It may not be recommended by most financial advisors, as it could impact you in retirement, but many of us may have needs that require access to an additional source of funds, such as a pension, at particular points in time.
“Our overall view is normally that anyone who has pension funding should not be looking at ‘how soon can I access’ but rather ‘how long can I leave it invested’,” says Liam Naughton, associate director in Grant Thornton Financial Counselling. “It’s very much a last resort, but it can great to be able to access it if it’s absolutely essential.”
In general, a retirement age of 60 or 65 applies to most pension schemes. This is because during the investment stage, you get tax relief, of up to 40 per cent, on all your contributions. This is designed to allow your fund build up tax free so you can get the best return on your contributions; allowing you to access your funds early can reduce the point of this tax relief.
However, there are some exceptions, but, as with many things to do with pensions, the rules around encashment dates are anything but clear.
As Sinead McEvoy, head of technical solutions with Standard Life, notes: “There’s no sense to any of it.”
A Government review last year suggested standardising the minimum retirement age to 55, although it’s not clear if this will actually happen.
Until then, in an effort to put some sense on it, here is how early encashment works.
PRSAs
First up are personal retirement savings accounts or PRSAs.
If you have a PRSA set up from a previous employer, and leave that employment, then you will be able to access the pension fund from the age of 50.
If, however, you are still contributing to that PRSA, or your employer is, then the earliest date you can access it is from the age of 60, up until the age of 75.
Separately, you can also get a refund of contributions in your PRSA if you haven’t contributed for two years, if it’s worth less than €650, and you give three months notice to terminate it.
Occupational pension scheme
If you’re in a defined contribution (DC) scheme with your current employer, then you won’t be able to access these funds until you turn 60 at the earliest.
However, if you have left that employer, and are no longer making contributions to that pension fund, then you may be able to access it from the age of 50. You will, however, need the consent of the trustees to do this, although as McEvoy notes, it’s unlikely that they would have an issue with this.
You can do this by transferring your fund into a buy-out-bond (BOB) or PRSA.
If you’re in a defined benefit (DB) scheme on the other hand, in theory, you should be able to access it from the age of 50. In practice, however, given how such schemes are funded and the fact that many are running deficits, means you may not get permission from trustees to do this. Doing so would also necessitate financial advice, as you may be giving up significant pension rewards in the future should you do so.
Should you die while active in a pension scheme, the maximum your fund will pay out is typically four times your salary
If you have a hybrid scheme, which is a combination of DC and DB, you will be able to access the DC from the age of 60, but access to the DB may be unlikely before the age of 65.
Another point to note is that if you’re within a scheme for 16 months, but less than two years, you will be entitled to withdraw any contributions you have made up until this date. Withdrawing such funds will trigger tax at 20 per cent. However, what’s important to note here is that depending on how your pension fund is structured, your employer may also be entitled to have contributions made on your behalf returned to them.
According to McEvoy, you will find such information in your membership booklet.
So, if you’ve been in a job for less than two years, and don’t need to have access to your pension fund, consider checking the small print of your pension policy before you hand in your notice. It would be a shame to lose your employer contributions for the sake of a week or two.
Personal pensions
If you have a retirement annuity contract (RAC) you won’t be able to access it until the age of 60-75. Similarly, a small self-administered pension (SSAP), works like an occupational scheme, and the encashment date is 60-65.
Ill health
There are also provisions surrounding ill health, and options should you be unable to work. In such cases, you may be able to access your pension early.
However, it can be complicated. This is because should you die while active in a pension scheme, the maximum your fund will pay out is typically four times your salary. The remainder will go into an annuity paid out to your spouse/dependents.
According to Naughton, if you ceased your service with the scheme – even though you’re still an employee – and put the funds into a PRSA, it will all be payable to your spouse as a tax-free lump sum. This may deliver a greater lump sum to your estate.
PRSA v BOB
If you have an old occupational scheme you want to encash, you’ll need to transfer it to a PRSA or BOB first. But which to choose?
Well, the benefit of a PRSA is that, unlike an occupational scheme or BOB, you can split your fund into multiple PRSAs and retire them on a phased basis over time.
“This particularly works well for high net worth clients where their pensions are as much part of their tax planning than purely to provide an income in retirement. It is also especially useful where an individual has to consider the Standard Fund Threshold (SFT) as they approach retirement,” says Naughton.
The implications of the SFT only arises when a fund in excess of €2 million is drawn down. By keeping funds in different PRSAs, it may mean that one of the PRSAs could pass directly to a spouse tax free in the event of the death of the pension holder, without ever incurring the excess 40 per cent tax.
“It (the higher rate of tax) only gets paid if you access it, it doesn’t get paid on death,” says Naughton.
It may not always be possible to go into a PRSA, however. If you’ve been in a pension scheme for more than 15 years, then it’s no longer an option.
On the other hand a BOB can be easier, and potentially cheaper, to transact. Should you decide to go into a PRSA, you’ll need to get a certificate of benefit comparison drawn up by an actuary, which could cost between €500 and €1,000.
As Naughton notes, your advisor may be willing to carry the cost of this.
Drawdown
While you may be able to access your pension early, this doesn’t mean simply withdrawing all the proceeds.
Rather, you can take 25 per cent out as a tax free lump sum, while the remainder must be put into a post-retirement fund, such as an approved retirement fund (ARF) or annuity.
If you opt for an ARF, you must show that you have a guaranteed pensionable income of €12,700 per year. If you can’t do this, you must either transfer €63,500 to an Approved Minimum Retirement Fund (AMRF), or purchase an annuity that will bring up your level of guaranteed income to the minimum amount.
And it will be difficult to get the rest of your money out of the AMRF, if that’s what you so wish, because, as Naughton notes, you can only draw down a maximum of 4 per cent a year, which could make it difficult to access the funds you want.
A way around this is if you transfer your money into a BOB. With this, you can take a lump sum amounting to 1.5 times your final salary at the company (provided you have worked for the company for more than 20 years).
With such an approach, you may be able to clean out your fund – if you so wish, of course.
