Redundancy advice to get the most from your pension

Employees who have had their contracts of employment terminated and have been made redundant should be provided with leaving service options by their scheme administrator.

They may also be entitled to a redundancy payment.

Full-time employees paying Class A PRSI who have worked continuously for their employer for at least 104 weeks (2 years) will normally qualify for Statutory Redundancy. Employers may also at their discretion make ex gratia redundancy payments to employees being made redundant.

Redundancy advice screenshot of redundancy lump sum options

Redundancy payments and Pension Lump sums

A major 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.

How Ex Gratia Payments work

There are 3 possible exemptions to taxation on Ex Gratia payments which are known as the Basic Exemption, Increased Exemption, and the Standard Capital Superannuation benefit (SCSB).

Basic Exemption

The Basic Exemption is €10,160, plus €765 for each complete year of service.

Increased Exemption

The Increased Exemption is the Basic Exemption plus an additional €10,000 but less the value of any pension lump sum received or to be received under an occupational pension scheme linked to this employment.

Standard Capital Superannuation Benefit (SCSB):

scsb calculation

The SCSB is a tax relief that normally benefits people with higher earnings and long service.

It can be used if the below formula gives an amount greater than the Basic Exemption or the Increased Exemption.

A: is the average annual remuneration for the last 36 months of service

B: is the number of complete years of service

C: The amount of any tax-free lump sum received or to be received under the occupational pension scheme (if any)

Any ex gratia payments in excess of the highest available exemption are taxable at the marginal rate of the individual. There is also a lifetime limit on Tax-Free Ex Gratia payments of €200,000.

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 the number of complete years of 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 the 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:

SCSB1Not 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;

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.

2 Key points to consider before you decide whether or not to sign a waiver.

retirement options man looks at blackboard and is confused

Lifetime limit
The maximum ex gratia termination payments that 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 by 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 the standard rate.

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.

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