I am in receipt of an Irish pension at the moment, of which I have received €167,000 as a tax-free lump sum. I have a UK company pension which I am about to draw down.
My UK pension allows me to take a £40,000 (€46,000 approx) lump sum plus monthly pension. Will all of this UK lump sum be subject to tax in Ireland or just the portion of it above €200,000?
An early reply would be appreciated as I am under pressure for a response.
Mr S O’C
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Pension lump sums are one of the several great tax advantages of investing in an occupational pension. Having availed of tax relief at your upper, or marginal, income tax rate on the contributions you made to the pension scheme in the first place, the lump sum allows you to draw down a significant sum again free of tax on retirement.
So it is worth making sure you have the figures right.
How much you can draw down depends on the type of pension product you have.
For personal pensions – retirement annuity contracts (RACs) and personal retirement savings accounts (PRSAs) – the limit is 25 per cent of the fund. The same is true for anyone with a defined contribution occupational pension who is transferring their fund on retirement to an approved retirement fund (ARF), where it remains invested.
People in older defined benefit schemes – where your pension is determined by years of service and, generally, your final salary, can sometimes opt to take 1.5 times their final salary.
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The same is true of anyone in the public service who joined before 2013. Those who joined since the start of 2013 can avail of a lump sum of 3.75 per cent of their career earnings.
But in all cases the upper limit is €200,000. So if, like most people in Ireland, your pension fund is worth less than €800,000, the maximum lump sum you will receive will be lower than €200,000.
Two other things are worth noting in your particular circumstances. First, that €200,000 limit is a lifetime cap and can apply across more than one pension scheme.
In today’s more mobile world of work, it is likely that people will find themselves with more than one pension pot so it makes sense that the rules would accommodate that. Confining you to a one-time tax-free lump sum would, in many cases, severely limit your benefit.
Second, as an Irish tax resident, that limit applies to all your pension schemes, regardless of whether they are based in the State or abroad.
So where does that leave you?
You have already taken €167,000 as a tax-free lump sum from your Irish pension. That leaves you with the capacity to take up to €33,000 in tax-free money from this UK pension.
You say you expect your UK pension to deliver a potential lump sum of £40,000 (around €46,200). So the next question is what happens the portion of this lump sum that will not be tax free – around €13,200.
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And again there is good news for pension savers, in particular those whose retirement income takes them into the higher 40 per cent income tax bracket. If your lump sum exceeds €200,000 but is less than €500,000, you will be taxed only at the standard rate of income tax – 20 per cent – regardless of your actual income.
Anything above €500,000 will be taxed at the 40 per cent rate but, for those fortunate enough to be in that position, they still benefit from the 20 per cent rate on the amount between €200,000 and €500,000. Anything under €500,000 is also free from universal social charge (USC).
In your case, on the basis of the lump sum from the UK pension translating to around €46,200 in euro, your income tax bill on the balance of the cash that is not covered by the tax-free limit will be €2,640.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice
