Would it ever be prudent not to take 25% tax free lump sum from pension

[thedaddyman]

One area to consider is if you get a large ex gratia redundancy sum. It can sometimes make sense to forego the future tax free sum from your pension in certain cases to reduce the tax liability on your redundancy

 

[phoenix53]

By the time the OP retires I'd say this will be a feature of pensions.

Gerard

www.prsa.ie

By the time the OP retires I'd say this will be a feature of pensions.

Gerard

www.prsa.ie

Did standard life issue policies with 20 segments thereby allowing you encash one segment at a time. It's a long time.ago, I can't remember if it was life policies only or not.

 

[Mommabearof3]

One area to consider is if you get a large ex gratia redundancy sum. It can sometimes make sense to forego the future tax free sum from your pension in certain cases to reduce the tax liability on your redundancy

Unlikely although I would jump at it given the chance.

 

[Setforlife]

Let’s say there’s €800k behind a wall. You’re offered a one-off opportunity to take €200k of it completely tax-free. Otherwise all of the money stays behind the wall and any future withdrawals are taxable. I can’t envisage any reasonable scenario where it would make sense to refuse the tax-free cash.

does it not depend on how the pension fund looks at retirement, I.e if annuity/arf drawdown is still below tax threshold by leaving the money in the pension, but say you go arf and can take out the 37k a year rather than 25k a year and also you have 200k more growing so good insulation against other events.

Read this one recently enough, which while still seems to show it make sense to take out the lump sum, but it’s not so crazy not to also.

Take Your 25% Tax Free Lump Sum, Or Not?? Blog 171

informeddecisions.ie

 

[Fortune]

Did standard life issue policies with 20 segments thereby allowing you encash one segment at a time. It's a long time.ago, I can't remember if it was life policies only or not.

Only in personal pensions, nothing for occupational pensions.

 

[conor_mc]

does it not depend on how the pension fund looks at retirement, I.e if annuity/arf drawdown is still below tax threshold by leaving the money in the pension, but say you go arf and can take out the 37k a year rather than 25k a year and also you have 200k more growing so good insulation against other events.

Read this one recently enough, which while still seems to show it make sense to take out the lump sum, but it’s not so crazy not to also.

Take Your 25% Tax Free Lump Sum, Or Not?? Blog 171

informeddecisions.ie

Article assumes TFLS €240k invested in paltry 1% deposit account (option A) versus invested in ARF with a 75/25 mix of stocks and bonds (option B).

Reality is that anyone inclined to be reading this forum or that blog article probably would not leave it on deposit at 1%.

A fairer comparison would have been to invest the TFLS in a similar risk profile as option B (75/25), but outside of the tax-efficient structure of an ARF.

 

[Gordon Gekko]

does it not depend on how the pension fund looks at retirement, I.e if annuity/arf drawdown is still below tax threshold by leaving the money in the pension, but say you go arf and can take out the 37k a year rather than 25k a year and also you have 200k more growing so good insulation against other events.

Read this one recently enough, which while still seems to show it make sense to take out the lump sum, but it’s not so crazy not to also.

Take Your 25% Tax Free Lump Sum, Or Not?? Blog 171

informeddecisions.ie

There are advisers in this thread with decades of experience who’ve never seen a scenario where is would make sense not to take one’s tax-free lump sum. I can’t envisage such a scenario where it would make sense not to take it. So I think ‘crazy’ is a fair enough description.

 

[Tickle]

Article assumes TFLS €240k invested in paltry 1% deposit account (option A) versus invested in ARF with a 75/25 mix of stocks and bonds (option B).

Reality is that anyone inclined to be reading this forum or that blog article probably would not leave it on deposit at 1%.

A fairer comparison would have been to invest the TFLS in a similar risk profile as option B (75/25), but outside of the tax-efficient structure of an ARF.

Is there a scenario where one could either take the 25% tax free and invest in a fund that attracts 41% tax on growth, or leave it in the ARF, invested in a similar fund, to grow tax free and pay only 20% tax on drawdown?

 

[Tickle]

Is there a scenario where one could either take the 25% tax free and invest in a fund that attracts 41% tax on growth, or leave it in the ARF, invested in a similar fund, to grow tax free and pay only 20% tax on drawdown?

Obviously when left in the ARF, you'd be paying the 20% on the initial capital + the gain. Whereas outside th ARF, the 41% is just on the gain.

 

[Fortune]

Article assumes TFLS €240k invested in paltry 1% deposit account (option A) versus invested in ARF with a 75/25 mix of stocks and bonds (option B).

Reality is that anyone inclined to be reading this forum or that blog article probably would not leave it on deposit at 1%.

A fairer comparison would have been to invest the TFLS in a similar risk profile as option B (75/25), but outside of the tax-efficient structure of an ARF.

The funds available on the ARF are likely to be also available on an investment product from the same provider. The difference then comes from comparing 1% levy (possibly paid for by the provider) and 41% exit tax on growth compared to PAYE being paid on capital and growth. Fund performance shouldn't be a factor in the comparison.

 

[Fortune]

Is there a scenario where one could either take the 25% tax free and invest in a fund that attracts 41% tax on growth, or leave it in the ARF, invested in a similar fund, to grow tax free and pay only 20% tax on drawdown?

Yes, if you look at a life assurance company that sells ARFs, they will also have the same funds available in single premium investment bonds.

 

[euroDilbert]

If I was over 65 then no dirt but we were just talking and we felt it was another hassle.

You are still liable for DIRT over 65 - unless your total income is under the exemption limit.

 

[Mommabearof3]

You are still liable for DIRT over 65 - unless your total income is under the exemption limit.

So I did not know that thanks.

 

[Mommabearof3]

There are advisers in this thread with decades of experience who’ve never seen a scenario where is would make sense not to take one’s tax-free lump sum. I can’t envisage such a scenario where it would make sense not to take it. So I think ‘crazy’ is a fair enough description.

I am just trying to future plan as said previously while it is not my area of expertise its glaringly obvious that I will need a combination of research and professional advice nearer the time. My better half does have a sibling who is an actuary so will probably ask for their input when we next see them. If not for this forum I would have even less knowledge so appreciate the insight and thoughts.

 

[Mommabearof3]

The funds available on the ARF are likely to be also available on an investment product from the same provider. The difference then comes from comparing 1% levy (possibly paid for by the provider) and 41% exit tax on growth compared to PAYE being paid on capital and growth. Fund performance shouldn't be a factor in the comparison.

I think answers my main query as to whether increased growth of the fund could be a factor in this decision.

 

[Gordon Gekko]

I am just trying to future plan as said previously while it is not my area of expertise its glaringly obvious that I will need a combination of research and professional advice nearer the time. My better half does have a sibling who is an actuary so will probably ask for their input when we next see them. If not for this forum I would have even less knowledge so appreciate the insight and thoughts.

Hopefully with more weighting towards professional advice than research. Finance and investment seems to be one of the few areas where people feel that an article speed-read on the toilet trumps being a CFA or tax consultant.

 

[Mommabearof3]

Hopefully with more weighting towards professional advice than research. Finance and investment seems to be one of the few areas where people feel that an article speed-read on the toilet trumps being a CFA or tax consultant.

The research would be for day to day stuff it is very clear to me that I need professional advice and to be honest it would be reassuring because its quite anxiety causing to think we may make an adverse decision. While our needs are simple health care, house maintenance and changing cars are all costs that need to be financed. I asked a question it has been answered and I appreciate that financial and professional advice and services is another topic.

 

[AJAM]

This YouTube video outlines a scenario where it makes sense not to take it as 1 lump sum.

The 3 Big Pension Mistakes EVERY Retiree Makes (Real world examples)

Taking tax-free cash is not tax-free if it means you have to pay more tax in the future!Financial PlanningI am a Chartered Wealth Manager and Partner in a fi...

www.youtube.com

However it is UK based, and it seems they have the option to spread out the tax free cash, rather than taking it as 1 lump sum.
Not sure if we have that option in Ireland?