Breakdown of redundancy packages and pensions
Ulster Bank, Bank of Ireland, AIB, Eircom and Aer Lingus have all offered a range of redundancy packages and/or enhanced transfer value of their pension scheme to current and ex-employees; it is important for people to fully understand these offers.
Redundancy packages and offers have become quite frequent over the past 12 months. Financial institutions such as Ulster Bank, Bank of Ireland and AIB have recently all offered redundancy packages to their employees.
Other former semi-state bodies such as Eircom and Aer Lingus over the past couple of weeks been offering Redundancy packages and Enhanced Transfer Value of their pension scheme to both their current and ex-employees. Unfortunately, with Covid-19 drastically slowing down our economy, even more redundancy packages are coming down the line across all industries in Ireland.
If you are one of those people who have recently been offered or considering applying for a redundancy package from your employer, it is very important to educate and clearly understand all the options available to you.
It is important to break down the redundancy package offered into two areas:
- Your redundancy Package and
- Your Pension entitlement.
The redundancy drawdown options that you choose can have a significant impact on the Tax-Free Lump sums that you qualify for from both your Redundancy package and your Pension entitlements.
You have a lifetime limit of €200,000 tax-free for redundancy payments and a lifetime limit of €200,000 tax-free for pension lump sums.
In most circumstances, a redundancy package is offered to employees who have accumulated many years of service with their employer. Redundancy entitlements are earned once you have worked for two or more years with this company.
Each Redundancy packages needs to be analysed on an individual basis as each package can be calculated differently – depending on their circumstances (years of service, average salary over their employment etc).
Statutory Redundancy entitlement Everyone is entitled to compulsory Statutory redundancy with all packages. This entitlement allows you two weeks' pay for every year of service plus one additional week's pay. Payment is subject to a limit of €600 per week. This amount is tax-free.
In addition, some employers also offer a Redundancy Ex Gratia payment or an incentivised exit payment. These additional have a tax-free Exemption portion with the remaining funds taxable at the employees’ marginal rate of tax (20/40%).
Under current Revenue rules, there are three methods of calculating this Tax-Free Exemption.
It is important to understand the implications of each option and what you may be giving up from your pension benefits by choosing one over the other. The option you choose should entitle you to the largest tax-free exemption.
The three ways of calculating this exemption are illustrated below.
-€10,160 plus €765 for each complete year of service.
This option allows you to retain the right to a tax-free cash lump sum from your pension at retirement.
-€10,160 plus €765 for each complete year of service plus €10,000 minus the tax-free lump sum entitlement from your pension entitlement.
This option is only available if you have not received a tax-free lump sum in the last 10 years and you are not getting a lump sum from your employment pension payment now or in the future.
With this option, you waive the right to a tax-free cash lump sum at retirement.
Average earnings over the last 36 months multiplied by complete years of service and answer divided by 15.
You can either waive your tax-free pension entitlement or retain it with this option.
To retain your pension tax-free lump sum entitlement, you minus the tax free pension amount from the figure which in turn reduces your redundancy tax-free exemption figure.
To waive your pension tax-free lump sum entitlement, you do not reduce the figure.
As you can see, these calculations are quite complex. It is imperative that you thoroughly go through the three options above and choose the best option for you. There is no guarantee that your employer will calculate these correctly, so it is highly advisable to get your redundancy figures double-checked by an independent financial advisor or institution.
If you are also a member of your employer's pension scheme, how you draw down your redundancy package can have a significant impact on your Pension entitlements. The Redundancy Tax-Free Exemption option chosen can either waive or retain your right to a Pension Tax-Free Lump Sum.
The bottom line is that you want to ensure that you are getting as many funds out of both your Redundancy package and your Pension tax-free. Below is an illustration of the typical option available and the various tax-free areas to be chosen. Making the correct decision can have a significant impact on your finances for the rest of your life.
Due to legislation changes in May 2016, it may also be possible for you to get access to your pension fund once you take your redundancy package, if you choose the correct option.
If you choose to take a transfer value of your defined benefit pension (swapping your future annual pension for one lump sum payment), you could potentially get access to two tax-free lump sum payments with 6–12 weeks for the date you leave your position. However, you do need to be age 50 at a minimum to gain access to your pension lump sum.
Taking a transfer value for your defined benefit pension may or may not make financial sense. The transfer values offered are calculated individually by the actuaries of the pension scheme. The offer is usually a multiple of the annual pension entitlement from the traditional offer. Some offers can be enhanced, and others can be very small. If the Transfer Value is over 20 times the annual DB pension entitlement it usually makes sense to transfer, if it is lower than this, then it may not be financially advisable to transfer. It is also important to know the access ages, the taxation and the implications upon death of both the DB options and the Transfer option. This can be a very personal decision, not just financial and it needs to be discussed in detail taking into account your current and future long and short-term financial goals/commitments/requirements and personal/family situation. The implications on death if single/widowed/divorced and if children are over age 22 can mean that none of your pension fund is paid out to your estate from a DB scheme.
Your defined contribution pension has a value based on what is paid in and what growth has been achieved. If you have worked for several years with a company and both you and your employer have been contributing the values can be very good. You have the option of a tax-free lump sum from your DC. This is either 25% of the fund value or calculated based on your salary and years of service. If you choose the 25% option, you can invest the balance into Approved Retirement Funds and if you chose the salary and service route the balance must be used to purchase an annuity.
If your employer has provided for a pension for you regardless of it being defined benefit or defined contribution your pension options need to be discussed with a Financial Advisor before you complete your Redundancy options.
Ensure you can make an educated decision on whether you waive or retain your tax-free lump sum. It is very imperative fully understand what you are giving up if you decide to waive your pension lump sum rights. So many people do not realise the monetary value and only see the tax advantage of the redundancy lump sum. Depending on the value of your pension you may be giving up a way larger figure tax-free than what you are going to receive through the redundancy exemption and if you are over 50 you will be able to access both of them once you have left your employment.
Remember you do have a lifetime limit of €200,000 tax-free for both redundancy payments and tax-free for pension lump sums, ensure that you are maximising both by speaking to a Financial Advisor before you complete your redundancy papers.
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