Tax free lump sum or ARF

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

JudeMcA said:

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

Click to expand...

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

JudeMcA said:

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.

Click to expand...

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.

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.