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Approaching Retirement - Tax-Free Lump Sum

Most people who have built up a pension in Ireland are able to take 25% of their savings as a lump sum on retirement*.

The first €200,000 is tax-free, and the next €300,000 is taxed at the standard rate of 20%.  In general, this is a huge tax saving, and is well worth doing.

But for many people, dealing with a substantial lump sum like this is new, and requires some careful thinking.  What should you do with the money?

Moneycube identifies three approaches to investing your lump sum.

Dimitry Anikin Zczeskiwfyo Unsplash &Ndash; Tax-Free Lump Sum

First, sort the basics

Moneycube can help you put your tax-free lump sum at retirement to work, but we always advise sorting the basics first.  In short, that means:

  • Paying down your debts. Your lump sum at retirement is an ideal opportunity to make a clear any loans, including home loans.  Most retired people prefer to be mortgage-free before adding to their investments.
  • Keeping a cash fund. It’s sensible to retain a certain amount in cash to cover unexpected outlays.

Invest the rest?

With inflation rising, and interest on bank deposits at near zero levels, investing your lump sum is a solid option for many retirees.

In general, there are three possible approaches: investing for growth, for security or for income.  The right mix for you depends on your circumstances.

In each case, Moneycube can recommend appropriate investment funds.

1. Investing for growth

If you can afford to leave your money alone for some time, then investment funds which focus on companies with high-growth potential are a strong option.  Over time, investing in equities consistently outperforms other asset classes.

If you have invested the remainder of your pension fund in an annuity, for example, you may not intend to touch your lump sum for many years, giving the best possible chances of growth.

But over short term, returns can be volatile. That’s why it’s worth considering your overall financial security.

2. Investing for security

Your financial security is vital at retirement.  You can structure your investments to protect yourself against key financial risks such as a jump in inflation which erodes the value of your income, or a fall in the markets which erodes the value of your wealth.

The best route to take here is to invest in a broad selection of assets.  That way, you will have spread your risk if any one industry or geography should fail to perform.

Many investors choose multi-asset funds and absolute return funds for this purpose.

3. Investing for income

Lastly, you may wish to take a regular income from your investment.  If that’s your priority, an investment fund which is focused on companies with a strategy of paying regular dividends will help you draw a regular income without eating into your capital.

We can help you set up an investment to pay a monthly, quarterly, six-monthly or annual income.  Typically, you can choose to pay yourself either a Euro amount, or a percentage of the fund.

Because the profits on your investment are taxed under Ireland’s exit tax regime, the money you take is not liable to income tax.

Time to talk?

Everyone’s situation is different, especially at retirement. It’s worth thinking carefully about the right balance between growth, financial security, and income as you invest your tax-free lump sum.  Moneycube can help.

If you’re considering your investment options at retirement, get in touch and we’ll help find the right solution for you.

* It’s a bit different if you’re in a company scheme or occupational pension. Here, you’ll probably be entitled to take one-and-a-half times your final salary – still a very attractive offer for many people.


Read on: Moneycube retirement planning blog