Pension Actual value

[artur]

I am trying to work out approx how much a pension pot of 1million for example is actually worth in my back pocket. If i have a pension worth 1 million and decide to retire at 55. How much is that pension actually worth if i follow the 4% rule.
Here is my understanding. 1) 25% is tax free upto 200k so 800k left. 2) 500k of this is taxed at 20%.
1) 200k to me
2) 400k to me . 100k to taxman
3) Now there is 300k left that is taxed at ??

A) is this how pensions actually work?
B) if correct how does item 3 work
C) How does an Arf come into play here?
D) I think in ireland you must drawdown 4% minimum. Is that correct.
C) say i retire at 55, and have my own person cash to cover the first 5 years, can i defer steps 1,2,3 above
D) if someone has an irish related link that explains all this i am happy to read.

 

[spinuscyn]

@artur So usually you can only take 25% of the total pot as a lump sum.

in yiur example of 1million this would be 250,00, 200,000 tax free and then 50,000 taxed at 20% - so a total lump sum of 240,000.

This leaves 750,000
You could put this into an annuity (guaranteed income) or an ARF where the money remains invested and you have to draw down a minimum of 4% each from age 61, (this rises to 5% at 71).
Money from an ARF or annuity is fully taxable at your marginal rate. The theory is that most people will be earning less in retirement than when working so should be paying a lower rate of tax.

4% of 750,000 would be 30,000 a year, the amount of tax you pay would depend on your tax credits and any other income you had.
I 30,000 was your only income then a tax calculator suggest you would pay about 4,000 a year in PaYe, usc and PRSI giving an effective tax rate of 13%.

Once yiu reach 66 then PRSi is no longer payable but presuming you qualify for a full state pension up your income would also increase…

So hard to give exact value of your pension.. but hopefully gives some idea

 

[newlyconverted101]

@spinuscyn You can take the whole lot as a lump sum if you wish, it will just be taxed

 

[spinuscyn]

@newlyconverted101 Ya kinda

I think there are rules saying 25% max, but if you put the remainder in an ARF nothing stops you taking it all out instantly and paying the tax.

Generally a bad idea I guess

 

[newlyconverted101]

@spinuscyn There isn no such rule, you can take 25% tax free and the remainder as a taxable lump sum , nothing to do with arf

 

[spinuscyn]

@newlyconverted101 Ok sorry

 

[newlyconverted101]

@spinuscyn Ud better be

 

[spinuscyn]

@newlyconverted101 Of course

 

[ecsid]

@artur The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). So that's the 299k, not the next 500k.

Any amount in excess of €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).

From this point of view, there is probably little or no benefit in withdrawing any more as a lump sum than the first 20%. Drawing down normally will see normal PAYE rates, which will probably result in a lower average tax rate than the lump sum rates beyond the tax free threshold.

 

[artur]

@ecsid Ok. So worse case the actual value is:
1) 200k to me (200k taxfree allowance)
2) 240k to me. 60 k to taxman (20 % tax on upto 500k)
3) 300k to me. 200k to taxman

A) Total 740k
B) In the real world, item 3 per tax i.e the 500k would go into the arf.

Is A and B correct?