Pension lump sum

seanr125

Hi there,

Maybe someone b able to provide a bit of valuable advice on this...hopefully some finance guru reads this 😄.

I'm helping someone I know filling out forms to set up their pension. She's getting a tax free lump sum from her AVC.

The remainder of the money in the AVC can be taken as a taxable lump sum at emergency tax rates with a fee too... around half in tax...not very appealing 😖.

The alternative is to put money into an approved retirement fund (ARF) (1% is deducted every yr automatically...also if she fully cashed it out she'll pay tax @ 40% as she has fully utilised 20% tax band).

Perhaps there is nothing which can be done here to help but maybe you can advise - If she went with the ARF is there any ideas on how to (legally) minimise this hefty tax bill?

Thanks in advance for any suggestions,

Liam D Ferguson

Two quick queries...

(1) What age is she?

(2) You say that she has fully utilised her 20% tax band. Is that just this year or is her pension from the main pension scheme of a size that in itself it will always use up her 20% band? Or is it that she has income from several taxable sources that, in combination, are using up her 20% band?

seanr125

Liam D Ferguson wrote: »

Two quick queries...

(1) What age is she?

(2) You say that she has fully utilised her 20% tax band. Is that just this year or is her pension from the main pension scheme of a size that in itself it will always use up her 20% band? Or is it that she has income from several taxable sources that, in combination, are using up her 20% band?

Hi Liam,

She retired early - is in early 60's.
She has several sources that just about use up 20% band.

Thanks a mill 🙂

coylemj

seanr125 wrote: »

The alternative is to put money into an approved retirement fund (ARF) (1% is deducted every yr automatically...

Who is getting that 1%? If it's the broker, tell her to find a different adviser. She has a large choice of funds, most of which do not involve paying the broker an annual commission. I used a broker who split his 2% commission with me so he kept a one-off 1% and I got a 101% allocation with no ongoing commission to him.

Remind her that she does not have to invest the money in an ARF with the same company which managed her DC pension or AVC. So she is tied to nobody.

seanr125 wrote: »

Perhaps there is nothing which can be done here to help but maybe you can advise - If she went with the ARF is there any ideas on how to (legally) minimise this hefty tax bill?

You don't pay any tax on the ARF until you withdraw money from the fund, all of it goes in tax-free. When you withdraw from the fund, you pay tax at your higher rate. So as your friend has incomes which use up her 20% band, all of the withdrawals from the ARF will attract PAYE at 40%, she will also pay USC and (up to age 66), PRSI in Class S at 4%.

As your friend is now in her 60s, she will be subject to the 'imputed distribution' rule whereby she will be assumed to have withdrawn 4% (5% from age 70) of the ARF each year and will be liable for the appropriate taxes whether she withdraws the money or not. In practice, the insurance company managing her fund will withdraw the minimum amount (4% or 5%), deduct the taxes and and remit the net amount to her because to pay the taxes and not take the net amount would be financial lunacy. Any one-off voluntary withdrawals she makes will count towards that 4% or 5% so for, example, if she tells the insurance company she wants to withdraw 6% p.a., the imputed distribution rule would have no effect.

seanr125

@coylemj thanks for the reply. Sorry I meant with the actually company where she sets the ARF with - the annual commission charge of 1%. But now that you say that - it is something I can be aware of too.

Liam D Ferguson

My guess is that the 1% annual ARF charge is split between the ARF provider and the broker. You'll always pay an annual charge to the ARF provider for administering the ARF. For an insured ARF (i.e. one with one of the High Street pension companies, e.g. Irish Life, New Ireland, Zurich Life etc., as distinct from a self-administered ARF) the annual charge can be from around 0.5% upwards. The ongoing fee to the broker is negotiable. The broker should only be getting an ongoing fee if s/he is providing an ongoing service. If you don't need or want an ongoing service, then don't agree to any ongoing fee to the broker.

As she's in her 60s, then as coylemj says, she must take a minimum income of 4% per year from the ARF or else suffer double taxation on a notional 4% withdrawal, which would be crazy. Once she's taken her tax-free lump sum from the AVCs, any withdrawals from the ARF will be subject to tax as additional income and levies. Is there any way she can reduce her other sources of taxable income so that the 4% withdrawal from the ARF remains just under her 20% band?

seanr125

Liam D Ferguson wrote: »

My guess is that the 1% annual ARF charge is split between the ARF provider and the broker. You'll always pay an annual charge to the ARF provider for administering the ARF. For an insured ARF (i.e. one with one of the High Street pension companies, e.g. Irish Life, New Ireland, Zurich Life etc., as distinct from a self-administered ARF) the annual charge can be from around 0.5% upwards. The ongoing fee to the broker is negotiable. The broker should only be getting an ongoing fee if s/he is providing an ongoing service. If you don't need or want an ongoing service, then don't agree to any ongoing fee to the broker.

As she's in her 60s, then as coylemj says, she must take a minimum income of 4% per year from the ARF or else suffer double taxation on a notional 4% withdrawal, which would be crazy. Once she's taken her tax-free lump sum from the AVCs, any withdrawals from the ARF will be subject to tax as additional income and levies. Is there any way she can reduce her other sources of taxable income so that the 4% withdrawal from the ARF remains just under her 20% band?

Thanks Liam. I think your last question is where the big issue is.

She gets some basic government pension along with the pension from the job she worked in. This is just enough to fully use up the 20% tax band.

It would be handy if she would be able to get her regular pension paid to another family member who actually helps with buying groceries etc. (if she wanted to do this) as this would reduce her earnings (I'd imagine that's not permitted though - might be worth checking on the off chance it's a possibility). Even if could there's inheritance/gift tax to consider in that case - but could look into it.

Cheers

coylemj

seanr125 wrote: »

It would be handy if she would be able to get her regular pension paid to another family member who actually helps with buying groceries etc. (if she wanted to do this) as this would reduce her earnings (I'd imagine that's not permitted though - might be worth checking on the off chance it's a possibility).

I understand the motives but that is total fantasy, it won't happen. Don't waste one microsecond pursuing it.

Over the next few years, it's possible that the 20% band will be increased and/or they will reduce the USC rates or widen the USC bands. So if she can afford to, she might consider minimising her withdrawals from the ARF until the tax situation is a bit more benign. But if she needs the money short term, she will have to take the hit on withdrawals with 40% PAYE, 4.5% USC and (until she is 66) 4% Class 'S' PRSI.

seanr125

coylemj wrote: »

I understand the motives but that is total fantasy, it won't happen. Don't waste one microsecond pursuing it.

Over the next few years, it's possible that the 20% band will be increased and/or they will reduce the USC rates or widen the USC bands. So if she can afford to, she might consider minimising her withdrawals from the ARF until the tax situation is a bit more benign. But if she needs the money short term, she will have to take the hit on withdrawals with 40% PAYE, 4.5% USC and (until she is 66) 4% Class 'S' PRSI.

Yeah total fantasy is right to be honest FWIW the help on Boards.ie is much better and quicker than her actual broker (maybe new broker required) Thanks guys for taking the time to give your thoughts. Appreciate it.