Financial Advice

Retiring Bank employees missing out on up €180,000 tax free cash from their pension by taking the wrong option at retirement.

Bank employees who are retiring shortly or being made redundant may be losing out on up to €180,000 of tax free and pension money from their pension by taking the wrong options on their pension.

If you are planning to retire and drawdown on your pension or you are being made redundant,  you need to get the proper advice on your pension.

Most bank employees are members of Defined Benefit pension scheme. The level of pension benefits that they receive will depend on their number of years or service and their final salary.

So for example if an employee is on a salary of say €70,000 at their normal retirement age and they have completed the full 40 years of service , in general they would receive  a tax free lump sum of €105,000 tax free which is 1.5 times their final salary along with an annual  pension of 50% of their final salary which is €35,000 per annum.

There is another option that retiring bank staff need to consider. If the retiring employee requests a transfer value, then the overall level of his tax free payment can increase considerably.

Based on a recent example we have a bank employee who is retiring at age 60 after completing the full 40 years of service. His final pensionable salary was approximately €80,000 and he would have received the following pension benefits which are the normal pension benefits from the Defined Benefit pension.

  • €120,000 tax free
  • Annual pension of €40,000 per annum

He requested a transfer value, and he received a guaranteed transfer value of approximately €1,300,000, based on this valuation he would receive the following.

The first 25% of €1,300,000 is €325,000, this is taken as follows

  • First €200,000 tax free       
  • Balance of €125,000 is taxed at 20% so a net amount of €100,000
  • So, the employee receives a total of €300,000 as against the €120,000 tax free with the Defined Benefit pension, that is an additional €180,000.
  • Balance of 75% or €975,000 is invested into an Approved Retirement Fund [ARF] and Approved Minimum Retirement Fund [AMRF] as follows
  • First €63,500 must be invested into the AMRF until the client receives their State Pension.
  • Balance of €911,500 is invested into an Approved Retirement fund and he can draw a minimum income of 4% per annum from age 61 onwards. So if the client retires at age 60 he does not need to drawdown on his ARF until he reaches age 61.

Let us assume that there is no investment growth on the ARF from the time he invests the money d to when he draws down on it.

So, 4% income from €911,500 gives him an annual income of €36,460

If we assume that the AMRF grows to €70,000 at State Pension age which is currently 66 then at 66 he can take 4% from this also.

€70,000 @ 4% is €2,800

Plus, the €36,460

That is a total of €39,260 per annum from age 66, as against €40,000 per annum from the guaranteed from the defined benefit pension.

In this case the employee receives an additional €180,000 and more or less the same annual pension benefits.

In this case could decide to buy a property through his ARF with some of his pension assets.

So if he bought a property for €400,000 and this generated a rental income of €25,000 per annum and then took an income of 4% from the balance of €511,500 this would give the employee €20,460 , that’s a total of €45,460 per annum , plus the €2800 from the AMRF at age 66.

With the €300,000 he has received he could clear any outstanding mortgage or personal debt and may be invest some of the money. He could if he wanted to use the tax-free cash payment to maybe buy an investment property or buy a property abroad, but he has more options open to him with €300,000 as against €120,000.

There are positives and negatives to each option, and you will need to take advice from a pension advisor and work out what is the best option for you.

If you have any questions in relation to any of the above, please call or email me


Colm Kelly Director of Cregan Kelly O’Brien Financial Planning  T: 01 870 0370