Frequently Asked Questions
What happens when I access my 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 and
- 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:
- A Tax Free Lump Sum equal to 25% of the value of the Pension Fund or in some cases,
- 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)
Understanding Your Retirement Options
Before you finalize your decision on which options to choose when accessing your Pension, 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?
At this point, you may even have received communication from your pension provider requesting you to complete a form which asks you how much ‘Tax Free Cash’ you wish to receive and also asking you to choose between an’ Annuity’ or ‘Approved (Minimum) Retirement Fund (ARF / AMRF)’. It is very important that you select the right options, particularly with reference to the above considerations.
Terms such as ‘Tax Free Cash’, ‘Annuity’, ‘Approved (Minimum) Retirement Funds (ARF / AMRF’) are issues we deal with every day, and we understand what these options really mean for you and your family.
Before making any decisions, it is crucial that you understand what the full long-term implications of each of these options means.
These decisions are very specific to you and to your personal needs and circumstances.
For a full explanation on how to access your pension and understand your retirement options click here to email Joanne and obtain our Pension Access Explained Guide.
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 in the event of your death but the basic concept stays the same in that purchasing an annuity involves giving up ownership of your residual pension fund in return for a guaranteed income.
For many people the notion of giving up ownership of the pension fund allied to historically very low annuity rates leads them to ask the question – is there another option?
The answer is Yes– you may prefer to elect to use the residual fund to invest in an ARF / AMRF – an Approved Retirement Fund / Approved Minimum Retirement Fund.
What is an Approved Retirement Fund / Approved Minimum Retirement Fund?
If you decide against the annuity options then the alternative is an ARF / AMRF.
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 / AMRF 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 obvious advantage here is deciding what income you want to take each month / year, and being able to vary the income, and also the ability to pass the unspent portion of the ARF to your next of kin in the event you pass away. The disadvantage is that you spend it to quickly and end up for example at age 80 with nothing left.
Annuity or Approved 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.
What is an Approved Retirement Fund? (ARF)
The ARF option 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. 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). You own the ARF fund. How long it lasts is up to you and your advisor!
What’s right for me?
There are many methods of weighing up which option is best. Trying to decide which route is best for you, Annuity or ARF, can be difficult. The best way of figuring it out is to compare both under the following headings:
- Certainty of Income
- Investment Risk
- Value for Money
1) Certainty of Income – an annuity provides for the greatest level of certainty of income as the insurance company commits to providing a fixed level of income for life. This kind of certainty allows retirees to plan their finances with confidence.
An ARF is different, it allows an investor to drawdown anywhere from 4% to 100% of the fund value each year. If it is spent to quickly then you could have a situation whereby the ARF has ‘run out’ before the investors passes away, leaving them without income in later years.
The ARF requires an understanding and detailed planning of what level of drawdown it can sustain in order to provide income for life.
2) Flexibility – once the decision to purchase an annuity is made, that’s it, you have your annuity for life. If an ARF is chosen it still allows an investor to convert the ARF to an annuity later.
3) Investment Risk – there is no investment risk with an annuity. The reisinvestment risk with an ARF. ARF investment decisions should be made very carefully and in most cases conservative funds should be chosen. Provided conservative funds are chosen and the ARF is reviewed regularly with your Financial Advisor then investment risk can be minimized.
4) Inheritance – inheritance opportunities for annuities are very limited. Most annuities allow for a continuation of income,perhaps 50%, to a spouse in the event of the annuity holder passing away.
However, in the event of death of an ARF holder, the full value of the ARF passes to his / her spouse. In the event of subsequent death of the spouse the full value of the ARF passes to his / her estate/ children etc.
5) Value for Money – this is possibly the hardest question. An annuity offers decent value for money if you plan on living a very long time. It’s fair to say if you purchase an annuity you would have to live to at least late 80’s in order to get back from the annuity payments what you purchased in the beginning.
Your health is a key consideration. An ARF can be very good value for money provided it is well managed by you / your ARF Provider and your Financial Advisor.
Conclusion- It is fair to say that annuities are less attractive than they have been for many decades due to the poor annuity rates offered by many of the annuity providers in the market. This may change in the future.
An ARF investment may be a prudent step in many cases as it offers flexibility of income, attractive inheritance options in the event of death and also the ability to convert the ARF to an Annuity at some point in the future.
For a full understanding on Annuity or ARF – which is best for you? click here to email Joanne and obtain our Pension Access Explained Guide.
Can I Withdraw An Income From My ARF?
Withdrawing Income From An ARF
You 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).
Withdrawing Income From An AMRF
You can only draw 4% per annum maximum of the value of the AMRF each year until age 75. At age 75 the AMRF reverts to an ARF.
What Happens If I Die?
Any value contained in your ARF / AMRF Fund forms part of your estate on death.
Which Pension Provider Do I Establish My ARF With?
You are free to establish your ARF with your existing Pension Provider but you are also free to look at ARF options with all other ARF providers on the market. Furthermore if you have an existing ARF but are unhappy with the performance of it then you are also free to transfer your ARF to a new ARF provider.
The choice of ARF provider can vary depending on many factors but we generally use the following criteria when deciding the most appropriate ARF provider with which to place our clients ARFs:
- Financial Strength of the ARF Provider
- Investment track record
- Access to viewing your account online / the ability to check your account balance online
- Competitive Fees / Charges
- Large range of conservative risk funds to choose from
I always found them to be ethical, client focused and more than willing to go the extra mile for me.
Michael has always fulfilled his initial commitment to undertake regular reviews and engage in proactive meetings which keep me well informed. I have no hesitation whatsoever in referring them on to someone looking for a client-focused financial advisor.