Agenda 29 th April 2008 Pensions & Redundancy Calculations LIA Ck Region CPD Michael Fitzgerald MSc FSAI Background to Bulk Bulk Due To Closure Individual Pension Considerations Revenue Maximum Pension Benefits Taxation of Redundancy Payments Practical Examples Benefit Options AVC Options www.mercer.ie 1 Background To Bulk Redundancy Typically fmula will apply to redundancy calculation. Especially if unionised wkfce. F example Statuty Redundancy plus 5 weeks pay f every year of service with the non statuty element subject to cap of 1 years pay. Precedence/expectations by previous exercises in Company industry Members may have little room f individual terms AVC Situation wth discussion with members 3 Employees need advice on - interaction of pension benefits with taxation of severance payments Bulk Redundancy - Closure As above but many of pension options may be reduced if company pension scheme is to close - Transfer options Individual Redundancy - Investment options post redundancy including - AVC options pri to redundancy - Possibly personalised options. As with nmal bulk redundancy but possibly much me scope to negotiate shape of redundancy package and therefe understanding of tax implications imptant 4 5 1
Pension Considerations Nature of Pension Arrangement Defined Benefit Defined Contribution Pension Considerations Revenue Maximum Benefits Pension Tax Free Lump Sum Fmula Based on Service Final Remuneration Scope F AVCs Employer Employee Individual Net Redundancy Payment Depends on Member Decisions 7 Nmal Leaving Service Options Refund of Contributions (if applicable) This is an option f members who have paid contributions and have less that 2 years service. Tax of 20% will be deducted from the gross employee contributions. This option is only available befe Wind-Up. Deferred Benefit This is the pension member would be entitled to at nmal retirement age typically 65 based on service to date of exit. Revenue Maximum Pension & Lump Sum Benefits Transfer Value to other arrangement The Actuary puts a current value on the Deferred Benefit. This is called the Transfer Value. Immediate Retirement Usually only Available if over age 50 8 Revenue Maximum Pension Benefits Specified in Revenue Pensions Manual Based on Final Remuneration Maximum Benefits at Nmal Retirement Age on Early Retirement on Withdrawal From Service Limits on pension and Lump Sum Benefits Revenue Fmula Based on Final Remuneration not basic salary not pensionable salary Final Remuneration broadly all income from the employment with fluctuating emoluments averaged over 3 years Lump Sum Revenue Maximum interacts with tax treatment of redundancy payments 10 11 2
Revenue Maximum Pension at NRA Revenue Max Lump Sum Benefits at NRA Years of service to Expressed as a fraction Expressed as a fraction nmal retirement age of maximum approvable of final remuneration pension f a full career Lump sum benefits greater than 3/80ths of final remuneration f each year of service may be given on retirement at NRA provided that the aggregate of the value of non-pension retirement benefits in respect of service with the current employer and any retained benefits does not exceed 1.5 times final remuneration. Years of Service Eightieths of final remuneration 1 1/10th 4/60ths 2 2/10ths 8/60ths 3 3/10ths 12/6oths 4 4/10ths 16/60ths 5 5/10ths 20/60ths 6 6/10ths 24/60ths 7 7/10ths 28/60ths 8 8/10ths 32/60ths 9 9/10ths 36/60ths 10 me 40/60ths 9 30 10 36 11 42 12 48 13 54 14 63 15 72 16 81 17 90 18 99 The last one is the familiar pension of 2/3rds salary at 65 19 108 20 me 120 12 13 Maximum Pension Benefits Early Retirement In cases other than Ill-Health, the maximum immediate pension is the greater of: (a) 1/60th of final remuneration f each year of service Maximum Lump Sum Benefits Early Retirement In cases other than ill-health retirement, the maximum immediate benefit is the greater of (b) N P N x P = number of actual years of service = number of years of potential service to NRA = maximum pension approvable had the employee served to NRA. Any restriction f retained benefits should be made in arriving at P and befe applying the N/ fraction. The fmula is subject to the qualification that if the employee's actual service is less than 10 years, the pension should not exceed the lesser of: (i) (ii) the maximum approvable at NRA f the same service in accdance with previous slide 2/3rds of final remuneration less any retained benefits (a) (b) 3/80ths of final remuneration f each year of actual service N x LS N and have the same meaning as previous slide LS = the maximum lump sum receivable had the employee served until NRA and may take into account the increased benefits detailed in paragraph 7.2 of the Revenue Manual. If the employee's service is less than 20 years, the benefit should not exceed the lesser of: (i) the maximum approvable at NRA f the same service (ii) 1½ times final remuneration less retained lump sum benefits. 14 15 Maximum Deferred Pension Maximum Deferred Lump Sum If a withdrawing employee's benefits are to be maintained by providing him with a deferred pension, the maximum amount is nmally computed on the same basis as f early retirement otherwise than on grounds of incapacity The restrictions f employees with less than 10 years service however apply only if the deferred benefit is taken befe NRA A deferred pension which becomes payable may be commuted at that date to provide a lump sum benefit of the greater of : (a) 3/80ths of final remuneration f each year of service The maximum figure calculated as above may be increased, when the payment begins, by a percentage cresponding to the percentage increase in the Consumer Price Index from the date when the employee withdrew from service. In other wds, the purchasing power of the pension may be maintained throughout the period of deferment (b) an amount calculated by the fmula N x LS The restrictions f employees with less than 20 years service only apply if the deferred benefit is taken befe NRA. 16 17 3
Tax calculations - Overview Statuty Severance is paid tax-free Taxation of Severance Payments Taxable element is taxed as nmal PAYE payment in the relevant month, as a result 41% tax will be paid on almost all of the taxable amount. Taxable element is subject to 2% levy but not nmal PRSI. Individual may be able to reclaim tax during the year against unused tax credits - use Fm P50 In addition top-slicing relief may be available at the end of the tax year 18 19 Tax calculations - Exemptions Tax Example I Tax free allowance available f balance of redundancy payment is the greater of three possible approaches. The basis f calculation is specified by the Revenue Commissioners. 1. Agreed package is statuty plus 5 weeks per year of service 2. Employee 1. Basic exemption = 10,160 plus 765 per each full year of service completed. 2. Additional Exemption. As basic plus 10,000 less present value of cash receivable under the pension scheme. - Only available once every 10 years. 1. 30 years service (both f company and within pension scheme) 2. Basic Salary 56,000 3. Average earnings over past 3 years of 72,800 4. Average weekly pay f company redundancy purposes 1,000 5. Present Value of Revenue Maximum Lump Sum is 98,000 3. Standard Capital Superannuation Benefit (SCSB). 1/15th of 3-year average taxable earnings per complete year of service completed less present value of cash receivable under the pension scheme. 20 21 Tax Example I 1. Statuty redundancy allows f 2 weeks times company service plus 1 additional week. - Exactly 30 years service - 61 weeks credit 2. Average earnings over 36 months limited to maximum of 600 per week 3. Statuty redundancy is 61* 600 = 36,600 all tax free 4. Company redundancy 150 weeks by weekly pay of 1,000 = 150,000 5. Some of this 150,000 may be tax free 1. Basic exemption = 10,160 plus 765 per each full year of service completed. - Basic Exemption independent of salary - 10160 + 765*30 = 33,130 2. Additional Exemption. Basic Exemption + ( 10,000 less present value of cash receivable under the pension scheme). In this case as present value of lump sum greater than 10,000 no advantage accrues from additional exemption 3. Standard Capital Superannuation Benefit (SCSB). 1/15th of 3-year average taxable earnings per complete year of service completed less present value of cash receivable under the pension scheme. In this case SCSB is (30)/15* 72,800-98,000= 47,600 So SCSB gives the most tax advantageous answer which is often the case with those with higher salaries and longer service 22 23 4
Total Redundancy 186,600 1. Statuty Element 36,600 tax free 2. SCSB calculation allows that 47,600 of company payment is also tax free 3. Therefe company must deduct marginal rate of tax from remaining 102,400 Tax Example II 1. Agreed package is statuty plus 5 weeks per year of service 2. Employee 1. 5 years service (both f company and within pension scheme) 2. Basic Salary 26,000 3. Average earnings over past 3 years of 36,000 4. Average weekly pay f company redundancy purposes 700 5. Present Value of Revenue Maximum Lump Sum is 5,000 4. Therefe 44,032 paid as tax 5. Net Redundancy 142,568* * This may be increased 24 25 Tax Example II 1. Statuty redundancy allows f 2 weeks times company service plus 1 additional week. - Exactly 5 years service - 11 weeks credit 1. Basic exemption = 10,160 plus 765 per each full year of service completed. - Basic Exemption independent of salary - 10160 + 765*5 = 13,985 2. Average earnings over 36 months limited to maximum of 600 per week 3. Statuty redundancy is 11* 600 = 6,600 all tax free 4. Company redundancy 25 weeks by weekly pay of 700 = 17,500 2. Additional Exemption. Basic Exemption + ( 10,000 less present value of cash receivable under the pension scheme). 13,985 + (10,000-5,000) = 18,985 5. Some of this 17,500 may be tax free 3. Standard Capital Superannuation Benefit (SCSB). 1/15th of 3-year average taxable earnings per complete year of service completed less present value of cash receivable under the pension scheme. In this case SCSB is (5)/15* 36,000-5,000= 7,000 So Increased Exemption gives the most tax advantageous answer which is often the case with those with lower salaries and shter service 26 27 I Tax calculations - Option to waive right to cash on retirement Total Redundancy 24,100 1. Statuty Element 6,600 tax free 2. Increased Exemption allows that up to 18,985 of any company payment is also tax free 3. Therefe all the payment is tax free This involves giving up the right to take cash from the plan at retirement. As a result the tax exempt amount is increased under Increased Exemption and SCSB options. This decision is irreversible and means no cash can be taken in respect of benefits under the scheme even if you do transfer out your benefits. F certain individuals it can significantly increase net pay out from redundancy 4. Net Redundancy 24,100 28 29 5
Example I Revisited 1. Basic exemption = 10,160 plus 765 per each full year of service completed. - Basic Exemption independent of salary - 10160 + 765*30 = 33,130 2. Additional Exemption. Basic Exemption + ( 10,000 less present value of cash receivable under the pension scheme). In this case as present value of lump sum greater than 10,000 no advantage accrues from additional exemption 3. Standard Capital Superannuation Benefit (SCSB). 1/15th of 3-year average taxable earnings per complete year of service completed less present value of cash receivable under the pension scheme. In this case SCSB is (30)/15* 72,800-98,000= 47,600 Total Redundancy 186,600 1. Statuty Element 36,600 tax free 2. SCSB calculation allows that 145,600 of company payment is also tax free if retirement TFC is waived 3. Therefe company must deduct marginal rate of tax from remaining 4,600 4. Therefe 1,892 paid as tax 5. Net Redundancy 184,708 If member waves right to future tax free cash at retirement then SCSB increases by 98,000 to 145,600 30 31 Tax calculation - Top slicing relief Tax calculations - Option to waive right to cash on retirement Top-slicing relief may be available at end of tax-year i.e. post 31 December 2008 Top-slicing relief must be applied f from your local tax office. Copies of your last 3 years P60s must be supplied and all tax affairs must be up to date. Tax due is recalculated based on average rate of tax paid over the last 3 tax years. The average rate of tax paid is calculated as = Tax paid over last 3 years / (Total P60 earnings less tax free allowances over the last 3 years) This involves giving up the right to take cash from the plan at retirement. As a result the tax exempt amount is increased under options 2 & 3. This decision is irreversible and means no cash can be taken in respect of benefits under the scheme even if you do transfer out your benefits. 32 33 Further Benefit and AVC Options F Individual Redundancies there is scope to advice on the most advantageous shape of redundancy offer Further Benefit Options and AVC Options There is also scope f members to make last minute AVCs to increase aggregate tax free benefits receivable at date of redundancy especially if member retiring Understanding various scenarios allows individual to make infmed decision at a difficult time Significant scope f further investment advice and advice of choice of new pension vehicles May be a growth area in next few years! 35 6
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