I have a pension just north of €800,000, of which I took 25 per cent two years ago.
I’m 64 and my wife is nearly 60. We both have retired from the family business which we now rent and, with other properties we own, we make in the region of €130,000 annually. I take the compulsory 4 per cent from my own pension annually. I think we will always be in the higher tax bracket.
My wife has her own pension of €187,000. My question is, since we will always be in the highest tax bracket, should we just bite the bullet and pay full tax on the remaining 75 per cent.
Mr MM
On the Money: the personal finance newsletter from The Irish Times
Parents on summer childcare: ‘Holidays are too long for how families are set up. The cost is ridiculous’
Will my mother be liable for capital gains tax if we sell her house on her behalf?
Invest like you shop? For men, that’s a mistake
Fortunately for you, you are in a strong position as you consider your retirement finances but that doesn’t mean you should rush your fences.
I am certainly not advocating people to evade tax but equally there is no reason why people would logically choose to pay more tax than is necessary. And I don’t really see how it will benefit you in paperwork.
As of now, around a third of Irish workers have no private pension provision at all and even among those who do, the average pension pot is currently estimated to be around €110,000.
Even your wife’s pension fund is comfortably ahead of that average before we consider your pension and the other income you are bringing in as a family.
You have taken the 25 per cent tax-free lump sum you are entitled to from your pension, leaving you with a pot of €600,000, which you have invested in an approved retirement fund.
That will deliver a pension of €24,000 a year, depending on investment returns at the 4 per cent drawdown rate mandated by the Revenue Commissioners.
If your wife activates her pension, she, too, will have access to a quarter of her fund free of tax. So, given your current level of income, why would you not just draw down the entire fund, paying tax on it at the higher rate?
Well, there are a couple of reasons.
First, while times are clearly good now, with a comfortable income coming from your former business and your properties, there is no guarantee that this will remain the case. That is what those unfortunate people who listened to the advice that they should invest their retirement income in dividend-yielding blue-chip stocks – the listed banks – thought. And look what happened to them.
For sure, it is unlikely, but if the financial crash taught us anything it is that we cannot be certain that property or business will continue to deliver returns.
You have 20-plus years to live: a lot can happen in that time.
And it is not like it will even save you time and paperwork. From what you say, it appears you file jointly. Even if you were to liquidate your wife’s pension fund, you will still have to make the same filings and go through the same process of paying tax on your various sources of income.
So I am struggling to see where the advantage is. It would be one thing if you had a pressing need for those funds at the moment but there is no suggestion that you do.
Quite apart from anything else, from your wife’s perspective particularly, it makes sense to preserve some financial independence. Liquidating this pension leaves her more exposed.
Obviously, for most couples in their 60s, that is not an issue. However, I have come across more than enough cases where retirement presented issues people never expected, not to dismiss the need for some level of financial security.
What I would advise, given the level of income you have, is that you consult a professional financial and tax adviser on how best to organise things to ensure you have access to the money you require on an annual basis without paying any more tax than necessary.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice
