PREVIOUS DEFINED BENEFIT PENSION OPTIONS

Below is a detailed analysis of these 2 options;

2.1 Transferring to a New Employer Pension Scheme Explained

If the new employer pension scheme is also a defined benefit pension scheme, then all of the access and draw-down rules are similar to the rules mentioned in option 1. However, if the new employer pension is defined contribution, then the following rules apply ;

• Access to the pension

Restricted to the Normal Retirement Age of that pension scheme (usually 60 or 65)

• How pension benefits are received and taxed?

Defined Contribution Occupational pension schemes are usually accessed as follows;

• • 25% of the Pension fund is usually received as a tax free lump sum
  • The remaining 75% is usually either
    • Taken as Taxable cash or
    • Transferred into an Approved Retirement fund (ARF) or a Vested PRSA

It is rarely advisable to take the remaining 75% of the pension fund as taxable cash as you can end up giving half of the fund value to the revenue as a tax liability. Transferring these funds into an Approved Retirement fund (ARF) or a Vested PRSA is usually the preferred and most tax-efficient method to choose. The pension funds withdrawn from the ARF/Vested PRSA are taxable as income – liable to PAYE, PRSI (until age 66), and USC. This ARF/Vested PRSA income can be received monthly/quarterly or annually, whichever pension holder chooses.

An annual minimum withdrawal of 4% of the total pension fund value is compulsory from age 61, but they can withdraw as much as they wish from this pot of money at any time. It is prudent to withdraw these funds tax efficiently. It is possible to pay very minimal taxes (if any at all) on this income if certain annual income limits and thresholds are not exceeded.
Transferring into a new employer’s Defined Benefit Pension scheme is rarely advisable. Many people who start working in the public sector later in their working career often transfer any previous employment pensions into the public sector superannuation pension scheme to bump up their public sector pension on retirement. However, this rarely makes financial sense and is not advisable.

• • Tax implications on Death – pre retirement In the event of death prior to Normal retirement age (NRA) of your new employer defined contribution pension scheme, the full fund value is left to the surviving spouse. However, this benefit cannot exceed 4 times final salary If widowed/divorced/single – the pension fund is left to next of kin (children) as and taxed as inheritance. No tax is paid if the lifetime limit of €335000 gift/inheritance threshold is not exceeded.

If the new employers pension is a defined benefit scheme then a tax free death benefit of usually 1.5 times Salary (salary at date of leaving this employment) is be payable to the surviving spouse. 50% of the annual pension income is also usually paid to the surviving spouse until his/her death. This income is taxable (Income tax/PRSI/USC etc.). If widowed/divorced/single, the pension annual income dies with the pension owner. No benefit is passed down to their next of kin (children).

• • Tax implications on Death – Post Retirement – If the pension holder has reached Normal Retirement age of his new employers defined contribution scheme and a tax-free lump sum received prior to death, the remaining funds will usually have been transferred into an ARF/Vested PRSA. On death, these benefits are then passed onto the surviving spouse tax free. However withdrawals from the ARF/Vested PRSA are taxable as income. If widowed/divorced/single, the remaining funds within the ARF/Vested PRSA are passed onto next of Kin (usually children). Children under 21 are taxed under normal inheritance tax rules but may pay no tax if their lifetime limit for gift/inheritance limits/thresholds of €335000 are not exceeded. (see table below). Children over 21 are not taxed as inheritance but instead pay a compulsory standard tax rate of 30% on funds due from ARF/Vested PRSA.

If the new employers pension is a defined benefit scheme then 50% of the annual pension income is paid to the surviving spouse until his/her death. This income is taxable (Income tax/PRSI/USC etc.). If widowed/divorced/single, the pension annual income dies with the pension owner. No benefit is passed down to their next of kin (children).

2.2 – Transfer the full Pension Value to a Personal Retirement Bond (PRB) or PRSA with one of the main pension providers in Ireland.

• Access– access to the PRB or a PRSA can be gained from age 50 onward. This is a HUGE benefit when compared to the other options.
• How are the pension benefits received and taxed? the most tax-efficient of the following calculations/options;
  • 25% as a tax-free lump sum with the remaining balance invested in an ARF/Vested PRSA or
  • 5 times salary as a tax-free lump sum with the balance used to purchase an annuity (annual pension income).

Both the withdrawals from the ARF/Vested and the annuity income are taxed as income and liable for income tax, PRSI and USC.

• • Tax implications on Death – Pre Retirement– In the event of death prior to Normal retirement age (NRA), the full fund value is left to the surviving spouse. If widowed/divorced/single – the pension fund is left to the next of kin (children) as and taxed as an inheritance. No tax is paid if the lifetime limit of €335000 gift/inheritance threshold is not exceeded. Please see figure 1.2 for inheritance tax table thresholds/limits.
  • Tax implications on Death – Post Retirement – If the pension has been retired and a tax-free lump sum received by the pension holder prior to death, then the remaining funds will usually have been transferred into an ARF/Vested PRSA. These benefits are then passed onto the surviving spouse tax-free. However, withdrawals from the ARF/Vested PRSA are taxable as income. If widowed/divorced/single, the remaining funds within the ARF/Vested PRSA are passed onto the next of Kin (usually children). Children under 21 are taxed under normal inheritance tax rules but may pay no tax if their lifetime limit for gift/inheritance limits/thresholds of €335000 is not exceeded. (see table below). Children over 21 are not taxed as inheritance but instead, pay a compulsory standard tax rate of 30% on funds due from ARF/Vested PRSA.