Life Planning On Redundancy

These days there is no guarantee of a job for life with economic or business changes forcing many employers to re-evaluate their business strategies. Inevitably many people, with sometimes lifetime service, are given no option but to take a Redundancy Package.

Quite often these packages have linkages to pension scheme options as well as different ways in which any tax-free payments are calculated.

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Understanding Pension Options On Redundancy

If you are a member of a Defined Benefit Scheme, you may need to weigh up whether the best option for you is to remain a member of the scheme (even though you may still be some years off retirement age).

Alternatively, should you take a transfer value to maximise your tax-free lump sum entitlements and maintain easier access to a pension pot that you could access from time to time?

Financial Issues On Redundancy

If it is relevant, do you need to consider using some of the tax-free payments to clear debt or finance children’s education and, if so, what are the financial consequences now and into the future?

All of these scenarios have long term implications and require serious consideration and experienced advice before anyone decides to accept an employer’s redundancy offer.

Questions you may have..

An employer must provide a minimum entitlement redundancy payment to an employee under the Redundancy Payments Act 1967 – 2014, but only when the employee has completed the statutory period of 2 years’ service with the employer and met the eligibility rules. The employer must also provide the employee with a minimum 2 weeks’ notice prior to dismissal. This notice period increases depending on the number of years’ service the employee has worked.

The eligibility rules state that the employee must be over 16, in insurable employment under the Social Welfare Acts, and have been in employment for at least 2 years.

The minimum statutory lump sum payment entitlement is Two weeks’ pay for every year of service and one further week’s pay subject to a maximum earnings limit of €600 per week.

It is important to note that you may reach an agreement with your employer to receive a redundancy payment above the statutory minimum sum and even in circumstances where the employee has worked less than the 2 year minimum requirement.

If the Lump Sum payment relates strictly to a statutory redundancy, then no tax will be applied to this payment. If, however you were to receive a lump sum payment as compensation for a loss of employment only part of this payment may be tax free dependent on the sum received.

Any non-statutory payment (also known as ex-gratia payment) over and above the Statutory allowance that is paid becomes taxable once a choice of three tax-exempt options have been availed of which can be found at the following link:

http://www.revenue.ie/en/employing-people/what-constitutes-pay/what-pay-includes/lump-sum-payments.aspx

An ex-gratia redundancy payment is exempt from income tax, USC and PRSI (up to a lifetime limit of €200,000) based on the higher of three calculations:

The Basic Exemption
The Increased basic Exemption
The Standard Capital Superannuation Benefit (SCSB)

If the SCSB method is deemed to provide the highest redundancy payment, then the employee must choose whether to waive or retain their right to a pension lump sum. The choice of whether to waive or maintain the right to a Pension lump sum depends on whether prior redundancy payments have been taken or not and if the €200,000 limit is or will be exceeded upon the taking the ex-gratia payment.

It would only make sense to sign a waiver (Form SCSB2) if getting the higher tax-free lump sum redundancy payment now was used for a vital personal need or where there is a period of more than 10 years to reaching the State retirement age and the funds were being used to clear interest bearing debt.

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