About to Access your Pension? Confused about your options?
Accessing your Pension can be a confusing time. You want to make sure you maximise your tax free lump sum entitlement and also ensure you have enough income for the rest of your life. This means it is crucial you understand your retirement planning options, and seek pension advice before making the next step.
Before you make your decision, you will need to understand and give careful consideration to the following:
· How do you maximize your Tax Free Lump Sum entitlement?
· How much income you will get from your pension each week/month?
· How long will your pension income last?
· What happens to your pension if you die?
· What income tax will you pay on your pension income?
What happens when you access your pension?
When you access either a Personal Pension or Company / Occupational Pension or PRSA Pension, you will access the Pension under 2 headings:
· Tax Free Cash Lump Sum
· The balance of the Pension is taken in the form of an Annuity or Approved (Minimum) Retirement Fund also known as an ARF & AMRF
The tax free lump sum entitlement can be calculated in one of 2 ways (depending on the type of pension you are accessing). These are:
1. A Tax-Free Lump Sum equal to 25% of the value of the Pension Fund or in some cases,
2. A Tax-Free Lump Sum no more than 1.5 times your pre-retirement income
In both cases the tax free lump sum is capped at €200,000. In most cases you will be required to use the residual balance of the pension to either:
· Purchase an Annuity or
· Invest in an ARF / AMRF (Approved Retirement Fund / Approved Minimum Retirement Fund)
What is an Annuity?
An annuity is a financial product whereby after taking your tax-free lump sum from your pension fund you elect to allow the insurance provider / pension provider (or another insurance provider / pension provider) to retain ownership of your residual pension fund and in return they will give you a guaranteed income for the rest of your life. Sometimes this annuity income will also allow a partial income payment for your spouse in the event of your subsequent death.
The obvious advantage here is the security of income but the disadvantage is that you will have to live a long and healthy life before you eventually get back the value of your residual fund by way of income over your lifetime. There are various add ons to annuities such as a partial spouse payment.
What is an Approved Retirement Fund (ARF)
An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money invested after retirement, as a lump sum. You can withdraw from it regularly to give yourself an income, on which you pay income tax, PRSI and Universal Social Charge (USC). It allows you to retain ownership of your funds. An ARF is established with your current insurance provider or another provider on the market if you so wish. These funds are then invested in much the same fashion as your original pension (but we recommend a conservative investment approach at this stage of your life). You then have the option of taking income from the ARF fund as and when you see fit (subject to a minimum of 4% per annum from age 60).
The above is a very brief summary of your available options for pensions planning. For more information and or pension advice, contact Guardian Wealth:
Wexford: 053 9110380
Dublin: 01 5267770
COMPLIANCE & FINANCIAL MANAGER
Michael has been providing tax, investment and lifetime financial planning advice to clients since 2005. He has an in-depth understanding of Business Owners and their requirements, which allows him to guide his clients through the complex world of long-term financial planning.