“If I was a financial adviser I would… know what lump sum is right for me!”
By now you should know your ARF from your AMRF and your trivial pensions to your annuities.
Those choices tend to be the ones that need careful consideration as those decisions are the ones that will affect your entire retirement for years to come.
But what about the cash bit? How much cash can a pension scheme member take from their pension as a lump sum? It’s at this point that most retiree’s eyes light up. This is the part where we explain that all those years of work mean that your now have a windfall of cash on the way.
But you might have guessed it, there are rules.
In general, you can always take 25% of your pension fund tax free. That’s the starting point.
If you are a member of occupational pension scheme in addition to the 25% rule you will be presented with the option to take up to 1.5 times your final salary as a lump sum. Assuming you have more than 20 years qualifying service that is. If you have less than 20 years, there is a sliding scale which reduces the limit from 1.5 times downward. Often this method allows for a client to take more out tax free than the 25% method, but yes of course there is a catch.
I will assume for second you have read my blog on Annuities. If you did you’ll notice that I am not a massive fan of them in normal circumstances. Well, if you take the 1.5 times final salary method then you must use the balance of your fund to buy an annuity. No, you can’t have an AMRF or ARF or anything else, just the annuity.
Now you can shop around for an annuity with good rates and one that you like but the reality is that you are looking at a fast food menu when you really want a steak and you can’t get in to a steakhouse.
It’s a decision between more money now and the balance of your savings on the drip or less more now and full control of your drawdown.
I don’t have a favourite. The individual circumstances of the client dictate which is best for that client, so our first port of call is to understand the clients goals in retirement, their outstanding debt at retirement, their long held desires to buy something or go somewhere special. All of these are important, so think carefully when deciding and please understand your options fully before deciding.
Finally, it important to say that tax free lump sums are only tax free to a point. The first €200k is tax free, and that is a lifetime limit too. If you are lucky enough to have a fund of €800k or more then it’s likely you will have a tax bill on your lump sum too. But don’t panic it won’t be big! Your lump sum between €200k – €500k will be taxed at 20% and the balance above €500k then higher. Speak to us if this is the case as there are various other considerations at this level.
In summary, most of us like cash. Why wouldn’t you, but consider all of these options and draw a map of how you see your retirement going. When will you need most of your money? Is your mortgage fully paid? Do you want to go on the holiday of a lifetime now, later or not at all? Are you going to gift house deposits to your kids?
Your idea of retirement should be the driving force behind how your pension benefits should be drawn down. Map your drawdown to your expected costs in retirement is the key message.
Be warned though, all of the above is just an outline of the various elements of the rules and there are many more which I haven’t covered so please don’t consider this as a comprehensive lump sum guide as it is not.
If you need us we would of course be happy to help, just get in touch with me directly on email@example.com or call Kathy on 01 531 0571 and she will arrange a chat for us.