As the name suggests, it is taking a lump sum of cash (above that of your tax-free lump sum) at the point of retirement and paying tax on the amount withdrawn. You may liquidate the whole fund at this stage or just a portion of it. As it is taxed under PAYE, you have to be careful of the income tax rates. Any income over €41,800 for a married couple, single income will be taxed at the higher rate (41% at the time of writing).
It is not common to see an entire liquidated at once. You are more likely to see a portion of the fund used to make a large purchase. In a previous blog, I said the biggest mistake a retiree makes is carrying debt into retirement. If the tax-free cash amount isn’t enough to pay off the debt, the retiree may dip into their retirement fund to start retirement debt free.
Another instance is if the amount is relatively small and not really worth investing in an ARF.
As with the ARF, the same conditions regarding a guaranteed income of €12,700 or having an AMRF applies. Details can be found on last weeks blog.
If you elect to take the taxable cash option, you will get a tax-free lump sum of 25% of the value of your pension fund up to a maximum of €200,000. For funds over €800,000, any lump sum over €200,000 up to €575,000 tax at 20% is paid.
Cash now. May allow repayment of expensive debt.
Lose ARF potential to leave to adult
children @ fixed 20% tax rate.
If within €375k Standard Chargeable
Amount tax may be limited to 20%
Tax free payment of net cash to spouse
Lose gross roll up potential to second
May be matched by tax deductions and
allowances. E.g. Medical expenses, tax
credits, income exemption limit, etc.
Tax, levies, etc.
Where taxable at marginal rate, higher
rate if bunched in with other taxable
income in same year.