TRINITY
THE UNIVERSITY OF DUBLIN
COLLEGE PENSION SCHEME
CONSIDERATIONS
WHEN TAKING A TAX-FREE LUMP SUM
The University of Dublin, Trinity College Pension Scheme - CONSIDERATIONS
WHAT
WHEN TAKING A TAX-FREE LUMP SUM
YOU SHOULD CONSIDER WHEN DECIDING TO
EXCHANGE PENSION FOR A TAX-FREE LUMP SUM
If you are close to retirement, it may be time to start thinking about
whether or not you should exchange part of your pension for a tax-free
lump sum.
2 If you are married, any exchange of pension for
cash will reduce the pension payable to your
spouse in the event of your death.
This is because your spouse’s pension is 2/3rds of
your own pension after any cash lump sum is taken;
therefore, a tax-free lump sum may be more
attractive to a single rather than a married person.
The maximum amount of tax-free cash that you can take
is 1.5 times your Final Remuneration, provided you have
at least 20 years of service with the College. A smaller
amount will apply if you take cash from the pension
scheme of a former employer or if you have less than 20
years of service.
The maximum tax-free lump sum that can be taken at
retirement is subject to an overall lifetime limit of
€200,000. Higher amounts will be taxed at the standard
rate (currently 20%) and amounts in excess of €575,000
will be liable to tax at your marginal rate.
3 By exchanging some of your pension for cash you
give up the possibility of receiving increases on
the amount of pension exchanged.
The Board of the College currently follows public
sector practice when reviewing the pensions of
retired members. Any increases are granted on an
ex-gratia basis, i.e. they are provided by the College
and do not represent a liability of the Scheme.
The rate at which your pension can be exchanged for a
tax-free lump sum varies according to your sex and your
age. At normal retirement age (i.e. 30th September
following your 65th birthday), a male will currently get
€9 for each €1 p.a. pension he exchanges for a cash
lump sum and a female will get €9.80 for each €1 p.a.
of pension she exchanges. The different rates for males
and females reflect the different life expectancies of
males and females at age 65.
These discretionary increases are applied to your
pension in payment, i.e. your pension after any
amount exchanged for a tax-free lump sum.
4 Is the lump sum received more valuable than the
cost of securing the amount of pension
exchanged?
One way of judging the attractiveness of the lump
sum option is by comparing the lump sum received
with the cost of securing the amount of pension
exchanged on the open market. This comparison will
vary by individual and will be dependent on your age,
sex and marital status. The comparison will also vary
depending on when you retire as the notional
pension you could purchase on the open market with
your lump sum is affected by the cost of buying
annuities. These depend on a number of factors such
as life expectancy and long-term interest rates which
are continuously changing.
Of course, individual circumstances are different and
there is no substitute for talking through the issues with
an Independent Financial Advisor; however, to make
sure you are aware of what you should consider, here
are some of the issues involved:
1 The main attraction of the lump sum is that it is
tax-free.
All pensions paid are taxed as income - obviously, this
is more important if your marginal rate of tax will be
41% than if it will be 20%. The tax-free lump sum
tends to be more attractive to those on the higher
marginal tax rate.
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The University of Dublin, Trinity College Pension Scheme - CONSIDERATIONS
WHEN TAKING A TAX-FREE LUMP SUM
6 Your own circumstances.
Deciding whether or not to take a lump sum depends
very much on your individual circumstances. You may
wish to consider what to do with the lump sum if you
decide to take it, whether you can live comfortably on
the remaining income you have, or if you would
prefer to have a larger regular income for life.
The examples at the back of this document show the
annuity that could be purchased by lump sum
amounts. It is important to note that each individual’s
circumstances will differ and the examples are
designed to give an indication of the effect of taking
cash.
It should also be stressed that using annuity rates is
just one way of looking at the relative value of the
lump sum option. In reality, most people who take a
lump sum will not use it to purchase an annuity.
Some may spend it, others may invest it
conservatively (e.g., by placing it on deposit), while
others may place it in riskier but potentially more
rewarding investments such as company shares.
You should weigh up the pros and cons and make
sure your choices suit your retirement objectives.
Need more information?
TCD Human Resources can arrange, on written request,
for Mercer to provide you with an illustration of the
effect of exchanging some of your expected pension for
a tax-free lump sum.
Different investment approaches will produce returns
which are higher or lower than the returns used in
annuity costs, thus altering the comparative value of
the pension and lump sum options.
It is important to note that the option you choose at
retirement is irrevocable once made; therefore, the
College recommends that you take independent financial
advice on a personal basis if you are in any doubt before
making a decision to exchange some of your pension for
a tax-free lump sum at retirement.
5 Your current state of health.
You need to consider whether or not you have any
medical conditions which might decrease your life
expectancy and, therefore, your future pension
payments.
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The University of Dublin, Trinity College Pension Scheme - CONSIDERATIONS
WHEN TAKING A TAX-FREE LUMP SUM
EXAMPLES
The following examples are based on the tax rates for the 2011 tax year
and annuity rates at October 2011. They exclude any other income you
or your spouse may have such as pension benefits payable by the State
or other pensions payable to you or your spouse.
Example 1: Male Married Member
Peter is almost 65 years old, he’s married and retiring this month. He has been with the College for more than 40
years (he joined before 6 April 1995) and currently earns €60,000. He and his wife have no other taxable earnings.
No lump sum
Maximum lump sum
0
€90,000
Annual pension
€40,000 p.a.
€30,000 p.a.
Spouse’s pension on Peter’s death in retirement
€26,667 p.a.
€20,000 p.a.
Lump sum
Notes
Value of the pension exchanged for lump sum
n Pension is calculated at 40/60th of salary
By taking the lump sum option, it is important to
understand the value of the pension exchanged for this
tax-free lump sum.
n Reduction in pension on taking a lump sum is
calculated as €90,000/9
The cost of securing a pension of €7,300 per year on
the open market would be approximately €149,000 for a
65 year old, based on current annuity rates. This pension
will not increase in payment and has an attaching
spouse’s pension of 2/3rds payable on the member’s
death. These rates are subject to change and this value
is based on bond yields as at October 2011.
n Spouse’s pension is 2/3rds of member pension
n Maximum lump sum is 1.5 times salary
After tax
If Peter does not take a tax-free lump sum, he will have
to pay tax on the additional pension received. Based on
the 2011 tax rates, he will pay 20% tax and the
Universal Social Charge (USC) on the additional pension
received.
When it is considered that the pension of €7,300 p.a.
has the potential to increase in payment whilst the
annuity purchased will not, the value of the pension
given up is significantly higher than the lump sum
received of €90,000.
By taking cash of €90,000 Peter would reduce his
own pension by €7,300 after tax and his spouse’s
pension would also reduce.
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The University of Dublin, Trinity College Pension Scheme - CONSIDERATIONS
WHEN TAKING A TAX-FREE LUMP SUM
Example 2: Female Married Member
Mary is almost 65 years old, she’s married and retiring this month. She has been with the College for more
than 40 years (she joined before 6 April 1995) and currently earns €60,000. She and her husband have no
other taxable earnings.
No lump sum
Maximum lump sum
0
€90,000
Annual pension
€40,000 p.a.
€30,816 p.a.
Spouse’s pension on Mary’s death in retirement
€26,667 p.a.
€20,544 p.a.
Lump sum
Notes
Value of the pension exchanged for lump sum
n Pension is calculated at 40/60th of salary
By taking the lump sum option, it is important to
understand the value of the pension exchanged for this
tax-free lump sum.
n Reduction in pension on taking a lump sum is
calculated as €90,000/9.8
The cost of securing a pension of €6,704 per year on
the open market would be approximately €133,000
based on current annuity rates for a 65 year old. This
pension will not increase in payment and has an
attaching spouse’s pension of 2/3rds payable on the
member’s death. These rates are subject to change and
this value is based on bond yields as at October 2011.
n Spouse’s pension is 2/3rds of member pension
n Maximum lump sum is 1.5 times salary
After tax
If Mary does not take a tax-free lump sum, she will have
to pay tax on the additional pension. Based on the 2011
tax rates, she will pay 20% tax and the Universal Social
Charge (USC) on the additional pension received.
When it is considered that the Scheme pension of
€6,704 p.a. has the potential to increase in payment
whilst the annuity purchased will not, the value of the
pension given up is significantly higher than the lump
sum received of €90,000.
By taking cash of €90,000, Mary would reduce her
own pension by €6,704 after tax and her spouse’s
pension would also reduce.
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The University of Dublin, Trinity College Pension Scheme - CONSIDERATIONS
WHEN TAKING A TAX-FREE LUMP SUM
Example 3: Single Male Member
Jack is almost 65 years old, he is single and retiring this month. He has been with the College for more than
40 years (he joined before 6 April 1995) and currently earns €75,000. He has no other taxable earnings.
The cost of purchasing a pension of €6,500 on the open
market would be approximately €112,000 for a 65 year
old. These rates are subject to change and this value is
based on bond yields as at October 2011.
No lump sum Maximum lump sum
Lump sum
Annual pension
0
€112,500
€50,000 p.a.
€37,500 p.a.
As the Scheme pension of €6,500 p.a. has the potential
to increase in payment whilst the annuity purchased
would not, the value of the pension given up increases;
however, this value and the tax-free lump sum received
are significantly more comparable than that of Examples
1 and 2.
By taking the lump sum of €112,500, Jack surrenders
€12,500 of his own pension i.e. no spouse’s pension
applies.
Jack is in a different marginal tax bracket and he would
pay 41% tax and the Universal Social Charge (USC) on
the extra pension of €12,500 if he does not take cash.
This example demonstrates the relevance of marital
status and the individual’s marginal tax rate when
comparing value on this basis.
In this case the comparison is quite different. If Jack
does not take cash, his net additional pension after tax
would be €6,500 p.a.
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The University of Dublin, Trinity College Pension Scheme - CONSIDERATIONS
WHEN TAKING A TAX-FREE LUMP SUM
Example 4: Single Female Member
Jill is almost 65 years old, she’s single and retiring this month. She has been with the College for more than
40 years (she joined before 6 April 1995) and currently earns €75,000. She has no other taxable earnings.
The cost of purchasing a pension of €5,969 on the open
market would be approximately €111,000 for a 65 year
old. These rates are subject to change and this value is
based on bond yields as at October 2011.
No lump sum Maximum lump sum
Lump sum
Annual pension
0
€112,500
€50,000 p.a.
€38,520 p.a.
As the Scheme pension of €5,969 p.a. has the potential
to increase in payment whilst the annuity purchased
would not, the value of the pension given up increases;
however, this value and the tax-free lump sum received
are significantly more comparable than that of
Examples 1 and 2.
By taking the lump sum of €112,500, Jill surrenders
€11,480 of her own pension i.e. no spouse’s pension
applies.
Jill is in the higher marginal tax bracket and she would
pay 41% and the Universal Social Charge (USC) on the
extra pension of €11,480 if she does not take cash.
This example demonstrates the relevance of marital
status and the individual’s marginal tax rate in the value
comparison.
If Jill does not take cash, her net additional pension after
tax would be €5,969 p.a.
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