Early Pension Cash Release Considerations

A new client recently asked me “How to encash a lifetime’s trail of itty-bitty pensions into an ARF?” he was also thinking long term, and how this might affect his future benefits in actual retirement.

What he was carefully considering was, should he take his tax-free pension cash early by retiring a pension product early, which is technically called a pension “ benefit crystallisation event”.

Notably, this early access option (unless due to serious ill health) is only permissible from age 50 (without actually retiring) under previous occupational pensions, meaning past employer group pension schemes.

It involves the transfer of the past employer benefits to a Personal Retirement Bond (PRB) and then retiring the PRB, by first taking your tax-free cash, usually amounting to 25% of that pot and transferring the balance into an Approved Retirement Fund (ARF).

Considering Age 50 Access

So, referring back to my client’s question, “How to encash a lifetime’s trail of itty-bitty pensions into an ARF?” which can be a relatively common case; especially for those in certain occupations (e.g. IT professionals) who now find themselves contracting.

Indeed, it is very possible, for someone to have a trail of previous pensions, albeit monies left in Group Occupational Pension Schemes, already sitting in a PRB, or paid-up Personal Pension Plan (PPP), or even an old Executive Pension (EPP).

However, the issues of past pension plan consolidation and possible early cash access are far from straightforward and need to be carefully assessed on an individual basis, with the help of an experienced qualified pensions professional.

A planned reliance on Google research for a fully comprehensive understanding in assessing your own individual established pension situation is in my view a folly, but with that said, I have written the following to provide at least a head start, for those in this particular client’s boat.

Early Pension Cash Availability

Firstly, if preserved pension benefits still sit in an old Group Employer Scheme, then the first question is, is it a Defined Benefit (DB) or Defined Contribution (DC), the latter should be typically left alone and usually is. If DB, it has typically already gone into a PRB, but not always, so then that is still a requirement.

Some self-employed individuals, such as contractors may start out with a personal pension plan or PRSA but then go to an EPP when they incorporate. The EPP can be cash accessed from age 50 with the balance going straight to an ARF (or PRSA to delay automatic percentage withdrawals from age 61) but with a PPP, or individual PRSA it’s only normally possible from age 60.

Should a PRSA be chosen as an ARF alternative, which can only be done early under an EPP and not with a PRB, under the PRSA Disclosure Regulations, a Certificate of Comparison and Written Statement is required and there is a considerable cost in producing these actuarial documents.

Identifying Legacy Plan Types

Early access from age 50 is not permitted under an individual PRSA or Personal Pension Plan, so if you have either of these plan types no longer active, the wait pushes out to age 60.

Whereas to access a past employer-sponsored PRSA from age 50, you must first retire from all employment, so in short, if you’re thinking about early cash access and you’re not yet retiring, the only contract type to identify, amongst any legacy pension plans that you may have is a PRB or retained/preserved group occupational scheme benefit.

Early Pension Cash Access Summary

1. Most legacy pensions are preserved group scheme benefits, personal pension plans, or PRBs.
2. To access a previous employer scheme from age 50, you must first transfer out to a PRB and then retire the PRB to an ARF.
3. You can go directly to an ARF or PRSA, on taking your tax-free cash from age 50 under a paid-up EPP (previous employment), or if retiring under your current employment-related EPP.
4. You can only access a PPP from age 60, as is the case with a PRSA, unless it was a previous employer-funded PRSA, in which case you can retire it directly into an ARF, but only if you have fully retired from work i.e. you are bona fide retired.

 

Actual Retirement Benefits

Whilst some people will have just one PRB offering early cash access, others with multiple legacy plans, may start thinking about tax-free cash limits and maximum fund thresholds, as part of any early access considerations.

Here it’s very important to understand:

1. The maximum tax-free lump sum that you can take from all combined pension plans over your lifetime is 25% (unless 20 years plus company where a final salary and service-related calculation may prove higher), subject to a limit of 200K.
2. The maximum tax-free cash you can ever access from all combined pensions over your lifetime amounts to 200K and any balance up to 500K is then taxed at 20% (remember you need 2M in your fund to achieve these maximum lump sum limits).
3. The maximum combined total fund allowable at retirement known as the standard fund threshold (SFT) is currently 2M but is likely to rise to 2.8M over the next 4 years (but the 500K lump limit is not changing).
4. Taking tax-free cash early will limit the cash balance available later at retirement, but only for those with large retirement funds e.g. if you have 800K in your fund at retirement and you have previously taken 50K in tax-free cash, when moving a PRB into an ARF, you can only then take the balance of 150K tax-free (limits are lifetime limits).
5. Taking tax-free cash early will reduce your then combined pension fund values, plus you will lose out on the further tax-free growth of those particular monies. However, it’s important to realise, that doing so will not affect your SFT, the balance going into the ARF is invested for later retirement access and any active employment pensions can continue to grow and be funded.

 

Legacy Plan Consolidation

Although this could be considered a separate topic in itself, as can Irish pension transfer rules, returning once again to my client’s original question “How to encash a lifetime’s trail of itty-bitty pensions into an ARF?” he like others, was thinking about the timing of such actions, as well as trying to tidy up legacy pensions into one place.

I have already referenced pension transfer rules above, with a link to my blog on this topic, but as far as PRBs go, due to underlying pension legislation that relates to funding limits and the resulting tax relief, you cannot consolidate several PRBs into one PRB (also called a buy-out bond) your options are instead, as follows:

(1) Transfer all PRBs into a new employers scheme, or into a Master Trust Executive Pension Plan (EPP), where you have your own limited company.

Few would want to do this as it limits early access from age 50 and may also limit your control in terms of investment choice, under a group scheme.

(2) Transfer all PRBs into a single ARF.

The most common way of tidying up a host of PRBs (with the option of early cash access) is to ARF them, but in doing so, automatic withdrawals occur from age 61, under the ARF fund and at a minimum rate of 4% per annum. For this reason, you may prefer to wait until actual retirement.

 

Legacy Plan Charges

When someone has gone to the bedroom locker or home office filing cabinet to dig out their various pension plans paperwork, they may quickly notice varied charging structures.

Fund Size Matters

What’s key to appreciate here and is strangely seldom obvious, fund size matters, or in other words the higher the total fund value the lower the charge.

If you have monies still sitting in a previous employer group scheme, the AMC is likely to be the lowest of all, especially if it was a large employer, a PRB is likely to carry an AMC of 1% or less, especially if it is over circa 100K in value.

Paid-up Personal Pensions or Executive Plans are likely to also carry an AMC of 1.00%, but if you have significant fund values (300K +) lower cost PRBs and or PRSA options should be investigated.

Remember, however, a number of PRBs cannot be transferred into a single PRB for lower charges.

Disclaimer

This article is in no way designed to encourage accessing pension cash early as in many cases this may diminish actual retirement benefits come retirement. Moreover, it is never advised to attempt to do this, without proper and full consideration of your bigger and long-term financial picture, under the guidance of an experienced qualified professional advisor in the pensions space.

Speak with a Financial Advisor

To arrange your free no-obligation discovery consultation by phone contact us today.

Contact: Ken O’Gorman – Director – Retirement Planning Specialist – One Quote Financial Brokers on: 01 845 0049 or email: ken@onequote.ie

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