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We would all love to dip into a tax free lump sum, be it to fund a holiday, a new hobby or treat yourself and your loved ones to some well-earned gifts.
You may see a tax free lump sum as a means of paying off a chunk of your mortgage and ridding yourself of the stresses that come with that monthly obligation.
The Irish government gives workers an opportunity to withdraw a chunk of their pension fund in retirement, but it is also possible to access a tax free lump sum years before you stop working.
Under Irish tax law, it is possible to cash in a portion of your pension when you turn 50, giving you access to a 25% pension tax free lump sum (up to €200,000).
If the thought of a cash influx years before your retirement appeals to you, you may want to consider the route of cashing in your pension early.
How to Use Your Pension to Get a Tax Free Lump Sum
If you are aged 50 or above in Ireland, and you are or have been part of a pension scheme with a private company, you may be able to cash in your pension early.
This is not uncommon – the majority of Irish workers qualify for partial early access to their pension fund.
Managing your money in retirement can be tricky, and pension planning is often a grey area that can leave you feeling uncertain about your financial situation.
You can figure out what type of pension you have, and get a better grasp on the options available to you by availing of our online pension transfer assessment and talking to an experienced financial advisor today.
How Much of My Pension Can I Access Early?
If you are aged 50 or above, you can access up to 25% of your pension up to a total of €200,000.
This means that 25% is the applicable percentage for pension funds of €800,000 and below – if, for example, your pension fund is worth €160,000, you can access up to €40,000 tax free.
Putting a valuation on your pension fund may be confusing, and you will need to have knowledge of what type of pension fund you subscribe to before calculating its worth.
What Type of Pension Allows Me to Withdraw a Tax Free Lump Sum at Age 50?
You can only cash in your pension early if your pension fund is with a former employer, and your line of work is in the private sector.
This type of pension is known as an occupational pension or a company pension, and there are two main brackets within that – defined benefit pension schemes and defined contribution pension schemes.
If you have an occupational pension scheme with an old employer, it may be possible for you to access a tax free lump sum from your fund when you turn 50.
Unfortunately, those with a public service pension are not entitled to access their pension early.
Tax free lump sums from Defined Benefit pensions
Defined Benefit pension schemes allow members age 50 and above to withdraw a tax free lump sum from their fund.
Upon retirement, DB pensions guarantee a specific payment, lump sum or combination of the two, courtesy of an employer or sponsor.
Their value is based on an employee’s current and past salaries, the number of years they have worked in their role and their age.
This is opposed to a pension fund that is made up of individual contributions made by the employee over a number of years.
Tax free lump sums from Defined Contribution pensions
Defined Contribution pension schemes are made up of payments or contributions from an employee, employer, or both, over a number of years.
When an employee retires, their DC pension fund will amount to the number of payments that have been made over the course of their career.
DC pension schemes can also allow workers to withdraw a tax free lump sum from their pension fund when they turn 50.
Tax free lump sums for Directors and Key Employees
The final type of occupational pensions concern “key employees” – usually, this means directors of a company.
A key employee may be the beneficiary of an executive pension set up by a company, or they may choose to establish their own Personal Retirement Savings Account (PRSA).
PRSAs are long term pension plans that allow workers to invest in their own pension via a PRSA provider.
They allow you to avail of tax relief on your PRSA contributions until retirement, when Revenue subject withdrawals to a PRSA tax.
Executive pensions are not constrained by the same limits as personal pensions, meaning they can amass a significantly higher value over time.
Both executive pensions and PRSAs may allow you to withdraw a tax free lump sum when you turn 50.
Different pension schemes allow for different benefits –your fund may qualify if it is an occupational pension scheme (defined benefit or defined contribution), or an executive pension.
The easiest way to figure out whether or not you qualify is to get in touch with a specialist financial advisor who can offer you a free consultation on your position.
Can I Continue to Work After Accessing My Tax Free Lump Sum at 50?
In most cases, you can continue to work while accessing a portion of your pension ahead of retirement.
This means you can benefit from the cash influx of a tax free lump sum, and not have to contend with a reduced cash flow outside of that fund.
Learn More About Tax Free Pension Lump Sums
Speak with an experienced financial advisor today to find out if cashing in your pension early might be the best course of action for your retirement plan.
You can find out the value of your pension by trying out our free pension transfer calculator today.