Redundancy and Pensions Presented by Brian Deegan New

Redundancy and Pensions Presented by Brian Deegan, New Ireland Assurance

Agenda • Statutory Redundancy • Ex-gratia payments • Basic and increased exemptions • Standard Capital Superannuation Benefit (SCSB) • Waiving the lump sum from an Occupational Pension (OPS) • Other relevant facts 2

Redundancy payments 3

Statutory redundancy • Must be over 16 • Have 2 years continuous employment • All statutory payments are tax-free Statutory redundancy entitlement 2 weeks “gross pay” for each year of “reckonable service” + 1 weeks “gross pay” Bonus week 4

“Gross pay” • Normal gross weekly wage PLUS • Any “regular” BIK and overtime GROSS PAY Capped at € 600 per week (€ 31, 200) Fluctuating payments e. g. bonuses are not taken into account 5

“Reckonable service” • Period of employment LESS • Non reckonable absences • Partial years are credited • Absences that do not impact reckonable service 6

Statutory example • John has been made redundant • He worked for 15 years and 9 months (15. 75 years) • His gross weekly pay € 500 Statutory redundancy entitlement (€ 500 x 2) x 15. 75 + € 500 = € 16, 250 7 Tax F ree

Statutory redundancy 8

Agenda • Statutory Redundancy • Ex-gratia payments • Basic and increased exemptions • Standard Capital Superannuation Benefit (SCSB) • Waiving the lump sum from an Occupational Pension (OPS) • Other relevant facts 9

Ex-gratia payments “A voluntary payment made by the employer above the statutory redundancy” • Can be…. • Additional cash payment or • Non-cash benefits provided to the employee on termination of employment 10

Ex-gratia payments • There are three areas to consider when calculating the tax due on ex-gratia payments 1. Basic exemption 2. Increased exemption (needs prior Revenue approval) 3. Standard Capital Superannuation Benefit (SCSB) • The higher of the three will be exempt from tax 11

Agenda • Statutory Redundancy • Ex-gratia payments • Basic and increased exemptions • Standard Capital Superannuation Benefit (SCSB) • Waiving the lump sum from an Occupational Pension (OPS) • Other relevant facts 12

Basic exemption € 10, 160 PLUS € 765 for each full year of service with the employer 13

Basic exemption example • John receives a termination payment of € 50, 000 • He worked for 15 years and 9 months (15. 75 years) € 16, 250 statutory redundancy – tax free Basic exemption is = € 10, 160 + € 765 x 15 = € 21, 635 tax free € 12, 115 taxed as income Income tax at John’s marginal rate + USC but not PRSI Tax liability on ex gratia payment: Income Tax at 40% = € 4, 845 USC at 7% = € 850 14

Increased exemption Basic exemption can be increased by € 10, 000 where: No termination payment claims within the last 10 years AND The individual is NOT a member of an Occupational Pension Scheme (OPS) related to that employment OR They irrevocably waive the right to receive a tax-free lump sum from the OPS at retirement 15

Increased exemption IF the tax-free lump sum exceeds € 10, 000 § No increased exemption will apply § Move on to SCSB IF the tax-free lump sum is less than € 10, 000 § Increased exemption is € 10, 000 if lump sum is waived § Increased exemption is € 10, 000 less net present day value (NPV) of lump sum if it is NOT waived 16

Increased exemption example 17 • John receives a termination payment of € 50, 000 • He worked for 15 years and 9 months (15. 75 years) • € 16, 250 statutory • € 33, 750 ex-gratia • No previous tax-free termination payment • Member of OPS • NPV of lump sum € 9, 000

Increased exemption example € 16, 250 statutory redundancy – tax free Basic exemption is = € 10, 160 + € 765 x 15 = € 21, 635 tax free Signs waiver on lump sum Increased exemption € 21, 635 + € 10, 000 = € 31, 635 € 50, 000 less (€ 16, 250 + € 31, 635) = € 2, 115 which is taxable Does NOT sign waiver on lump sum Increased exemption € 21, 635 + (€ 10, 000 -€ 9, 000) = € 22, 635 € 50, 000 less (€ 16, 250 + € 22, 635) = € 11, 115 which is taxable 18

Agenda • Statutory Redundancy • Ex-gratia payments • Basic and increased exemptions • Standard Capital Superannuation Benefit (SCSB) • Waiving the lump sum from an Occupational Pension (OPS) • Other relevant facts 19

SCSB May give higher exemption figure than increased exemption if employee has long service / high salary Standard formula: Ax. B ------ less C 15 Where: A = Average remuneration over last 3 years prior to date of redundancy B = Number of complete years of service. C = Net Present Value of any TFLS under employer’s OPS(s). Where lump sum waived C = € 0 20

SCSB Remuneration • TOTAL income liable to tax under schedule E • No cap i. e. € 600 per week statutory • Can include bonuses, all overtime Service • FULL years of service only • Partial years ignored • Career breaks not included 21

SCSB Net Present Value (NPV) of lump sum • Depends on whether under or over age 50 and • Whether retiring (drawing benefits) or deferring • If retiring it is amount of lump sum available NOW • If deferring it must be calculated by provider Assumptions may vary by life office No explicit Revenue guidance • Capped at € 200, 000 22

SCSB Calculating NPV of lump sum • Mary is 53 and being made redundant • Her final salary is € 40, 000* • She is a member of her employer’s DC OPS • She has 20 years past service and her NRA is 65 • TFLS on leaving = 20/32 x (1. 5 x € 40, 000) = € 37, 500 • TFLS at NRA = € 44, 800 (indexed at 1. 5%) • TFLS discounted back to present date = € 22, 300 (6% discount rate) • This is the figure for SCSB * Can use any of the Revenue definitions 23

SCSB example • John receives a termination payment of € 50, 000 • He worked for 15 years and 9 months (15. 75 years) • € 16, 250 statutory • € 33, 750 ex-gratia • No previous tax-free termination payment • Member of OPS • NPV of lump sum € 9, 000 • Average earnings in the past 36 months = € 35, 000 (€ 30, 000+€ 40, 000+€ 35, 000) / 3 24

SCSB example Basic exemption is = € 10, 160 + € 765 x 15 = € 21, 635 tax free Signs waiver on lump sum Increased exemption € 21, 635 + € 10, 000 = € 31, 635 However, can use SCSB if higher…. . € 35, 000 x 15 - € 0 = € 35, 000 15 Ex-gratia part of the redundancy is € 33, 750 All can be paid tax free 25

SCSB example Basic exemption is = € 10, 160 + € 765 x 15 = € 21, 635 tax free Does NOT sign waiver on lump sum Increased exemption € 21, 635 + (€ 10, 000 -€ 9, 000) = € 22, 635 However, can use SCSB if higher…. . € 35, 000 x 15 - € 9, 000 = € 26, 000 15 Ex-gratia part of the redundancy is € 33, 750 less € 26, 000 = € 7, 750 which is taxable 26

Agenda • Statutory Redundancy • Ex-gratia payments • Basic and increased exemptions • Standard Capital Superannuation Benefit (SCSB) • Waiving the lump sum from an Occupational Pension (OPS) • Other relevant facts 27

Waiving lump sum from OPS • Waiving all lump sums from all approved OPS relating to the employer paying the termination payment • Cannot waive part of the lump sum equal to the taxable amount of the ex-gratia payment • Personal Pension and PRSA lump sums are excluded • Waiver only applies to the tax-free lump sum i. e. does not apply to retirement lump sum above € 200, 000 28

Waiving lump sum from OPS • Can 25% of the fund be used in the increased exemption or SCSB? • If NPV is based on salary and service are you electing for this option at the point you take you benefits in the future i. e. annuity only? only • SHOULD PRSA be included? • What happens if you are 50+ but say you are not taking benefits at the point of leaving and then decide to take them shortly after? after 29

Waiving lump sum from OPS Big decision for the employee…. 30 • Higher lump sum payment now but no TFLS • More tax on termination payment now and retain right to TFLS at retirement • Immediate need for cash • Need to be looking at possible lump sum at NRA • Some will focus on the much lower NPV • Age will be a big factor as well as plans • Also DB v DC (commutation factors)

Agenda • Statutory Redundancy • Ex-gratia payments • Basic and increased exemptions • Standard Capital Superannuation Benefit (SCSB) • Waiving the lump sum from an Occupational Pension (OPS) • Other relevant facts 31

Transfer of OPS The usual transfer options and rules apply 32

Transfer of OPS Well………. • New employer OPS waiver only on the transferred amount • What happens if leave second OPS…. or third…. . ? • PRSA is still subject to restrictions • SHOULD the waiver carry? NIA view is if we know about it we cannot pay a lump sum 33 • Legislative difficulties for sure • Application form – does not ask the question anyway…. • What happens if you transfer OPS to PRSA BEFORE redundancy?

Limits • Maximum lifetime exemption limit of € 200, 000 From all redundancies • If taking second redundancy previous amounts taken into account • You still have the € 200, 000 tax-free retirement lump sum Statutory payments don’t count towards this • 34 Ex-gratia termination payments in excess of € 200, 000 are fully taxable

Subsequent claims Increased exemption • Only available where last claim was 10 or more years ago Basic exemption and SCSB • Generally available against any subsequent lump sum • Can only be allowed for once against a lump sum from the same employer or an associated employer • Lifetime limits apply in both cases 35

Pension contributions before redundancy • Employee / AVC PRSA can be made but must be paid before employment is terminated • Date employment terminated is the date of the P 45 • Can work really well where the current fund value is less than the Revenue maximum lump sum at NRA This is calculated on early retirement basis • In some cases can get relief at source e. g. pay date is before termination date! • Tax relief on pension contributions cannot be claimed against the taxable redundancy payment AFTER the fact 36

Last minute AVC example 37 • Frank is age 58 and being made redundant • 32 years service at date of leaving • NRA 65 • Current salary € 65, 000 • Current DC fund value € 70, 000 • Revenue maximum lump sum 32/37 x (1. 5 x € 65, 000) = € 84, 300 • Assuming he is not waiving lump sum could pay € 14, 300 • Maximum tax relief = 35% x € 65, 000 = € 22, 750

Pension contributions before redundancy • Employer contributions may be made in addition to but not instead of redundancy payment • Making up a shortfall of promised pension funding (within Revenue limits) • Must be made at the same time/before severance package is agreed • Employee cannot choose an employer contribution over a taxable termination payment – seen as tax evasion 38

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Slides are based on current legislation and are subject to possible change Terms and conditions apply. While great care has been taken in its preparation, this presentation is of a general nature and should not be relied on in relation to a specific issue without taking appropriate financial, insurance, investment or other professional advice. The content of this presentation is for information purposes only and does not constitute an offer or recommendation to buy or sell any investment, or to subscribe to any investment management or advisory service. New Ireland Assurance Company plc is regulated by the Central Bank of Ireland. A member of Bank of Ireland Group. July 2016