Question: I am self employed and due to retire in a few months time. I am worried about the changes which the upcoming mini budget might introduce in relation to pensions, particularly a reduction in the tax free lump sum to which I am entitled. As a precaution should I bring my retirement date forward?

Answer: There is widespread speculation about the measures which the Minister for Finance will introduce in the mini budget and some changes to the tax treatment of pensions are expected. Although no one can know for sure, one of the options allegedly being put forward is a restriction on the amount of tax free cash that can be taken from a pension fund at retirement.

Logically one would assume that such a restriction would be aimed at those who have pensions at the higher end of the scale, where the maximum tax free lump sum is currently €1.35m, however the changes could be more wide ranging.

Under existing rules, at retirement employees are entitled to take a tax free lump sum of up to one and a half times their final salary, providing they have 20 years service. This amount is reduced pro-rata for those with less than 20 years service. Those who own their own companies (controlling directors) also have the option of taking a fixed percentage (currently 25%) of their total pension fund in tax free cash. The self employed and those with private pensions can take 25% of their fund tax free.

Some experts are advising those due to retire this year to bring their retirement date forward to avail of the existing rules. Even if changes are not introduced in the mini-budget the expectation is that future reform of the rules is likely, and that these reforms will make them less favourable.

So, if the current speculation is to be believed those who are due to retire in next few months could be risking some of their lump sum if they do not elect to take their benefits before April 7th. However, there are other matters that need serious consideration before making such a decision. The main concern is whether now would be an appropriate time to cash in your pension. If your fund it is still largely invested in shares you could be cashing in at near the bottom of the market, effectively crystallising a loss as a result the large fall in the market. Also bear in mind that if you are an employee you are forced to buy an annuity with the balance of your fund remaining after you take your tax free cash. This annuity is designed to pay you a fixed annual pension income for the rest of your life. The rate that the annuity pays is fixed at the time it is purchased, and with annuity rates at historic lows, the income they will generate will also be low.

Before making any decision to bring your retirement forward you should speak to your financial adviser to discuss these issues and make an informed decision. However, time is very short so should you decide to proceed your advisor will need to expedite the paperwork to give you the best chance of getting your lump sum before any changes are made.

Aside from the issue of tax free cash, many believe that the government will restrict the tax relief available on the money that you pay into your pension fund. At present because of the tax relief available every €100 paid into a pension fund by a higher rate taxpayer costs them €59, and every €100 contributed by a lower rate taxpayer costs €80.As a precaution, it may well be advisable, especially for the self employed, to make their annual pension contributions before the budget rather than waiting until their tax return is due in October.

For further information on any of the above contact:
CML Financial, Independent Financial Advisors, The Business Centre, Lisfannon, Buncrana, Co. Donegal, T: +353 (0)74 9364255 F: +353 (0)74 9361955
CML Financial Limited t/a CML Financial is regulated by the Financial Regulator

Joanne Enright MSc QFA MSI
Email: joanne@cmlfinancial.ie