Pension - tax free lump sum

serco

Hi All

Looking for some advice on a pension due to be received soon by a friend. The pension is from a previous employer (occupational pension scheme) and he is self employed now.There are 2 options:

1. A tax free lump sum of X and a monthly payment of Y
2. A larger monthly payment

My understanding is that the tax free lump sum is actually tax free and have checked citizens info etc and it confirms that amounts under 200K are not subject to any income tax.

However, his accountant has said that the lump sum is taxable. Is this correct, is there any tax to be paid on the tax free lump sum amount?

thanks in advance

coylemj

serco wrote: »

However, his accountant has said that the lump sum is taxable. Is this correct, is there any tax to be paid on the tax free lump sum amount?

The accountant is presumably far more conversant with the fine details of your friend's situation than you are so I find it amazing that you're essentially asking a bunch of anonymous strangers to comment on and maybe even overrule his advice.

Your friend could have received a tax-free lump sump from that or a different employer which may have used up any or most of his lump sum tax-free allowances.

Tax thresholds for lump sums on retirement are documented on the Revenue website here....

http://www.revenue.ie/en/tax/it/reliefs/lump-sum-payments.html

If it's a defined contribution (DC) scheme, it's probably tax-efficient to take the maximum tax-free lump sum since the pension will be taxed as income and liable to PAYE and USC.

If it's a DB scheme then it's a different story....

Unless your friend is in desperate need of cash, he would be much better off not converting any of his pension to a lump sum. The simple reason for this is that pension funds typically convert the annuity to a lump sum using a formula that is basically crap value for money. By that I mean that if your friend took that lump sum and the next day attempted to purchase an annuity with the money, he would be offered way less than the income forgone by taking that lump sum.

serco

Thanks for the reply; last time i checked, being an accountant didnt mean you were automatically correct but anyway. Im not asking people to overrule someone, i'm ensuring that tax isnt paid where its not necessary...

Its a DC scheme and the options are to buy an annuity for a large monthly payment or a tax free lump sum and a smaller monthly payment. No other pension payments etc are being received.

The info i found here http://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/occupational_pensions.html states that the lump sum can be max 200K before income tax is applied. This is basically why im asking the question

coylemj

He will have to convert at least some of it to an annuity and as interest rates are currently at historic lows, annuity rates are correspondingly bad so he should defer a decision if at all possible.

The accountant will have asked your friend to say what if any lump sum(s) he has already received from leaving previous employments, I believe that has a cumulative effect and is taken into account when receiving subsequent lump sums so your friend may have used up all of his allowances. The same applies to lump sum inheritances, you don't get a new allowance every time, it can get used up after which every penny you receive can be taxable.

Read the stuff on the Revenue website rather than what's on Citizens Information, they (CI) tend to simplify things too much.

The J Stands for Jay

The 200k limit is for all lump sums received since December 2005. Could be the accountant is aware of some earlier lump sums received. Or, it's not unusual for accountants to know absolutely nothing about pensions.

Jim2007

serco wrote: »

Thanks for the reply; last time i checked, being an accountant didnt mean you were automatically correct but anyway. Im not asking people to overrule someone, i'm ensuring that tax isnt paid where its not necessary...

Your friend will have discussed their financial affairs in far greater detail with their accountant than with you and if the accountant is saying that there is tax due then obviously he is in possession of facts that you are not privy to!