If you have recently been made redundant, are likely to be so in the near future or know of someone else who is in this situation, then you really need to be reading this. First and foremost in your thoughts, will most likely be questions around tax-free Termination Payments and how these integrate with any Pension Lump Sums and then, what options you have regarding the pension you are leaving behind from your previous employment.
Firstly, any lump sum payments by an employer on the termination of an employee’s service is generally liable to PAYE with some exceptions, which I have outlined below, and these are:
Pension Lump Sums:
A lump sum taken on retirement from the employer’s approved pension scheme which is within the €200,000 limit on all pension lump sums taken since December 7th 2005.
Statutory redundancy payment of 2 weeks per year plus one week’s pay where the employee has worked for that employer for at least 2 years and part thereof, and payment limited to €600 per week.
Example – Mary has worked for 14 years and 9 months with her employer and is now being made redundant. Her gross earnings are €800 per week. Her statutory (not taxed) redundancy payment is therefore (2 x 14.75 + 1) x €600 = €18,300.
Ex Gratia payments in lieu of injury/illness:
An ex-gratia payment made by the employer on account of an employee’s injury or disability which gives rise to the termination of employment up to a lifetime limit of €200,000.
Any other lump sum payments made by the employer on termination of service are generally taxable, although part or all of such lump sums may be tax-free if those payments were not provided for in the contract of employment, ie., are ex gratia.
An ex gratia termination payment may be exempt from income tax, USC & PRSI, up to the higher of the following three amounts, within an overall lifetime limit of €200,000 on all tax-free ex gratia termination payments from all sources.
- Basic Exemption
€10,160 plus €765 for each complete year of service
Example – John’s employment is being terminated after 22 years and 5 months of service. His basic exemption is:
€10,160 @ €765 x 22 = €26,990
This basic exemption is applicable in all cases and is not impacted by whether the individual also has an entitlement to a tax-free pension lump sum.
- Increased Exemption
This increases the basic exemption by up to €10,000, provided the individual has not received a tax-free termination payment within the last 10 years and has no right to a lump sum under a pension scheme related to this employment, or has waived their right to such a lump sum.
- Standard Capital Superannuation Benefit (SCSB)
A slightly more complicated formula and calculated as N / 15 x (average annual Schedule E remuneration from that employment over the last 36 months)
The value of any tax-free pension lump sum received or receivable under a pension scheme related to this employment, where N = no of complete years’ service to date of termination.
In many cases, the highest exemption will be a straight shootout between:
- SCSB1, not signing the waiver leading to a lower tax-free lump sum now, but holding onto the right to take a tax-free lump sum from your employer’s pension scheme either now or in the future, or
- SCSB2, signing the waiver and getting a higher tax-free lump sum now but with no tax-free pension lump sum now or later from the employer’s pension scheme.
Once the above calculations are made, the employee will then have a decision to make as to whether they waive or retain their right to their pension lump sum.
If you waive your right to any tax-free pension lump sum from your employer’s pension scheme, either now or in the future, then that can increase the tax-free lump sum you are now receiving from your termination payment.
You will also need to be aware of the lifetime tax-free limit of €200,000 and this may shape your answer but there are a number of calculations that need to be taken into consideration also, before a decision should be reached and we here at Lifestyle Financial Planners would be more than happy to run through these with you.
Interaction between the two €200,000 tax-free limits.
There is also quite a bit of confusion as to whether one can get a €200,000 tax-free pension lump sum and another €200,000 tax-free ex-gratia termination payment from the same employer, and the answer is, although one would need quite an amount of salary and service, yes it is possible to get both.
Now that’s out of the way, what options do I have in relation to my pension? Do I leave it behind or can I bring it with me?
One of the unfortunate consequences of Covid 19 is that quite a number of jobs across a whole spectrum of sectors are going to be made redundant. If you, or someone you know finds yourself in this unenviable position, then you have a decision to make about what you want to happen with any pension scheme you are leaving behind. There are a number of options available and which works best for you will depend on your personal circumstances, your age and potential occupation status going forward. The main options available to you are:
- Your pension scheme will have been set up under trust and is not an asset of the company you are being made redundant from, so it is safe in that regard. However, you will have no control over where your pension is invested as this will be decided by the trustees and may or may not be in line with your risk profile. You will have to maintain contact with the trustees of your pension scheme to keep track of your pension, when you can retire etc and if the scheme you are leaving behind was a Defined Benefit scheme, then you should at least beware of the schemes funding levels. Quite a number of DB schemes in Ireland are underfunded and if you have been just made redundant, it’s possible the scheme could be under a little duress also.
- This is a Revenue Approved structure, designed specifically to receive retained pension benefits of an employer’s pension scheme. With a BOB, you will have complete control over where your funds are invested and normally much more investment choice. You will be bound by the same rules as the company pension scheme but will now also be able to access your pension benefits from age 50, if you wish. When you access your pension benefits, you will also be able to access a tax-free lump sum of up to one and a half times your final salary (certain conditions apply) or 25% of the fund value. If the pension scheme was a Defined Benefit scheme and is well funded, then you really need to think twice about transferring as you are more than likely leaving much better benefits behind.
- A PRSA is another Revenue Approved structure and quite similar in a number of ways to a Buy Out Bond particularly regarding flexibility around investment choice and control. However, to enable your fund move to a PRSA, you must have been in the scheme less than 15 years, and if your fund is worth more than €10,000, you will need to get a Certificate of Comparison, the cost of which will vary but as a percentage can be quite high for smaller funds.
- If you commence new employment, and that company also has a company pension scheme in place, then it is possible to transfer your benefits to this new scheme which will at least keep all your benefits in the one place. Be careful if you have had less than 2 years in the pension scheme as in this case, your employer is not legally obliged to pay out the value of any employer contributions back to you.
- . If you decide to open up your own business, then similar to the previous option, you can transfer in the scheme and get your new company to act as trustee where you will have control over investment decisions. As a company director, you will also have extremely attractive and tax-efficient options around getting your new company to fund your own executive pension scheme. See here, my top 10 reasons Why pensions still make sense