If you are an employee who has been put in a voluntary redundancy situation, it is vitally important that you understand all of your options. Those who have had their contracts of employment terminated and have been made redundant should be provided with leaving service options by their scheme administrator. They may also be entitled to a redundancy payment. Full-time employees paying Class-A PRSI who have worked continuously for their employer for at least 104 weeks (2 years) will normally qualify for Statutory Redundancy. Employers may also at their discretion make ex gratia redundancy payments to employees being made redundant.
Statutory redundancy payments are tax free and the payment equates to 2 weeks pay for every year of services plus an additional weeks pay (capped at €600).
Ex gratia payments are potentially taxable but there are many exemptions available which are outlined below.
How Ex Gratia Payments work
There are 3 possible exemptions to taxation on Ex Gratia payments which are known as the Basic Exemption, Increased Exemption and the Standard Capital Superannuation Benefit (SCSB). The highest available exemption could be applied to an Ex Gratia payment.
The Basic Exemption is €10,160, plus €765 for each complete year of service.
The Increased Exemption is the Basic Exemption plus an additional €10,000 but less the value of any pension lump sum received or to be received under an occupational pension scheme linked to this employment.
Standard Capital Superannuation Benefit (SCSB):
The SCSB is a tax relief that normally benefits people with higher earnings and long service. It can be used if the below formula gives an amount greater than the Basic Exemption or the Increased Exemption.
The calculation for the SCSB is (A x B)/15 – C where:
A: is the average annual remuneration for the last 36 months of service
B: is the number of complete years of service
C: The amount of any tax-free lump sum received or to be received under the occupational pension scheme (if any)
Any ex gratia payments in excess of the highest available exemption would be taxable at the marginal rate of the individual. There is also a lifetime limit on Tax Free Ex Gratia payments of €200,000.
Although an employee may be enticed to sign the waiver given the potential for a higher redundancy payment now, this benefit should be weighed against the loss of the ability to take a lump sum from the scheme or any Personal Retirement Bond purchased by the scheme Trustee at a future date.
Paul, who has over 25 years of service with his employer, is offered redundancy of 6 weeks for each year of service with the company and is currently on a salary of €52,000. There is a potential lump sum from the scheme of €78,000 as advised by the pension scheme administrators. Paul’s calculation of redundancy will be as follows:
Total package offered is salary x service x weeks per year:
€52,000 x 25 x (6/52) = €150,000
Statutory redundancy is 2 weeks’ salary per year worked, capped at €600/week. (With one additional week):
(2 x €600 x 25) + €600 = €30,600
The amount offered in excess of statutory redundancy is considered ex gratia:
€150,000 – €30,600 = €119,400
Using the exemption calculations we ascertain the following:
|Waives Right to Pension Lump Sum||Retains right to Pension Lump Sum|
|Basic Exemption||€10,160 + (€765 x 25) = €29,285||€10,160 + (€765 x 25) = €29,285|
|SCSB||(€52,000 X 25)/15 – €0 = €86,667||(€52,000 X 25)/15 – €78,000 = €8,667|
|Highest exemption is €86,667||Highest Exemption is €29,285|
On this basis the taxation of the total package would be as follows:
|Payment||Waives Pension Lump Sum||Retains right to Pension Lump Sum|
|Ex Gratia Tax Free||€86,667||€29,285|
|Ex Gratia Taxable||€32,733||€90,115|
|Tax @ 48%* on taxable element||-€15,711||-€43,255|
|Total Redundancy Payment||€134,289||€106,745|
There is a significant difference in the net figure and so Paul decides to waive his right to a tax free lump sum in the future.
However, two years later at the age of 60, Paul decides to retire his pension. Following advice from his financial advisor, he is made aware of the retirement options available to him. The scheme valuation of his pension at that point is €500,000. The advisor points out that under normal circumstances Paul could be entitled to up to 25% of his pension tax free.
However, as he has waived his right under the redundancy this option is no longer available to him. In this case, Paul has lost the opportunity of taking up to €125,000 tax free from his pension scheme.
This case is actually something very similar to one we worked on recently and in this example, there was a cost to the client of over €97,000. This is hugely significant and something that is not properly discussed with employees at the time of a redundancy.
We have worked with many companies over the past decade from large multinationals to smaller local companies who need advice in the area of redundancies and pension management for their employees.
For more information, give us a call on 025-30588 or book a complimentary chat by clicking this link. We are available for in-office consultations as well as zoom, phone, or any alternative you prefer. Thanks and stay safe.
Adrian Godwin is a Senior Financial Consultant and the co-founder and managing director of Oaktree Financial Services. With a background in accounting and tax advising, Adrian specialises in estate planning and wealth management.Adrian offers clients reassurance through best practice solutions. His unique skill set and qualifications enable clients to develop comprehensive life plans that align with their goals.