05 May 2018

Employed & Turning 60? What To Do With Your Pension Lump Sum

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As part of his personal finance column in the IMT, John O’Connor talks about accessing your pension lump sum at 60 and how it all works..

Pension has always been a word that as we grew up indicated old age, infirmity and a general downgrading in a person’s health and wellbeing. In fact I even remember during my school days learning that the average life expectancy of a male in Ireland was not much more than 70, while his female counterpart was a little longer, in her mid ‘70’s.

Nowadays things are considerably different. As my clients get older I see many turn 60 quite regularly and with that they gain access to their hard earned pension savings.

In fact I see so many clients with pension savings and their general level of health and fitness is so much better than it was for a 60 year old 30 years ago, this milestone birthday is now something to be looked forward to rather than tip toe’d away from. Whether 60 is the new forty or the new fifty I don’t know but I can certainly see that those being able to avail of their tax free lump sum at a relatively young age are delighted to take full advantage of it.

There seems no end to the number of urban myths about what you are allowed do regarding taking the benefits. I have outlined some of them below which I hope will help to give some clarity to the situation.

So… What actually happens at age 60 then? 

When you turn 60 you have a variety of options. If you wish to move some or all of your pension funds into ‘post retirement’ funds then you have the option to do so. Most people decide to avail of the cash lump sum which is there for them if they choose. This means that they can take up to 25% of the fund out in cash, the first €200,000 of which is tax free and the remainder is taxed at 20%. The maximum fund you can have is €2m for those lucky enough to reach that level.

It is likely your remaining 75% is then invested to your appropriate risk level, to provide you with an ongoing income from retirement funds. You can buy an annuity if you choose but in most cases rates are so low that it doesn’t make financial sense. If you do have a high annuity rate locked into your pension you would probably be wise to avail of it.

However, most of us will be investing in what are called ‘approved retirement funds’(ARF) and ‘approved minimum retirement funds’ (AMRF). If you do not have a pension of at least €12,700 per annum then you must invest your first €63,500 in an AMRF. All funds above that are invested in an ARF. The main difference between these two is that you must take an income of 4% from an ARF and with funds in an AMRF you have the option to take up to 4%.

If I take my pension lump sum at age 60 do I have to cease earning from my profession? 

No absolutely not, once you turn 60 you can either leave your pension savings as they are or avail of some or all of them. You can continue earning from your profession as you always have and in fact you can also continue to make contributions to your pension savings thus continually building up your funds. If you exercise some of your funds the annual income you receive from you funds will be included in your tax return along with your professional income.

I have three different pension funds, if I take money from one of them will I have to encash all of them? 

No you can decide to move one or some of your pension funds into retirement funds and avail of the tax free cash without having to move all of them. To give you an example, Peter is 60 and has three different funds worth €500,000 in total. One of his funds is valued at €100,000 and he wishes to take his tax free cash from it but he wants to leave the other two funds as they are for the moment. So, he can take his €25,000 in cash tax free and the remaining €75,000 will be invested in an AMRF and an ARF. He can leave the other two funds invested as they are in pension funds until a later date when he chooses to avail of them.

When I turn 60 can I just take my tax free lump sum and leave the balance in my pension without going near it? 

That depends somewhat on how much you have in your pension savings. As mentioned above if you have less than €12,700 pa in income then you have to invest the first €63,500 (after you’ve taken your lump sum) in an AMRF. You do not have to take an income from this if you do not wish to, however you can if you wish take up to 4%pa. The funds you have above the €63,500 will be invested in an ARF from which you must take an income of 4% per annum. The revenue refer to this as ‘imputed distribution’.

The government recently changed my retirement age to 68 so I won’t be able to access my pension funds until then or will I? 

The changes that took place in relation to the retirement ages only relate to the state pension and not your own personal retirement date. You are able to avail of your personal pension funds at any time from your 60th birthday. The state retirement age refers to the age from which you will be entitled to the state pension and are as follows:

Year Born (From Jan 1)      Retirement age 

Before 1955                                   66

1955 to 1960                                 67

1961 or after                                 68

The state pension also depends on satisfying the state requirements to an individuals retirement

If there is a caveat to add to people accessing their pension funds at age 60, whether for the benefit of the lump sum or to use the funds for retirement purposes, it is important (in most cases) that people remember they should continue to make contributions each year if they are still working. There is very extensive research to show that people are living far longer now than previously, so once these pension funds are being relied upon for income. It is important they are as large as possible so that they last what could be a significant number of years in retirement.

To summarise 60 is a great age to be able avail of your pension benefits. It does not mean that you have to retire at that stage and availing of the lump sum may be a welcome boost to your finances Younger people should be encouraged to remember this, it will help them put money aside for later life, they will certainly appreciate it when they get there.