Redundancy payments and Pension Lump sums
In a Redundancy situation a key concern for the employee is often the interaction between their redundancy payment and their accumulated pension benefits from that employment.
In general, a lump sum payment by an employer on the termination of an employee’s service is liable to PAYE but there are some important exceptions, outlined below.
Termination payments not liable to income tax:
Pension Lump Sums
A lump sum taken on retirement from the employer’s pension scheme subject to the €200,000 limit on all pension lump sums taken since 7th December 2005.
Statutory redundancy payment where the employee has worked for that employer for at least two years.
Disability/Injury Ex Gratia Payments
An ex gratia payment made by the employer on account of injury or disability of the employee which gives rise to the termination of employment, up to a personal lifetime limit of €200,000 for such payments. These payments do not reduce the €200,000 tax free limit for normal ex gratia termination payments.
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 the payments were not provided for in the contract of employment, i.e. are ex gratia.
Ex gratia termination payments exempt from income tax
An ex gratia termination payment may be exempt from income tax, USC and PRSI, up to the higher of the following three amounts, within an overall lifetime limit of €200,000:
1) Basic exemption
2) Increased basic exemption
3) Standard Capital Superannuation Benefit (SCSB)
In many cases the SCSB calculation will be the relevant amount; and the decision an employee will have to make will be whether they waive or retain their right to their Pension Lump Sum.
The SCSB exemption is calculated using on the number of complete years’ service and the average annual remuneration over the last 36 months to the date of termination of employment.
If you retain your right to your pension lump sum then he value of any tax free pension lump sum received or receivable under a pension scheme related to this employment is then deducted from the SCSB amount.
The amount you received tax free now can therefore be increased if you waive your right to take a tax-free lump sum from your employer’s pension scheme.
The two outcomes can be summarised below:
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 the employer’s pension scheme either now or in the future; and
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.
Some points to consider about the choice of signing the waiver or not:
The maximum ex gratia termination payments which can be received tax free in a lifetime is €200,000. If you have already taken prior tax-free termination payments and your total taxable termination payments will be over €200,000, signing the waiver may not make financial sense as you may give up the right to take a tax free pension lump sum but not increase your tax free termination payment at all, or increase it by a lesser amount than the tax free pension lump sum given up.
Only TAX-FREE pension lump sums are offset against SCSB
An individual might have a lump sum entitlement under their employer scheme which is not offset against their SCSB even If the waiver is not signed, i.e. where the lump sum will be all subject to standard rate tax. This could happen where the individual has already used up their €200,000 tax free pension lump sum limit buy taking lump sums from other arrangements not linked to this employment. This works because the offset against the SCSB only applies to ‘tax free’ lump sums from the employer’s scheme and ignores pension lump sums taxable at standard rate.
Pension and Redundancy – If you need advice relating to your redundancy lump sum and pension scheme contact Harvest for a chat on 01-2375500 or email email@example.com.
This marketing information has been provided for discussion purposes only.
The legislative information contained herein is based on Harvest Financial Services Limited’s understanding of current practice as at May 2020 and may be subject to change in the future.