Gintax answers Sunday Independent readers’ questions on tax.
Article published on 2 August 2020

FUNDING ADULT CHILDREN WITH PENSION FUNDS

Q. I have a substantial pension pot of around €350,000 and I am considering withdrawing around €150,000 of it to help two of our children buy their houses and somewhat reduce the size of their mortgages. The plan would be to give each child €75,000 each. Is there any tax-efficient way I can withdraw such a large sum when I am gifting it to my children - without incurring the normal current tax rate on pension drawdowns? I am currently 61 years of age, I work part-time and I have a small farm. In time, hopefully I will also qualify for a pro-rata contributory State pension. My wife also works part-time and we are jointly assessed but even with all incomes combined, we are still in the lower bracket. Pat, Co Offaly

A. Depending on your circumstances, there are different pension options for you to consider at retirement. Broadly, you can take a lump sum and can use the balance to avail of a pension income stream (known as an annuity) and/or reinvest the balance in a further retirement fund, such as an Approved Retirement Fund (ARF).

The amount of cash you can take out depends on the type of arrangement you have. Cash lump sums are tax efficient - up to certain levels. Most people will choose to take the attractive tax-free retirement lump sum option of up to €200,000 from their pension fund, subject to various rules. The tax-free amount is capped at 25pc of your pension - about €88,000 for you.

You mention that you are still in the lower tax bracket, so if the pension rules allow, you could take out a further sum so the amounts subject to lower rate tax are maximised.

Given this income bracket is a maximum of €70,600 for married couples in 2020, it would probably only increase the available lump sum by a modest amount.

A withdrawal of anything further would be subject to top income tax rates. This would not appear to be tax efficient for you, as income in future years would likely still be in lower tax brackets.

A pensions adviser will be able to talk you through options in relation to your pension and work out how much income in retirement you could have after withdrawal of any lump sum. Your wife's position in the event of your death should also be considered.

You should then be able to make an informed decision taking into account your other income and lifestyle requirements. At that point, you can decide whether you have the capacity to make the proposed gifts. Generally, parental support is most needed by adult children when they are acquiring their home. However, you should ensure that your future is not compromised.

You mention the gifts would reduce the size of your children's mortgages. Alternatively, you could use any excess annual income or funds to help with your children's mortgage repayments on an ongoing basis. This would give you further flexibility if your current or future means are not sufficient to make a significant cash gift now.

Any gifts should not give rise to tax issues as your children's lifetime tax-free Capital Acquisitions Tax (CAT) parent thresholds are €335,000 each. In any case, the first €3,000 of annual gifts received from any person are exempt from CAT.

It would also be wise at this point to consider planning for your entire estate. The farm and family home can be contentious so it is best to put a plan in place and ensure your will is up to date.