If you hold a pension plan or are a member of a pension scheme, you should be entitled to a lump sum at retirement. For most people, their lump sum entitlement can be taken tax free. It is usually, though not always, advisable to take your full Retirement Lump Sum entitlement.
Value of the Retirement Lump Sum
- Holders of personal pensions or PRSAs are normally entitled to take 25% of the accumulated value of their pension at retirement as a Retirement Lump Sum
- Members of defined benefit pension schemes, along with those members of defined contribution pension schemes who intend to use the balance of their pension to buy an income for life (an annuity), will be entitled to a lump sum based on their final salary with the relevant employer and their years of service. The maximum lump sum available to them will be 1.5 times their final salary, but some will not have built up enough years of service to entitle them to this
- Members of defined contribution schemes who intend to use the balance of their pension to buy an Approved Retirement Fund or an Approved Minimum Retirement Fund can take 25% of their fund value as a Retirement Lump Sum
Taxation of lump sums
Retirement Lump Sum entitlements up to the value of €200,000 can be taken tax free. Under current rules, a further €300,000 can be taken at the standard rate of income tax (currently 20%). Any excess over this, if taken, will be liable to income tax at the individual's marginal rate along with PRSI and the Universal Social Charge.
Deciding whether to take your Retirement Lump Sum
While it is often attractive to receive a Retirement Lump Sum, it is important to remember that in most cases, this will reduce the annual income you will receive in retirement.
For holders of personal pensions, PRSAs or personal retirement bonds, or members of defined contribution pension schemes, it is almost always a good idea to take the maximum tax free cash possible from your pension.
This may not be the case for members of defined benefit pensions. This is because the reduction in annual income from a defined benefit pension may in some cases be greater than the value of the Retirement Lump Sum can justify.
The balance of your pension
You may have the following options for the balance of your pension after your Retirement Lump Sum:
- You may receive an annuity, or income for life – this is the case for most people
- You may be able to purchase an Approved Retirement Fund or Approved Minimum Retirement Fund (post-retirement pensions that can be inherited)
- You may under certain circumstances be able to take the balance of your pension as taxable cash
Not all of these options are available for all retirees.
Using your Retirement Lump Sum
Typical uses for a Retirement Lump Sum include:
- Clearing outstanding debt
- Buying a car
- Increased spending in the first few years of retirement
- Provision of financial assistance to children
- Investment for the future
Investing your money may make sense if you have no immediate use for some or all of your Retirement Lump Sum and you wish to plan for your future needs or for inheritance.