Redundancy Advice

Redundancy Advice

If you have recently been offered or considering applying for a redundancy Package from your employer, It is very important to educate and clearly understand all of the options available to you. The options that you choose can have a significant impact on the Tax Free Lump sums that you qualify for from both your Redundancy package and your Pension entitlements (if applicable). In most circumstances, a redundancy package is offered to employees who have accumulated many years of service with their employer. Redundancy packages needs to be examined on an individual basis each package can be calculated differently.

If you have recently been offered or considering applying for a redundancy Package from your employer, It is very important to educate and clearly understand all of the options available to you. The options that you choose can have a significant impact on the Tax Free Lump sums that you qualify for from both your Redundancy package and your Pension entitlements (if applicable). In most circumstances, a redundancy package is offered to employees who have accumulated many years of service with their employer. Redundancy packages needs to be examined on an individual basis each package can be calculated differently.

Redundancy Entitlements Explained

Redundancy Packages are predominantly made up of the following.

A Statutory Redundancy Entitlement

Ex Gratia Payment




(A) A Statutory Redundancy Entitlement

  • This is a minimum compulsory entitlement under revenue rules that a company is obliged to offer its staff.
  • All these funds are received by the employee tax-free.
  • This figure is calculated as follows.

2 weeks’ pay for each complete years’ service plus 1 weeks’pay (maximum allowed weekly wage is €600)’

Any additional funds remaining from the Redundancy Lump Sum, over and above the Statutory Entitlement is called an Ex-Gratia Payment.

(B) Ex Gratia Payment

  • This is an optional extra sum of money over and above the Statutory Entitlement that the company offers as a goodwill gesture to qualifying employees for their years of service with the company.


  • There is a tax-free portion with this payment option any balance taxable at the employees’ marginal rate of tax.

Redundancy Entitlements Explained

Redundancy Packages are predominantly made up of the following.

A Statutory Redundancy Entitlement.

Ex Gratia Payment




(A) A Statutory Redundancy Entitlement

  • This is a minimum compulsory entitlement under revenue rules that a company is obliged to offer its staff.
  • All these funds are received by the employee tax-free.
  • This figure is calculated as follows.

2 weeks’ pay for each complete years’ service plus 1 weeks’pay (maximum allowed weekly wage is €600)’

Any additional funds remaining from the Redundancy Lump Sum, over and above the Statutory Entitlement is called an Ex-Gratia Payment.

(B) An Ex Gratia Payment

  • This is an optional extra sum of money over and above the Statutory Entitlement that the company offers as a goodwill gesture to qualifying employees for their years of service with the company.
  • There is a tax-free portion with this payment option any balance taxable at the employees’ marginal rate of tax.

Ex Gratia Payment calculations

There are 3 options available to all Ex-Gratia recipients in relation to how these funds are split between what’s received tax-free and/or taxable. These 3 options are as follows

(1) Basic Exemption:

  • The Tax-Free Portion is calculated as follows.

‘€10,160 plus €765 for each completed year of service


  • The remaining funds left over are taxable.

(2) Increased Exemption:

  • The Tax-Free Portion is calculated as follows.

‘€10,160 plus €765 for each completed year of service plus €10,000 minus any tax-free lump sum entitlement from the employees’ pension****’.


  • The remaining funds left over are taxable
  • With this option, you waive any right for a Pension Tax Free Lump Sum (if any) in lieu of an increased Redundancy lump sum.

(3) Standard Capital Superannuation Benefit (SCSB):

  • The Tax-Free portion is calculated as follows:

Average earnings over the last 36 months multiplied by complete years of service and answer divided by 15’.

  • The remaining funds left over are taxable
  • There is an option here to waive any Pension Tax-Free Lump Sum in lieu of an increased Redundancy lump sum.. This calculation is as follows.

(The same calculation as above) – (Pension Tax-Free Lump Sum Entitlement) *****

Note:

Please note you have a lifetime limit of €200,000 that can be received tax-free for redundancy payments

throughout your career.

You also have a lifetime limit of €200000 that can be received tax-free for all pension funds on retirement.


The pension Lump Sum figure is the lessor: of 25% of the Pension fund value or (The Average Salary multiplied by Years of

service Multiply by 3/80ths)

An Ex Gratia Payment calculations

There are 3 options available to all Ex-Gratia recipients in relation to how these funds are split between what’s received tax-free and/or taxable. These 3 options are as follows

(1) Basic Exemption:

  • The Tax-Free Portion is calculated as follows.

‘€10,160 plus €765 for each completed year of service’


  • The remaining funds left over are taxable.

(2) Increased Exemption:

  • The Tax-Free Portion is calculated as follows.

‘€10,160 plus €765 for each completed year of service plus €10,000 minus any tax-free lump sum entitlement from the employees’ pension****’.


  • The remaining funds left over are taxable
  • With this option, you waive any right for a Pension Tax Free Lump Sum (if any) in lieu of an increased Redundancy lump sum.

(3) Standard Capital Superannuation Benefit (SCSB):

  • The Tax-Free portion is calculated as follows:

Average earnings over the last 36 months multiplied by complete years of service and answer divided by 15’.


  • The remaining funds left over are taxable
  • There is an option here to waive any Pension Tax-Free Lump Sum in lieu of an increased Redundancy lump sum.. This calculation is as follows.

(The same calculation as above) – (Pension Tax-Free Lump Sum Entitlement) *****

Note:

Please note you have a lifetime limit of €200,000 that can be received tax-free for redundancy payments

throughout your career.

You also have a lifetime limit of €200000 that can be received tax-free for all pension funds on retirement.


The pension Lump Sum figure is the lessor: of 25% of the Pension fund value or (The Average Salary multiplied by Years of

service Multiply by 3/80ths)

An Ex Gratia Option and its implication on the employees’ Pension Entitlement

The option is chosen to calculate an ex-Gratia Payment that has a direct correlation with the corresponding pension entitlement. It is very important to understand these implications before deciding which option to choose. Some of the options allow the employee to waive/give up their Pension Tax-Free Lump Sum Entitlement to gain more of a lump sum from their redundancy package. This may or may not be the case, so it is prudent to calculate these figures before a final decision is made.

Below is a summary of the Ex-Gratia Payment calculation options and whether the Pension Tax-Free Lump sum is waived or not with each option.


Ex Gratia Option and its implication on the employees’ Pension Entitlement

The option is chosen to calculate an ex-Gratia Payment that has a direct correlation with the corresponding pension entitlement. It is very important to understand these implications before deciding which option to choose. Some of the options allow the employee to waive/give up their Pension Tax-Free Lump Sum Entitlement to gain more of a lump sum from their redundancy package. This may or may not be the case, so it is prudent to calculate these figures before a final decision is made.

Below is a summary of the Ex-Gratia Payment calculation options and whether the Pension Tax-Free Lump sum is waived or not with each option.


Redundancy and Pension Entitlements

It is imperative to analyse what can be received tax free from both your redundancy package and your pension.

Rookie Mistake

Many people make the make the mistake of choosing an Ex-Gratia payment option that waives their pension lump sum

entitlement in order to get an increased redundancy lump sum. However, in many circumstances, if the client is over 50,

they could get almost double the amount tax free entitlements from both sources (redundancy and pension) by choosing

another Ex Gratia payment option.

Pension Transfer options - Defined Benefit vs Defined Contribution

The pension transfer options differ greatly depending on whether your pension is defined benefit or defined contribution. Below is an illustration of the various options for each;

Redundancy and Pension Entitlements

It is imperative to analyse what can be received tax free from both your redundancy package and your pension.

Rookie Mistake

Many people make the make the mistake of choosing an Ex-Gratia payment option that waives their pension lump sum

entitlement in order to get an increased redundancy lump sum. However, in many circumstances, if the client is over 50,

they could get almost double the amount tax free from both sources (redundancy and pension) by choosing

another Ex Gratia payment option.

Pension Transfer options - Defined Benefit vs Defined Contribution

The pension transfer options differ greatly depending on whether your pension is defined benefit or defined contribution. Below is an illustration of the various options for each;

Consequences of waiving the right to a Pension Tax-free Lump Sum with a Redundancy package.

If an employee waives the right to a Pension Tax-Free Lump Sum, under revenues rules, the tax-free lump sum entitlements from this pension should be restricted forever. However, there are some grey areas with some options. Please see below:


Transferring to a New Employers pension scheme

If an individual, transfers his/her previous pension from into a new pension scheme, on retirement, he/she may access 25% of his total pension pot accumulated (previous pension funds plus new company pension funds) as a tax-free lump sum at his retirement age of 68, but this is unlikely to occur.

The New Employers Penson Schemes Application form usually always asks


‘if any Pension Tax-Free Lump Sum entitlements have been waived from any previous employments’ before the funds are transferred.


Transferring to a PRSA

If a previous pension is transferred into a PRSA. It may be possible to get 25% of this fund out from age 60 onwards, even if the individual chose an option with their redundancy to Waive the Pension Lump Sum.

Now, this is allowed but this could change in the future.


Consequences of waiving the right to a Pension Tax-free Lump Sum with a Redundancy package.

If an employee waives the right to a Pension Tax-Free Lump Sum, under revenues rules, the tax-free lump sum entitlements from this pension should be restricted forever. However, there are some grey areas with some options.

Transferring to a New Employers pension scheme

If an individual, transfers his/her previous pension from into a new pension scheme, on retirement, he/she may access 25% of his total pension pot accumulated (previous pension funds plus new company pension funds) as a tax-free lump sum at his retirement age of 68, but this is unlikely to occur.

The New Employers Penson Schemes Application form usually always asks


‘if any Pension Tax-Free Lump Sum entitlements have been waived from any previous employments’ before the funds are transferred.


Transferring to a PRSA

If a previous pension is transferred into a PRSA. It may be possible to get 25% of this fund out from age 60 onwards, even if the individual chose an option with their redundancy to Waive the Pension Lump Sum.

Now, this is allowed but this could change in the future.


How to make the best decision for me?

Before making a final decision, all of the following options and calculations needs to be examined in detail;


All Ex Gratia payment options should be calculated in detail

  • Basic Exemption
  • Increased Exemption
  • SCSB -retaining Pension Lump Sum
  • SCSB - Waiving Pension Lump Sum

See which of these options offers the most tax free. Then you need to calculate which pension transfer option makes the most financial since;

  • Leaving it in old employers scheme
  • Transferring to New Employers scheme
  • Taking a Transfer Value from existing defined benefit scheme
  • Transferring to a Personal Retirement Bond
  • Transferring to a PRSA.

It is also important to examine when access to your pension fund can be gained for each option. For example;

  • Access to Personal Retirements can be gained from age 50 onwards,
  • Access to P.RSAs e from 60 onwards
  • Access to Occupational schemes Both DO and DC schemes are usually 65

Once all of these options are analysed, you will now be in a position to make an informed decision.

It is imperative to seek independent advice on all redundancies as due to the complexity of the calculations, many Companies offering these packages can get the calculations wrong. They also don't really analyse the impact your redundancy has on your pension entitlements.


How to make the best decision for me?

Before making a final decision, all of the following options and calculations needs to be examined in detail;


All Ex Gratia payment options should be calculated in detail

  • Basic Exemption
  • Increased Exemption
  • SCSB -retaining Pension Lump Sum
  • SCSB - Waiving Pension Lump Sum

See which of these options offers the most tax free. Then you need to calculate which pension transfer option makes the most financial since;

  • Leaving it in old employers scheme
  • Transferring to New Employers scheme
  • Taking a Transfer Value from existing defined benefit scheme
  • Transferring to a Personal Retirement Bond
  • Transferring to a PRSA.

It is also important to examine when access to your pension fund can be gained for each option. For example;

  • Access to Personal Retirements can be gained from age 50 onwards
  • Access to P.RSAs e from 60 onwards
  • Access to Occupational schemes both DB and DC schemes are usually 65

Once all of these options are analysed, you will now be in a position to make an informed decision.

It is imperative to seek independent advice on all redundancies as due to the complexity of the calculations, many Companies offering these packages can get the calculations wrong. They also don't really analyse the impact your redundancy has on your pension entitlements.


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© 2020 Money Maximiser | Money Maximising Advisors Limited is regulated by the Central Bank of Ireland - C154250 | Privacy Policy