Lump Sum & ARF when retiring a Pension

When retiring a Pension into a Defined Contribution post Retirement structure, the pension-owner can receive a 25% lump sum and the tax treatment is as follows:

• The first €200,000 of the lump sum is tax-free. The next €300,000 is taxed at 20% and the balance of any 25% lump sum (> €500k) will be taxed at the Marginal Rate of Tax

• The 75% Remainder goes to an ARF.

For example, assume a pre-Retirement Pension is valued at €900,000 and the Individual has not retired any previous Pensions. Assume that the person would like to go down the traditional route and set up an ARF. The following would apply:

• The Gross Lump Sum would be €225k. The first €200k is tax-free and the €25k balance is taxed at 20%. Therefore, the Net Lump Sum would be €220k

• The 75% Remainder would go to an Approved Retirement Fund (ARF)