The impact of temporary layoffs and redundancies on pensions

COVID-19 has had a serious impact on our economy and as a result many employees across the state have recently been temporarily laid off or made redundant by their employers. Gerard Tyrrell, Pensions Technical Support Assistant at Zurich, examines the impact of these two issues in the context of occupational pension schemes. 

Temporary layoffs

Generally speaking workers that have been temporarily laid off by an employer are still seen as employees, as their contracts of employment have not been terminated. Individual circumstances will differ, but the impact in terms of benefits under an Occupational Pension Scheme would likely be that those temporarily laid off employee’s would be classed as temporary absentees under the scheme’s rules and therefore not have a statutory entitlement to a Transfer Value or be eligible for Early Access to Benefits.

Redundancy

Those who have had their contracts of employments 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.

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.

Basic Exemption

The Basic Exemption is €10,160, plus €765 for each complete year of service.

Increased Exemption

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)  – C

                   15

where:

A: is the average annual remuneration for the last 36 months 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.

Example - John

• 15 years’ service
• Salary of €52,000 per annum for last three years
• Value of Future Pension Lump Sum: €30,000

John’s employer is offering a voluntary redundancy package of 6 weeks of pay for every year of service which John has accepted. The payments is broken down as follows:

We now calculate the value of the available exemptions, which will be impacted by whether or not John decides to waive or retain his right to a pension lump sum under the scheme.

In both instances the SCSB provides the highest available exemption.

On this basis the taxation of the total package would be as follows:

*Assumes 40% Income Tax & 8% USC. Actual rates of Taxation will depend on the individual’s circumstances.

Although John 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. It is key that John discusses these issues with his Financial Advisor who can analyse the pros and cons of each route and allow John to make an informed decision. 

Learn more

To find out more, simply contact Zurich Technical Services on 01 209 2020 or speak to your Zurich Broker Consultant.

The information herein is based on our current understanding of Revenue Law and Practice as at May 2020 and is to be considered as general guidance only. It is recommended that clients consider getting independent professional tax advice relating to their own individual circumstances.