Your Options at Retirement
A key difference between Occupational Pension Plans (for Company Directors and Employees), and Personal Pension Plans (often in place for Self-Employed clients), is the choice available in how an individual can elect to access their Occupation Pension fund when they come to retirement age.
What is an Occupational Pension Plan?
An Occupational Pension Plan can take a variety of forms!
This article is relevant to the following types of Occupational Pension Plans:
Executive Pension Plans (EPP’s)
Usually these are one-member pension schemes linked to an employment, into which the company (the Employer) paid contributions before retirement. Historically, EPP’s were the predominant pension structure of choice for Company Directors. Recent legislative changes have meant that EPP’s are no longer available in the Irish Market.
Retail Master Trust Pension Plans
The current version of the EPP. Retail Master Trusts were introduced in Ireland in 2022 and have replaced the EPP.
Employee Group Pension Schemes
Employees who have accumulated pension funds within a Group Pension Scheme will have the same options, and the same decision to make at retirement, as a Company Director in one of the previous pension structures.
Personal Retirement Bonds (PRB’s)
A PRB is a pension that was set up to receive a transfer of a pension fund from an Occupational Pension Plan. In a PRB, the rules as to how you can access the fund at retirement are carried over from the previous Occupational Pension Plan.
What Are Your Options At Retirement?
Now that we have outlined the types of pensions that fall within the definition of an ‘Occupational Pension Plan’, what are the options available to you if you have one of these pension plans and are approaching retirement?
Taking a Lump Sum Payment from the Pension fund
The first thing that will happen when you access the pension fund is that you will receive a lump sum from the fund.
Your entitlement to the lump sum will either be calculated as 25% of the fund value, or using a formula based on your final salary and length of service in the relevant employment.
The first €200,000 of this lump sum is paid to you tax-free. So, if you had a pension fund of €800,000, you would receive a €200,000 lump sum (25% of €800,000) with zero tax payable.
This lump sum is now outside of any pension structure – it is your personal cash, and you are free to use it as you see fit. You might decide to invest it to provide additional retirement income, pay off any personal debts, or use it to supplement your income from other sources.
If you have an entitlement to a lump sum larger than €200,000, you will pay tax at 20% on the lump sum over the €200,000 tax-free limit.
For example, if you had accumulated a pension fund of €1,000,000 then the gross lump sum due would be €250,000. The tax due would be €10,000 (€50,000 @ 20%), leaving you with €240,000 after tax.
Deciding what to do with the Balance of the Fund
The next decision to make is what to do with the remainder of the pension fund in retirement.
In most cases, the decision to make will be whether you:
- use the remaining fund to buy a regular pension payment for life (known as an Annuity), or
- keep the fund and invest it in a post-retirement pension structure (known as an Approved Retirement Fund).
This decision is a hugely important one, that will have long-term implications on your retirement.
Both options have comparative advantages and disadvantages.
The Annuity option provides certainty of income in retirement, but you give up the pension fund in return for that certainty.
An Approved Retirement Fund allows you to keep the pension fund as an asset in retirement, but the income you receive from it will depend on what you invest in, and how that investment performs.
So, What Is the Right Option for You?
It pays to consider all future implications when deciding how you access your Occupational Pension Fund, as the transition to retirement is a huge moment in anyone’s lifetime.
For clarity and guidance contact Harvest at justask@harvestfinancial.ie, and one of our Retirement Planning Advisors will be delighted to assist.
