Is a Lump-Sum pension right for you?

by | Sep 2, 2022 | Retirement & Pensions, Back to Blog

Lump-Sum Pension Donegal

One of the key motivators for contributing to a pension is the ability to withdraw a tax-free lump sum at retirement.

Below, we have answered some questions surrounding pension tax-free lump sums and how the process works.

Although there are many benefits to pensions, such as tax relief on contributions and tax-free growth, the tax-free lump sum is often seen as the most valuable benefit.

Is a Lump-Sum pension right for you?

What is a tax-free lump sum?

Lump-sum Pension Donegal

The government allows you to withdraw a percentage of your pension tax-free at retirement in order to encourage individuals to consider their long-term future. However, there are certain restrictions on the amount that may be taken out. We’ll look at those in a bit more depth later on.

Another incentive for many people is the guarantee that if they contribute to their pension plan, they will be eligible to withdraw a tax-free amount of at least 25% of the pension fund tax-free at retirement.

It’s also worth noting that this is subject to scheme rules, and if you accept an enhanced redundancy, it might jeopardise your eligibility for a tax-free amount at retirement. If you’ve taken redundancy and aren’t sure whether or not it affects your eligibility, it may be worthwhile having a conversion with an trusted financial advisor.

What is the highest tax-free lump sum pension in Ireland?

Lump-sum Pension Donegal

The amount of tax-free money you can get from your pension is restricted. As of January 2011, the maximum tax-free retirement lump sum was €200,000.

Keep more of your money by being aware of the tax-free threshold lifetime limit. This includes all retirement lump sums paid to an individual from December 7th, 2005 onwards.

In the table below, we show some relatable examples that you may find helpful.

Name Pension Fund Value 25% Tax-Free Lump Sum Remainder
Ciaran €335,000 €83,750 €251,250
Mathew €245,000 €61,250 €183,750
John €325,000 €81,250 €243,750
Niamh 515,000 €128,750 €386,250
Mary €132,000 €33,000 €99,000

The pension tax-free lump sum affects everyone differently, as seen in the Examples section above. We have illustrated how much your 25% tax-free lump sum is worth and what would remain in your pension. The remainder will then go into an Approved Retirement Fund (ARF) or an Annuity.

What is the average tax-free lump sum pay out in Ireland?

Lump-sum Pension Donegal

It’s difficult to pin down exactly what the average tax-free lump sum in Ireland would be. However, we may look at Irish pension averages and obtain a reasonable estimate from there.

We know that the average Irish pension is approximately €90,000. As a result, the expected lump sum should be around 25% of this amount. Of course, these figures should be taken with a grain of salt since they are estimates.

Tax on a pension lump sum over €200,000

Any part of your pension lump sum that exceeds €200,000 is the ‘excess lump sum.’

Anything over this amount is subject to tax in two stages: 20% until you reach €500,000, and anything above that will be taxed at your marginal rate–the income tax bracket you fall into (which may be either 20% or 40%).

Can I receive a tax-free lump sum from all types of pension arrangements?

Lump-sum Pension Donegal

Not all but most. Many pension arrangements will be eligible, but it will depend on what type of arrangement you have. For instance, Defined Benefit Pension (DB) (in certain circumstances) will not be eligible, similarly is the case for AVC-Employee DB Pension. It is important to seek professional advice for a trustee financial advisor.

Can you use your tax-free lump-sum to buy property?

Yes, you can use your tax-free lump sum to buy property; however, it would mean that you are using cash instead of a pension.lump-sum-pension-donegal-tax-free-advice-first-financial-advisor-letterkenny

As a result, it would be considered a typical property investment. On the other side, if you use your pension to buy property and hold it until you retire, you may benefit from several perks such as:

  • no income tax
  • no capital gains tax
  • maintenance cost funded via your pension

What about Enhanced Transfer Value (ETVs)

Lump-sum Pension Donegal

The Enhanced Transfer Value will be greater than the current transfer value. This is intended to persuade members to consider it.

If you’re a current employee who has lost access to future service benefits from the scheme, or if you’re a deferred member, you may be eligible for an Enhanced Transfer Value offer. Former employees who are not receiving benefits are included in this category. Employers may sometimes provide current workers with the option to join a Defined Contribution (DC) plan.

At what age can I access my pension tax-free lump sum?

You may be able to access benefits from age 50 with certain pension arrangements. This is often the case in occupational pension plans where a participant has departed the job. Most people are eligible to receive 25% of their payments tax-free after they have met the criteria.

Things to consider before taking a tax-free lump sum

Lump-sum Pension Donegal

Most likely, when you approach retirement, you’ll start to evaluate your alternatives in greater depth. A tax-free lump sum may be a component of your retirement plan.

The lifetime limit of €200,000 is another thing to think about. It’s critical to look at your entire position in context.

Your pension will probably be one of your most valuable assets, but it is only one part of the puzzle. Take some time to think about how you want your retirement to look going forward. Will you be able to retire when you want to? If not, this needs to be factored into your planning.

It’s especially vital when you’re approaching retirement because your primary source of income will likely stop. If this is something you wish to discuss further, please get in touch and we can arrange a review of your pension plans and existing arrangements.

We hope this article has provided some clarity regarding the pension tax-free lump sum process and how it works. If you are still unsure if you are eligible or want to chat through some options, feel free to contact our team.

We Help Our Clients access 25% Tax Free Lump Sum

If you’d want to talk about your eligibility and maybe claim benefits at age 50, give us a call.

If you have questions or need advice on lump-sum pensions, call 074 9103938 or email now

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Talk to us now and make an appointment with one of our Letterkenny team of QFAs. We are here to help with your Financial Planning Concerns. Ask us questions on Retirement & Pension, Life Insurance & Protection, Mortgages, and Investment Advice. Get in touch here or give us a call at 074 91 03938.

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