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Sunday 11 December 2016

Must I pay tax on my pension when I draw it down? I thought pensions were tax-free?

Gerry Stewart

Published 02/10/2016 | 02:30

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'. Stock photo: Getty
Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'. Stock photo: Getty

Do I have to pay tax on my private pension when I draw it down, and if so, do I also have to pay the Universal Social Charge and PRSI on it? Similarly, is the state contributory pension taxed too?

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Bernie, Crumlin, Dublin 12

You are usually entitled to draw down part of your private pension fund as a tax-free lump sum. This is normally 25pc of the fund value for private pensions, but it can also be a multiple of salary and service if your private pension is an occupational pension scheme. The maximum tax-free lump sum you can receive from all pension sources since December 7, 2005 is €200,000. The next €300,000 is subject to the standard rate of income tax. Any balance is taxed at your marginal rate plus the Universal Social Charge.

After drawing down your tax-free lump sum, any income or capital you draw down from the balance is subject to taxation. The state contributory pension is also taxable, but you are unlikely to pay tax if it is your only income or if your combined private pension and state contributory pension is low.

You do not have to pay PRSI on annuity (guaranteed income for life) payments. However, 4pc PRSI is due on all withdrawals from Approved Retirement Funds (ARFs) and vested PRSAs before the age of 66. There is no PRSI liability from the age of 66 onwards. You do, however, have to pay the USC.

My father has been getting the contributory Irish state pension for the last 10 years. He also receives a British retirement contributory pension of around £100 per week and has been getting that pension for the last 10 years. He recently got a letter asking him to declare if he has any other 'income'. Does his British pension count as income, and if so, what impact might that have on his Irish pension? He has never declared this pension to Irish tax authorities.

Paul, Kilmainham, Dublin 8

Your father has to declare all income including his British pension, even though he has been paying British tax on it. A double taxation agreement exists between Britain and Ireland, so he may be exempted from tax in Ireland.

I am an Irish citizen but have lived abroad on and off for many years. Are there any residency conditions which must be complied with to get the state pension?

Donnacha, Glencolmcille, Co Donegal

There are many rules associated with getting the state contributory pension. These are very complex.

Typically, you must have started paying social insurance before reaching the age of 56 and you must have paid at least 520 full-rate social insurance contributions (if you turned 66 before April 6, 2012, you need 260 paid full-rate contributions). In addition, you must have a yearly average of at least 48 paid and/or credited full-rate social insurance contributions from 1979 to the end of the contribution year before you reach the age of 66. If you do not have this 48 paid yearly average, you may qualify if you have a yearly average of at least 10 paid and/or credited full-rate contributions from 1953 (or the year you started insurable employment, if later) to the end of the contribution year before you reach age 66.

You mention that you lived abroad for many years. Working abroad does not preclude you from applying. If you paid social insurance contributions in an EU state or a country with which Ireland has a bilateral agreement (typically the USA, Australia, New Zealand, Canada and a few others), the contributions you made there may also be added to any Irish contributions you may have made.

My brother lives in Australia and is likely to continue to do so for the rest of his life. He has a private Irish pension which was initially set up about 25 years ago (before he left for Australia). My brother paid money into that pension until he emigrated. He now wishes to transfer this pension to me now. Is this possible - and if so, will I (or he) have to pay any tax on such a transfer?

Peter, Baltinglass, Co Wicklow

your brother cannot transfer the pension to you now. However, he may be able to transfer the pension on his death.

If he dies before his normal retirement age (which is usually between 60 and 75) and before drawing down his pension, the pension fund is normally paid to his estate and distributed accordingly.

If he has already retired before he dies and is in receipt of a pension income from this pension, then his passing the pension fund to you on his death will depend on whether it is an annuity or an Approved Retirement Fund (ARF). If an annuity, then it cannot pass to anyone. If it is in an ARF, then the remaining fund is paid to your brother's estate and deemed a taxable inheritance in your hands.

Under the Capital Acquisitions Tax (CAT - also known as inheritance tax) threshold, you are entitled to receive the first €30,150 without tax and the balance would be taxed at 33pc.

On a quite separate note, if your brother is currently drawing an income from this pension, this is taxable, but he could give you up to €3,000 per year (after he pays tax) using the annual small gift exemption and you would pay no tax on this.

Are pension mortgages a good idea - and are they still offered in Ireland?

Rob, Shankill, Co Dublin

They are a good idea in the right circumstances and with the right advice.

Essentially, you are asking a lender for an interest-only mortgage until your pension fund matures. When your pension fund matures, you are using part (or in certain cases, all) of your pension fund to clear the mortgage. In the meantime, you may also be making contributions to your pension and paying interest on the mortgage. Depending on the type of pension you have (either personal - including PRSAs, or occupational pension scheme), you may be able to take either 25pc of the fund as a tax-free lump sum to clear the mortgage or you may be entitled to use a multiple of your salary and service (normally up to a maximum of one-and-a-half times salary). You may also be able to fully encash your remaining pension fund (subject to tax) and use the full pension fund to clear the mortgage.

Pensions are very tax-efficient as tax relief is allowed on contributions. In addition, the funds grow tax-free and you are normally entitled to a tax-free lump sum at retirement. The main concern with a pension mortgage is that you are using all or a part of your pension fund to clear a mortgage, so your income in retirement may be diminished. Careful planning is therefore required. That said, if the pension fund is buying a property that will provide a rental income in retirement, you may deem it to be a good investment as the rental income will replace your potential pension.

It is important that your pension can mature at the same time as the mortgage is due to be cleared off. With personal pensions, they tend to mature from age 60 onwards so there is no point in having an interest-only mortgage to the age of 55 as you may not be able to access the pension fund to clear the mortgage at that time.

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

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