A retirement guide: Making the most of your tax-free lump sum

If you are planning to take a cash lump sum when retiring, then this blog is for you. Whether you want to travel, support loved ones, or simply enjoy greater financial freedom, understanding your options can help you make confident choices. In this blog we review some of the options available to you, but it is not an exhaustive list. If you think one or more of these options might be suitable to you, you can then discuss them with your Financial Broker or Advisor who will be happy to assist you with further information.

Retirement tax-free lump sum/tax-free cash – What is it?

When you retire, you are entitled to take a cash lump sum from your retirement fund. The lump sum is calculated based on the type of pre-retirement pension contract you've been saving into and is tax-free up to a maximum lifetime limit of €200,000.

If you are lucky enough to have a larger pension pot, then the next €300,000 of any lump sum is taxable at 20%. Anything over that €500,000 in total will be taxable at the retiree’s marginal rate of income tax, USC (Universal Social Charge) and PRSI (Pay Related Social Insurance), if applicable.

Did you know, only 42% of older people feel adequately financially prepared for the rest of their retirement₁ .

How is the tax-free lump sum calculated?

The amount of the cash lump sum you can take depends on the type of pension contract you had prior to retirement. Have a look below to see which of the two categories you fall into:

Benefits of receiving a tax-free lump sum

• Immediate access to money when life is changing. As you reach retirement, having a tax free lump sum gives you financial breathing room at a time when routines, income sources, and lifestyle needs are shifting.
• Greater peace of mind during a major life transition. Retirement brings not only financial decisions but also emotional and identity adjustments. Access to a lump sum can ease worries about stability and help build confidence as you move from career income to pension income.
• A stronger platform to shape the next phase of your life. A tax free lump sum empowers you to plan your retirement more intentionally, whether that means planning future cash flow needs, or redefining your lifestyle priorities.

Utilising your tax-free lump sum

Below are some examples of how you could earmark your tax-free lump sum. This will of course be different for everyone, but might give you a few ideas on utilising your tax-free lump sum. 

Option 1: Enjoyment

You’ve worked hard to build your pension savings, so it’s only natural to enjoy some of your tax free lump sum. Whether it’s a dream holiday, a home upgrade, or finally buying something you’ve always wanted - this is your moment.

Among consumers who have retired, 28% reported they spent their lump sum on things like travel; home improvements, money for family, living expenses or a new car₁.

But remember it’s important not to spend it all straight away. Your lump sum is a valuable financial resource for the years ahead, so balancing enjoyment with long term planning is key.

Option 2: Clear outstanding debts

Next, it’s a good idea to think about your financial security. Start by sorting out any debts or loans you might have:

• Pay off your mortgage. It’s usually the biggest debt and clearing it can give you peace of mind.
• Get rid of car loans or personal loans. These can eat into your budget, so clearing them can make a big difference.
• Tackle high-interest debt. Credit cards and other high-interest loans can cost a fortune over time, so it’s smart to deal with these first.

Among consumers who have retired, 28% reported they paid off their mortgage or other debts₁.

Option 3: Emergency fund

A simple way to protect yourself financially. Knowing you have a cushion to fall back on can reduce stress and help you enjoy your retirement.

Why is this important? It gives you immediate access to cash when life throws unexpected expenses your way. Whether it’s a car breaking down, a medical bill, or an urgent home repair, you’ll have the money ready without needing to borrow or dip into your savings.

Option 4: Save or re-invest.

Many people are surprised to learn that most retirees don’t simply spend their lump sum - many save or re-invest a portion.

Re-investing with Zurich can help your money work harder. Retirement can last 20 years or more, so reinvesting a portion of your tax-free lump sum could help you have the financial strength to maintain your lifestyle throughout retirement - not just the first few years.

By reinvesting some of your tax‑free lump sum into an investment bond, you can also choose to commence a regular income from it. This can provide an additional, flexible income stream to complement your pension, helping to bridge any income shortfall and support your lifestyle throughout retirement.

Your pension didn’t grow overnight - it grew because you committed to a long-term plan and trusted Zurich to manage your money with care.

Among consumers who have retired, 59% reported they reinvested or saved their lump sum₁.

Zurich’s investment bond for lump sum investors

A Zurich investment bond is suitable if you have a lump sum of money to invest, such as existing savings or a cash lump sum at retirement. Your money can be invested in Zurich’s range of investment funds including the risk-rated Prisma funds, explored in more detail below.

Choose if:

• You are looking to invest for seven years or more.
• You have over €5,000 to invest.

The benefits:

• You have an excellent investment fund choice to suit your attitude to risk.
• You can switch and move between a range of investment funds.
• If you need access to your money, that’s no problem as there are options available that give you access to your money without any penalties.
• You can check the value of your investment bond any time by logging on to Zurich’s online Client Centre.

Introducing Prisma multi-asset funds

If you don’t have the time or desire to dive into the complex world of investments yourself, the Prisma fund range may be the answer. It brings you five funds targeted to five attitudes to risk. The funds are designed to reflect a range of risk levels, so whatever your appetite for risk there is likely to be a fund to suit you.

What do the funds invest in?

The five Prisma funds invest in a mix of assets including equities, bonds, property, alternatives and cash, all of which provide the potential for investment growth over the longer term.

Why invest in the Prisma fund range?

Risk Targeted: Investment funds designed to target volatility bands to match your risk/return preferences.

Built on Expertise: The team at Zurich Investments consists of experienced and highly-qualified investment specialists, with a proven track record of making the right asset allocation decisions at the right times.

Actively Managed: The Prisma Funds are actively managed which means that it is our fund managers that make the specific investments within each fund. It also means our investment managers can respond to market movements as and when they happen.

Diversified: Each multi-asset fund is diversified and can include equities, bonds, property, cash and alternatives. Alternatives includes a range of commodity exposures including energy, industrial metals, precious metals, soft commodities amongst others. It can also incorporate other diversifying asset classes.

Zurich’s Small Gift Saver

Also called the Child Savings Plan, Zurich’s Small Gift Saver is designed to help you make the most of the Small Gift Exemption.

You know how small, regular contributions can add up to something big over time. Your pension is proof of that. A Child Savings Plus or Small Gift Saver works the same way. It’s straightforward and managed by experts to help you save for a child or grandchild’s future.

What would happen if I ‘gifted’ €3,000 to my daughter – each year?

Assuming a parent gifted €3,000 into an account,which gave no interest nor any fund growth, there would still be a considerable fund available to your daughter. And she’d have no liability to any Capital Acquisitions Tax on that fund.

After 10 years, she would have €30,000 available to her for a house deposit, a new car or to fund that trip around the world.

See how your gift could grow over time using Zurich's Small Gift Saver

By choosing to invest your yearly gift, it’s possible for the total value to surpass the original investment. Assuming an annual growth rate, your gift of €3,000 per year over 10 years could be worth more than the total amount saved. Investing for growth helps you make the most of every contribution.

Take the next step

Professional advice is invaluable. It makes sense to talk to a financial broker or advisor regularly, before, at and after you’ve retired. They will be able to provide a complete financial review and advise you on the best way to manage your retirement fund to suit your needs.

Source: ₁Irish Life Tables 2015-2017, Life expectancy at birth and age 65 by sex, 2016. 

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.