Redundancy taxation: Increased exemption and SCSB

Usjes

Hi,

The revenue leaflet on taxation of a redundancy lump sum mentions an increased allowance and SCSB allowance (http://www.revenue.ie/en/tax/it/leaflets/it21.html#section4):

If you are in an occupational pension scheme, this increased exemption of €10,000 is reduced by
the amount of:

Any tax-free lump sum from the pension scheme to which you may be immediately entitled or
The present day value at the date of leaving employment of any tax-free lump sum which may be receivable from the pension scheme in the future.

So I have a couple of questions about this pension amount:
1. What is meant by the 'present day' value of something which may be receiveable in future ?
2. I dont know much about the terms of my pension but I did jot down a note at a presentation last year that upon retirement I am entitled to take 1.5x my final sallary as a tax-free lump sum. Is this normal ? Or does it vary from scheme to scheme. The problem I see with it is that it seems to render the increased allowance and SCSB useless in all but the most extreme of cases. For example say I had 20 years service, then the SCSB is
Sallary*20/15 - future lump sum,

but if the future lump sum is 1.5x sallary then even with 20 years service the SCSB is zero, in fact the SCSB is only ever worth anything if you have over 22.5years service. Similarly 1.5xfinal sallary will always dwarf the 10k increased exemption.
Is this correct? Or is the 1.5x Sallary tax-free amount allowed by my pension just abnormally generous and therefore renders the SCSB virtually valueless ? Or is there some sort of depreciation formula to be applied to the retirement lump sum to give you its 'present day' value ?

Thanks,

Usjes.

Alan Shore

The present value of something is the value of a future cashflow discounted for the time value of money.

€10,000 receivable in 10 years using a discount factor of 5% is €6,140.

The rational of deducting the tax free lump sum on pension is that I guess they don't want to let you have two tax free lump sums.

If you are leaving your job you are unlikely to be entitled to 1.5 times your final salary, perhaps there is a further function: years service / 40 years?

So if you are leaving after 20 years you are entitled to 1/2 the benefits that a person with full service would get.

Hope that helps.

Usjes

Alan Shore wrote: »

The present value of something is the value of a future cashflow discounted for the time value of money.

€10,000 receivable in 10 years using a discount factor of 5% is €6,140.

The rational of deducting the tax free lump sum on pension is that I guess they don't want to let you have two tax free lump sums.

If you are leaving your job you are unlikely to be entitled to 1.5 times your final salary, perhaps there is a further function: years service / 40 years?

So if you are leaving after 20 years you are entitled to 1/2 the benefits that a person with full service would get.

Hope that helps.

Hi Alan,

Yes I'm sure it was 1.5x final salary tax free but note that this is available upon retirement the amount I am allowed from my pension currently upon being made redundant is zero.
If you are correct about the 'current value' of this future payment being calculated by some annual compounding factor then that would change the calculation somewhat, but it still leaves questions:
The exemption would then be
1.5x(Final Salary)xK , where K is <1, (k = 6140/10000 in your example)

1. But what precisely is the value of this compounding %'age used to calculate K, you used 5% in your example but what is the official value, where is this specified?

2. There is still the problem of the value of the 'Final Salary' which is also unknown, but it seems logical that you would apply some sort of compounding %age increase in the same way as we did to calucate the 'current value'

So, after apply scaling on both sides the final equation turns out to be more or less the same and I cant see how the SCSB and the increased exemption can ever be of any value,
For example for 22.5 years service:

SCSB = 22.5*CurrentSalary/15 - 1.5*FinalSalary*K, where K is <1 and gives the 'current value' of the tax free sum receivable upon retirement.
But FinalSalary is roughly = CurrentSalary*(1/K), so we now have:
SCSB = 22.5*CurrentSalary/15 - 1.5*CurrentSalary*(1/K)*K,
= 1.5*CurrentSalary - 1.5*CurrentSalary
= 0

So, even with 22.5 years service the SCSB and the increased allowance are worthless ? So I suppose my original questions remain:
1. Is it true that the SCSB is worthless if you have fewer than 22.5 years of service ? Or
2 Is the value of 1.5x FinalSalary tax-free lump sum allowed by my pension scheme just unusually generous?

Moreover, there is also a further complication with the FinalSalary value, I may well not be able to find a new job as well paid as my current one and therefore I have, in fact, no way of knowing what the value of my FinalSalary will be and basing it on my current salary will likely lead to an overestimate.

So does anyone know what the answer to these questions are ?

Thanks,

Usjes.