What do people typically do with their 25% DC Tax free amount

[AAAContributor]

Any chance somebody could do a synopsis?

Main points from the article:

Under current legislation, one can withdraw a portion of your pension fund, tax-free, up to €200,000.

This portion is 25% for retirement annuity contracts (RACs), Personal Retirement Savings Accounts (PRSAs) and for people transferring to Approved Minimum Retirement Funds (AMRFs) and Approved Retirement Funds (ARFs).

Members of DB Schemes can take up to 1.5x their final remuneration as a lump sum (with 20 years service and no other retained benefits).

ESRI economist speaking at an Oireachtas committee on budgetary oversight in June, said additional revenue would be needed for the Exchequer and limiting the tax-free lump sum could be a potential source as 2014 Revenue figures claim taxes foregone of €130mill. The economist argues that the relief is poorly targeted and benefits those on higher earnings.

An assistant professor at the School of Social Policy, Social Work & Social Justice at UCD, said that the current €200k limit is abnormally high in an international context, with many countries not facilitating any tax-free drawdown and that it benefits those with the largest incomes and pension savings.

Both the ESRI economist and professor from UCD argue that reducing the lump sum could improve equitability, with the UCD professor proposing a limit of two-thirds the average earnings, so a limit of €30,000. ESRI also suggest alternative subsidies to the lump sum to better target lower and middle earners such as higher personal tax credits for those over the State pension age or a top-up to pension funds if and when the fund is annuitised.

The counter arguments are provided by the CEO of Acuvest:
- agrees that more revenue is needed for the Exchequer;
- contrasts the potential €130m saving with more juicier targets such as removing CGT relief on homes (€2.4bn), CAT Business Relief (€200m p.a.) and increasing the standard rate of VAT (€440m p.a.).
- tax free limit is used by citizens to pay down debt, add to savings or travel abroad.
- with a rapidly ageing population, incentivization of private pension saving should be a priority, which is a struggle even at the current benefit levels.
- pensions have already been made fairer by the cut in the Standard Fund Threshold from €5m to €2m. An ESRI report is also looking to reduce this further.

The 20% rate of tax on lump sums between €200,000 and €500,000 is also discussed which is significantly less than the marginal rate of tax which would ordinarily apply on income amounts received at those levels. Acuvest CEO argues that this incentivises withdrawal allowing the government to receive funds faster, otherwise the funds would be retained.

 

[fayf]

A potential reduction on the lump sum would have big impacts, and may be worth considering, pulling an early trigger on PRB to ARF, or DC to ARF, for those impacted.

If this is going to become a reality, A phased reduction is surely the more common sense and reasonable approach, as there would be a cohort about to transfer into an ARF in the next year or two.