Great news for all of those in favour of early retirement while continuing to work;

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