What Are the Practical Decisions & Steps I Need to Take When Accessing My Pension?
Decision 1 – When Can I Access My Pension?
Your eligibility to access your Pension is directly related to the type of pension you have and your age. In most cases you cannot access your Pension until at least age 60, but there are some limited circumstances when you can access your pension lump sum from age 50. For example, if your pension relates to a period of previous employment, and you are no longer employed by that company, then you may be able to access your pension lump sum at age 50.
Decision 2 – Tax Free Lump Sum
There are different rules that apply when calculating the tax free lump sum you can take from your pension, but most pensions will allow you to take 25% of your pension fund as a lump sum, of which the first €200,000 is tax free. For example, if you had a pension fund valued at €500,000 then your lump sum would be 25% of €500,000 = €125,000. As the €125,000 lump sum is under the €200,00 limit this means the full €125,000 lump sum is paid tax free.
Here is a practical example of how the 25% tax free lump sum is paid.
Decision 3 – What happens with the balance of my Pension Fund after I take my Tax Free Lump Sum?
After you have taken your tax free lump sum you will have to decide what to do with the balance of your Pension Fund. The options here can vary but in most cases you will have to choose between:
- An Approved Retirement Fund (ARF) or
- An Annuity
What is an Approved Retirement Fund?
An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money with a pension company and it continues to be invested in retirement. You can withdraw from it regularly to give yourself an income. ARF income is assessable for income tax, USC & PRSI.
An ARF is established with your current pension 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. You also have 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 might end up for example at age 80 with nothing left in the ARF 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 pension company (or another pension company) 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. Annuity income is assessable for income tax, USC & PRSI.
Our article on ‘What are my Retirement Options?’ may be of interest to you if you want to know more about annuity and what happens, when you access your pension.
Annuity Or Approved Retirement Fund – What is 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:
1) Certainty of Income
2) Flexibility of Income
3) Investment Risk
5) Value for Money
Our Article on “What Are The Practical Decisions & Steps I Need To Take When Accessing My Private Pension?” will give you an insight to the important decisions that are right for you when accessing your ARF.
If I Choose an ARF, what should I Invest in?
All investment funds available to ARF investors work from a standardized risk rating scale, called the ESMA scale. This allows investors to understand the risk profile of their ARF investment.
The ESMA scale works on a 1 to 7 rating. A risk rated 1 fund is the lowest possible risk rating and would typically be a fund which comprised almost entirely of cash. A risk rated 7 fund however is the highest possible risk rating and would be comprised almost entirely of equities (stock & shares).
As a rule, we advise clients to consider taking a conservative investment approach with their ARF funds. We have developed several investment risk profiles at the more cautious end of the investment risk spectrum with all of the insurance / ARF providers we deal with. We have also developed a risk profiling tool for our clients so that we can establish what risk profile suits them best.
Can I Withdraw an Income From My 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).
What happens to my Pension/ARF when I die?
It passes to your estate.
How do I Choose which Provider to Establish My ARF with?
• 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.
Decision 4 – Who are we & why should you contact us?
Guardian Wealth are specialist Pension and Investment Advisors with an expertise in guiding our clients through all of the decisions they need to make when accessing their Pension Fund. We have a track record of almost 20 years in business and we currently advise our clients on over €100 million of Pension and Investment Funds.
We have agency appointments with most of the leading pension companies on the market so can not only advise you on the best path but we can also deal with all of the pension companies involved so make the process as smooth as possible.
Drawing down my Pension was a big financial decision and I was very happy I chose Guardian Wealth. Michael clearly explained my options to me and dealt with my insurance company to make sure it went smoothly. I now meet with Michael every year to make sure my retirement plans are on track. I have no hesitation in recommending Guardian Wealth’
I have been receiving advice from Jim Doyle in Guardian Wealth for 3 years. I was advised by a friend to use Guardian Wealth and so I contacted them when the time came to access my pension. Jim has been very good to me and has given me great advice over the years. He keeps in touch to give me updates on my pension and he is always available by phone if I have any questions. I am delighted that I am dealing with Guardian Wealth. They are a professional outfit and very straightforward to deal with.
My Retirement Fund is important to me. I wasn’t happy with the advice I was getting from my previous advisor and I didn’t feel there was a plan in place that was going to allow me to make the most of my Approved Retirement Fund. I researched a few firms, but Guardian Wealth seemed to give me the most practical advice. I now meet with Michael every year to keep on top of my ARF and make changes where needed. I am more than happy to recommend Guardian Wealth.