Tax free lump sum or ARF

[JudeMcA]

Hi,

The advice I've been given is to take the max tax free lump sum invest it and leave the rest in an ARF.

As I see it if I take the lump sum I get it tax free but pay tax on my investment returns at 41% if it's a European fund. If I put the money into an ARF and get my returns tax free and pay income tax when I withdraw cash from the ARF.

I'll be on the lower tax rate so this is 20% PAYE + 2% UPC + 4% PRSI until I'm 66 when PRSI stops. If I take out 4% per annum and assume a 7% return my calculations show that very quickly I'm better off putting my cash into the ARF.

If I was taxed at the higher rate on my withdrawals it would make sense to take the tax free lump sum.

So am I right in saying that one should leave enough money in their ARF to get them to the top of their tax band and take the rest as a tax free lump sum?

I know I am making a big assumption about the rate of return but it's all gazing into a crystal ball!

Thanks

 

[RedOnion]

As I see it if I take the lump sum I get it tax free but pay tax on my investment returns at 41% if it's a European fund

Here, you only pay tax on the 'growth'.

If I put the money into an ARF and get my returns tax free and pay income tax when I withdraw cash from the ARF.

Here, you pay tax on all of your withdrawal.

You mentioned 41% exit tax. If you're a low rate tax payer, you should look at Investments where return is subject to income tax & cgt, rather than funds.

 

[Marc]

You are definitely onto something here and my own analysis comes to much the same conclusion even to the extent that it is possible to advocate making contributions to a pension without tax relief upfront in order to convert investment capital into "income"

When combined with a phased retirement strategy whereby you defer part of the pension, take some tax free cash and a tax efficient income on the balance it can make a substantial difference to net income.