TFLS question

[Kev1964]

My wife is now in her retirement year (age 58) and we are spending time examining options for an income solution later this year.

She will have three different pension pots from three different employments but she may not retire them all at the same time. Possibly she will retire the biggest one now and leave the other two as they are for maybe another 7 years.

Our question is can she split her TFLS entitlement over different timescales and pension pots like described above, possibly 10% now and 15% when she’s 65 (always subject to the €200k limit)?

 

[Flybytheseat]

Yes - she can split over the different pension pots at different times if she retires these pots at different times. Limited to max 25% of each pot obviously and the overall lifetime €200K Tax free / €300K 20% Tax limits.

 

[Fortune]

Our question is can she split her TFLS entitlement over different timescales and pension pots like described above, possibly 10% now and 15% when she’s 65 (always subject to the €200k limit)?

Each employment is treated separately, and only has one chance to take a pension lump sum. If the percentage taken is less than 25% for that employment, there is no second chance to take more at a later time

 

[ClubMan]

Each employment is treated separately, and only has one chance to take a pension lump sum. If the percentage taken is less than 25% for that employment, there is no second chance to take more at a later time

There might also be the possibility to further split specific pensions into smaller contracts allowing more "fine grained" control over taking tax free lump sums and benefits.

 

[Kev1964]

Thanks for the responses so far but I’m not sure if they agree with each other. Apologies if I’ve misunderstood.

Is there a Revenue source to get a detailed official position from I wonder?

My own search reveals this quite thin explanation from Revenue. It mentions a Tax Free “Lifetime” Limit of €200,000 which suggests more than one bite at the cherry?

Taxation of retirement lump-sums

This page outlines the taxation of an excess lump-sum

www.revenue.ie

 

[Kev1964]

If I explain some numbers it might help explain what we are hoping to achieve.

The main pot is worth €750k. If she takes 25% straight away she will get €187500 which is not far short of her max entitlement. Leaving €562,500 in an ARF. So far so good.

However for the first two or three years of income drawdown she wants to take whatever is the max allowed by Revenue at 20% income tax. Currently that’s €53,000, possibly €55,000 next year. The 10% limit on ARF drawdowns will prevent her from doing that probably from year 2.

Our logic is to reduce the TFLS from the first pot to say €100,000 and with the other two pots, which are collectively forecast to be >€700,000 in 7 years time, to take the balance of the TFLS of €100,000 then.

 

[ClubMan]

What kind of pensions are they?
E.g. occupational (and still in the "company" pension), PRSA, personal pension plan, buy out bond etc.?

 

[S class]

You could arrange with the ARF provider to allow drawdowns in excess of 10% per year.

You could set up an ARF without early drawdown penalties.
This might have a slightly higher AMC.

After the larger withdrawals are no longer required you could change your ARF back to one with early drawdown penalties to get a lower AMC.

Zurich are definitely willing to do this.
They set up an ARF for about 22k for a friend.
They allowed annual drawdowns of 5k (almost 25%) from the ARF to enable the person to gain 4 years of class S Prsi.
This was set up by an execution only broker and the AMC was 1%.

You should be able to get a lower AMC on the much larger ARF.

Put your plan to the broker and ask them to check what deal they can get you. This is not asking for advice so an execution only broker can do this for you.

 

[ClubMan]

My own search reveals this quite thin explanation from Revenue. It mentions a Tax Free “Lifetime” Limit of €200,000 which suggests more than one bite at the cherry?

For a specific pension contract there's only one bite at the TFLS cherry which is what @Fortune was referring to above. That's why I wondered if you might be able to fragment some of the pensions that you have into smaller contracts to give additional flexibility with regard to taking TFLS and benefits rather than it being a one time only action for each of them. You can definitely do this with a PRSA (I've done it myself) but I don't know if it's also an option for other pension types.

 

[Kev1964]

What kind of pensions are they?
E.g. occupational (and still in the "company" pension), PRSA, personal pension plan, buy out bond etc.?

They are all PAYE company pension schemes where the employer and employee both contributed. They were never moved from where they were as an employee post resignation. She resigned from the employments related to two of the pots and will resign (and retire) from the third in September.

 

[Kev1964]

Thanks S Class. I had assumed that the very max withdrawal limit was 10% ……according to Revenue rules?

Interesting that this constraint may not apply.

It seems that the best approach is to ask a broker to come up with a solution that allows her to use the pots in the most tax efficient way.

 

[S class]

I think 10% is the maximum withdrawal the provider normally allows without charging an early redemption penalty.

There is no revenue limit on drawdowns.

 

[Conan]

There is no Revenue rule which limits the % drawdowns from an ARF. You could draw down 100% in a particular year if you wish (probably not very sensible in most cases). The minimum drawdown however is 4% once you are aged 61 or over (increasing to 5% after age 71).

 

[Kev1964]

There is no Revenue rule which limits the % drawdowns from an ARF. You could draw down 100% in a particular year if you wish (probably not very sensible in most cases). The minimum drawdown however is 4% once you are aged 61 or over (increasing to 5% after age 71).

Great. So I was labouring under a misunderstanding so. That makes matters simpler.

Thanks Conan.

 

[Setforlife]

Although there are no limits on the % drawdown, once you have taken the initial TFLS and setup the first ARF, all income from it is then taxed as normal income. You don’t get to treat it like further lump sums taxed at 20%.

In your scenario, you take the 25% of first pension, then your next lump sum is when you take the next pension. When you can take 25% as a lumps sum get the balance of 12500 tax free and the rest taxed at 20%. Then for final pension you can take 25% lump sum again but all taxed at 20% up until 500k total lump sums.

 

[Fortune]

My own search reveals this quite thin explanation from Revenue. It mentions a Tax Free “Lifetime” Limit of €200,000 which suggests more than one bite at the cherry?

Taxation of retirement lump-sums

This page outlines the taxation of an excess lump-sum

www.revenue.ie

A lot of people use slightly different terms interchangeably, which is what causes your confusion. There is a pension lump sum, which may have a tax-free portion.

For pensions relating to one employment, there can only be one pension lump sum, up to a maximum of either 25% or 1.5 times salary.

Pensions lump sums can be paid tax-free, up to a lifetime limit of €200k. This lifetime limit applies across all employments. The only way to get "more than one bite at the cherry" is to have more than one employment.

A slight exception to this is Personal Pension Plans (Retirement Annuity Contracts as Revenue refers to them) and PRSAs. Each individual contract can have a 25% pension lump sum taken from it (as a one time event) separately, giving the opportunity to split these into multiple contracts to allow them to be drawn down at different times. The exception to this exception is PRSA AVCs which must be taken at the same time as the rest of the benefits relating to that employment.

 

[Fortune]

You could arrange with the ARF provider to allow drawdowns in excess of 10% per year.

You could set up an ARF without early drawdown penalties.
This might have a slightly higher AMC.

I think a few of the ARF providers only apply the early drawdown penalties for transfers, rather than on withdrawals via payroll.

 

[misemoi]

So for multiple pensions, is the following correct ?
The last tied to my last employer before retirement = 25% tax free or 1.5 times salary if lower
Old deferred occupational pensions 25% tax free
Combined max tax free today is 200k, set to increase in coming years

 

[S class]

@Kev1964

I checked out my Zurich ARF policy document.
10% is the maximum regular yearly encashments.
On top of these a Partial encashment is allowed.
This can be any amount over 1k.
There is a 20 euro charge for a partial encashment.

There is no defined amount of yearly encashments that would trigger an early encashment charge.

It states,
in certain circumstances, early encashment charges may be made to your account.

As I stated above Zurich allowed almost 25% yearly encashments
on request without extra encashment charges.
(These were paid monthly to a total of 5k per year)

 

[Setforlife]

So for multiple pensions, is the following correct ?
The last tied to my last employer before retirement = 25% tax free or 1.5 times salary if lower
Old deferred occupational pensions 25% tax free
Combined max tax free today is 200k, set to increase in coming years

Correct but the combined max tax free of 200k or the 500k max lump sum isn’t set to increase in coming years. The sft limit increases but the lump sum amount free amount is currently locked to 500k. Not only that but the sft report hinted that if there was a change to lump sums it should be to tax the 200-500k at full rate.