What are the tax implications of a severance payment on my pension?
May 4, 2023 | 40,00 EUR | answered by Edith Hartmann
Dear Tax Advisor,
I recently received a severance payment from my employer and am now concerned about the tax implications on my retirement. I am 55 years old and plan to retire in the next few years. Currently, I am still receiving my regular salary, but I will receive the severance payment as a lump sum in the near future.
My question to you is, what are the tax implications of this severance payment on my retirement? Do I need to pay taxes on a portion of the severance payment and how does this affect my retirement income? Are there ways to minimize the tax burden or optimize my retirement?
I am worried that the severance payment could impact my financial future and therefore want to understand all possible implications in advance. I want to make sure that I do not pay unnecessary taxes and secure my retirement as best as possible.
I thank you in advance for your support and advice on this matter.
Best regards,
Thomas Otten
Dear Mr. Otten,
Thank you for your inquiry regarding the tax implications of your severance payment on your pension. It is understandable that you are concerned about how the lump sum could impact your financial future. I would like to provide you with detailed information on this matter.
Firstly, it should be noted that severance payments are generally subject to tax. The severance payment is usually treated as other income and taxed at the individual tax rate. However, it may be possible to claim a reduced tax rate through the so-called "Fünftelregelung" (fifth rule) if the severance payment is made due to termination of the employment relationship. In this case, the severance payment is evenly spread over five years and only one fifth of the amount is taxed.
In relation to your pension, severance payments can have implications. The lump sum payment may result in higher taxation of your annual pension payments, as the severance payment is considered as other income. This may lead to an overall higher tax liability and therefore a lower net pension.
To minimize the tax burden and secure your pension as best as possible, there are various options. One option could be to invest the severance payment in a tax-advantaged retirement plan to benefit from tax advantages. The structure of the severance payment distribution can also have an impact on the tax implications. It is recommended to seek individual tax advice to find the best solution for your personal situation.
In conclusion, it is important to seek professional advice early on to assess potential tax consequences and plan accordingly. I am available for further questions and individual consultation.
Kind regards,
Edith Hartmann, Tax Advisor
