The impact of Redundancy on your Pension
Many employees across the state have recently been made redundant by their employers. Below we examine the impact of redundancy in the context of occupational pension schemes.
Those who have had their contracts of employments terminated and have been made redundant should be provided with leaving service options by their scheme administrator.
They may also be entitled to a redundancy payment. Full-time employees paying Class A PRSI who have worked continuously for their employer for at least 104 weeks (2 years) will normally qualify for a Statutory Redundancy Payment. Employers may also at their discretion make ex gratia redundancy payments to employees being made redundant.
Statutory Redundancy Payment
- Payments are tax free
- Payment equates to 2 weeks’ pay for every year of service plus an additional weeks pay with weekly pay capped at €600.
Ex Gratia Payments
- Ex Gratia payments are potentially taxable but there are a number of exemptions available, outlined below
How Ex Gratia Payments work
There are 3 possible exemptions to taxation on Ex Gratia payments which are known as the Basic Exemption, Increased Exemption and the Standard Capital Superannuation Benefit (SCSB). The highest available exemption could be applied to an Ex Gratia payment.
Basic Exemption
The Basic Exemption is €10,160, plus €765 for each complete year of service.
Increased Exemption
The Increased Exemption is the Basic Exemption plus an additional €10,000 but less the value of any pension lump sum received or to be received under an occupational pension scheme linked to this employment.
Standard Capital Superannuation Benefit (SCSB):
The SCSB is a tax relief that normally benefits people with higher earnings and long service. It can be used if the below formula gives an amount greater than the Basic Exemption or the Increased Exemption.
The calculation for the SCSB is: (A X B) – C /15
Where:
A: is the average annual remuneration for the last 36 months service
B: is the number of complete years of service
C: The amount of any tax-free lump sum received or to be received under the occupational pension scheme (if any) Any ex gratia payments in excess of the highest available exemption would be taxable at the marginal rate of the individual. There is also a lifetime limit on Tax Free Ex Gratia payments of €200,000
Example – John
- 15 years’ service
- Salary of €52,000 per annum for last three years
- Value of Future Pension Lump Sum: €30,000
John’s employer is offering a voluntary redundancy package of 6 weeks of pay for every year of service which John has accepted. The payments are broken down as follows:
Total Package offered is salary x service x (weeks per year)
€52,000 x 15 x (6/52) = €90,000
Statutory redundancy is 2 weeks’ salary per year worked, capped at €600/week. With one additional week
(2 x €600 x 15) + €600 = €18,600
The amount offered in excess of statutory redundancy is considered ex gratia. €90,000 – €18,600 = €71,400
We now calculate the value of the available exemptions, which will be impacted by whether or not John decides to waive or retain his right to a pension lump sum under the scheme.
Waives right to Pension Lump Sum
€52,000 x 15 x (6/52) = €90,000
Basic exemption: €10,160 + (€765 x 15) = €21,635
SCSB: (€52,000 X 15) – €0/15 = €52,000
The highest available exemption is €52,000
Retains right to Pension Lump Sum
(2 x €600 x 15) + €600 = €18,600
Basic exemption: €10,160 + (€765 x 15) = €21,635
SCSB: (€52,000 X 15) – €30,000/15 = €22,000
The highest available exemption is €22,000
In both instances the SCSB provides the highest available exemption.
On this basis the taxation of the total package would be as follows
Payment Waives Pension Lump Sum Retains right to Pension Lump Sum
Statutory €18,600 €18,600
Ex Gratia Tax Free €52,000 €22,000
Ex Gratia Taxable €19,400 €49,400
Tax @48%on Taxable Element -€9,312 -€23,712
Total Redundancy Payment €80,688 €66,288
Difference €14,400
*Assumes 40% Income Tax & 8% USC. Actual rates of Taxation will depend on the individual’s circumstances.
Although John may be enticed to sign the waiver given the potential for a higher redundancy payment now, this benefit should be weighed against the loss of the ability to take a lump sum from the scheme or any Personal Retirement Bond purchased by the scheme Trustee at a future date. It is key that John discusses these issues with his Financial Advisor who can analyse the pros and cons of each route and allow John to make an informed decision
If you have any questions or would like more information contact Frank Ryan Financial Services