Pension on Leaving a Job

HurlingBoy

My contract with a company ended before 2 years where I was contributing to a pension scheme. As I am leaving the company before 2 years I am only entitled to get back my own contributions and not the company's contributions. I have 2 options - take a lump sum less 20% tax or transfer to another employer pension scheme. My new employer has a pension which I will join after 6 months. I am thinking that that the best option is to take the lump sum now and add the money to my new pension as an AVC given that the AVC will not be taxed at the higher tax rate. Although I would lose the 20% tax on the lump some I would gain 41% on the AVC.

Anyone advice would be appreciated.

Merowig

What about leaving the pension where it is now?

The J Stands for Jay

Why not transfer it to the new employer and pay no tax? Also, you'll be transferring the service to the new scheme so you won't lose out of you don't last 2 years there.

HurlingBoy

I don't have the option of leaving in the fund, either take the lump sum or else transfer to another scheme.

If I transfer to another scheme I would not be able to afford to contribute an AVC of the same value to my new pension scheme. For example if the lump sum is worth 4k I will get back 3.2K now. I keep this money and when I have the opportunity to contribute an AVC to my new pension I contribute 3.2K taken from my net pay. If I dont contribute this but just transfer the 3.2K to the new scheme now the 3.2K taken from my Net Pay will be taxed at higher income tax rate of 41% so would only be losing approx.1,300€ which is greater than the 800€ I would pay in Tax now.

The J Stands for Jay

HurlingBoy wrote: »

I don't have the option of leaving in the fund, either take the lump sum or else transfer to another scheme.

If I transfer to another scheme I would not be able to afford to contribute an AVC of the same value to my new pension scheme. For example if the lump sum is worth 4k I will get back 3.2K now. I keep this money and when I have the opportunity to contribute an AVC to my new pension I contribute 3.2K taken from my net pay. If I dont contribute this but just transfer the 3.2K to the new scheme now the 3.2K taken from my Net Pay will be taxed at higher income tax rate of 41% so would only be losing approx.1,300€ which is greater than the 800€ I would pay in Tax now.

Or just transfer the €4k now with no tax bill

Squatter

HurlingBoy wrote: »

If I transfer to another scheme I would not be able to afford to contribute an AVC of the same value to my new pension scheme.

That doesn't matter.

Pay whatever amount you can afford into the new scheme, but, as McGaggs has suggested, transfer the full €4K to the new scheme. Maybe I'm missing something, but from here it seems a no-brainer.

Bubbaclaus

Take it out and pay 20% tax on it now, then save 40% tax when you do an AVC to the new pension later.

Take this example:
10k in pension
Withdraw and pay 20% tax - Net 8,000
Put 13,333 into new pension by way of AVC (net cost of this to you is only 8,000 - which you have from above)

There you have it - turned 10k into 13.3k.

By just transferring straight into new pension youd still only have 10k.

HurlingBoy

Bubbaclaus wrote: »

Take it out and pay 20% tax on it now, then save 40% tax when you do an AVC to the new pension later.

Take this example:
10k in pension
Withdraw and pay 20% tax - Net 8,000
Put 13,333 into new pension by way of AVC (net cost of this to you is only 8,000 - which you have from above)

There you have it - turned 10k into 13.3k.

By just transferring straight into new pension youd still only have 10k.

Yes, that what I am thinking is the best option but was wondering if there is a catch here.I know there are limits to the percentage of AVCs you can make but it would be higher that the amount I would be adding.

HurlingBoy

Squatter wrote: »

That doesn't matter.

Pay whatever amount you can afford into the new scheme, but, as McGaggs has suggested, transfer the full €4K to the new scheme. Maybe I'm missing something, but from here it seems a no-brainer.

It is from the point of view of using the money from old pension and adding to the new pension as an AVC. Post below is a good example.

TG860

Bubbaclaus wrote: »

Take it out and pay 20% tax on it now, then save 40% tax when you do an AVC to the new pension later.

Take this example:
10k in pension
Withdraw and pay 20% tax - Net 8,000
Put 13,333 into new pension by way of AVC (net cost of this to you is only 8,000 - which you have from above)

There you have it - turned 10k into 13.3k.

By just transferring straight into new pension youd still only have 10k.

I'm not sure that's correct.
Both options proposed would actually have the same net effect. Transferring directly to the new pension funds would be simpler and avoid affecting AVC limits and therefore would be my preferred option. See calcs below (using 40% marg tax rate).

1)Transfer direct from old pension to net pension
Transfer from existing pension 10,000 (Net cost 6,000)
Additional contributions of 3,333 (Net costs 2,000)
Total pension fund 13,333 (Net cost of 8,000)

2)Take lump sum then invest as AVC in new pension
AVC contribution of 13,333 (Net cost of 8,000)
Total pension fund 13,333 (Net cost of 8,000)

freeze4real

I don't know much about pension but it wouldn't make much sense if there's a monetary difference in transferring from old pension to new one vs lump s investment.


If so there would be an element of arbitrage which everyone would exploit. I'm in agreement with TG860 that the net effect would be the same.