What happens when you retire
It is highly likely, in the Ireland we live in today, that during a person’s working lifetime they accumulate a number of different pension policies. Whether you have accumulated a number of funds or indeed a single arrangement, the decisions you make at retirement stage are crucial to your income in retirement and how your funds are subsequently distributed.
Before you decide to draw-down or retire any of your pension funds it is critical that you get good professional advice. This is a very complex area and the benefits you are entitled to at retirement depend on the pension structure you retire your funds from. David Peavoy has over 20 years’ experience working in the pensions industry and has been working with individuals on pension advice in Laois and indeed all across the country for a considerable length of time. At retirement, Peavoy Financial Planning, review your current situation, identify your needs and go through the choices you have with your accumulated funds.
We then put together the most appropriate tax efficient plan tailored to your individual requirements, so you can get on with enjoying your retirement.
Your options at retirement
At retirement your options regarding your accumulated pension funds include:
- Take a Retirement Lump Sum
- Purchase a Guaranteed Income for Life (ie: An Annuity)
- Invest in an ARF/AMRF structure
The three options are explained in some detail on the page below
Retirement Lump Sum
Most pension arrangements provide an option to take part (or maybe all) of the fund as a retirement lump sum rather than using it to buy an annuity or exercise ARF options. The options available as regards your retirement lump sum depend on the pension arrangement you are retiring from and are summarised in the following table.
| Pension Arrangement | Based on Final Salary & Service | Up to 25% of the Fund |
|---|---|---|
| PRSA | No | Yes |
| Personal Pensions | No | Yes |
| Defined Contribution Scheme | Yes | Yes |
| Personal Retirement Bond from Defined Contribution Scheme | Yes | Yes |
| Personal Retirement Bond from Defined Benefit Scheme | Yes | Yes |
| Personal Retirement Bond from UK Pension Transfer | No | Yes |
| Defined Benefit Scheme | Yes | No |
The overall maximum lump sum that can be taken tax free from all an individual’s pension arrangement is €200,000. Any amount taken between €200,000 and €500,000 will be subject to income tax at the standard rate. Any retirement lump sums taken on or after the 07 December 2005 count towards these limits. After taking your retirement lump sum the balance of your fund will have to be used to either purchase an Annuity or invest in an AMRF/ARF arrangement or potentially be taken as taxable cash.
What choices are available to you will depend on the structure of the pension contract, where the retirement lump sum came from and whether you elected to take the lump sum using the Salary & Service calculation or the 25% of the fund value calculation.
Annuity
An annuity is a secure income for life, which you can purchase at retirement, with all or part of the pension fund you have accumulated. The amount of secure income relative to the fund amount depends on a number of factors including your age, your health, interest rates at the time of annuity purchase, the type of pension purchased and the length of the guarantee period chosen. Higher interest rates will mean that a higher amount of income/pension can be bought for a given amount, while the opposite also usually applies.
An annuity can only be purchased from a life assurance company. Most pension policies allow an open market option which means that whoever is purchasing the annuity has a choice of going to any insurance company operating in the market to get the best option. At Peavoy Financial Planning we do this for you and present to you all options. Certain policies may have bonuses or guaranteed annuity rates attached to them. These should also be explored before you decide on your strategy at retirement.
Advantages of an Annuity
- Annuities provide certainty. The individual is paid a known pension for the rest of their life.
- The pension payment can have a guaranteed period of up to 10 years regardless of whether the individual dies within the period.
- A spouse’s, civil partner’s or dependent’s pension can be added and is paid for the life of the dependent.
Disadvantages of an Annuity
- Annuity rates are linked to long term interest rates and life expectancy. When interest rates are low and life expectancy is lengthening you would expect annuity rates to fall.
- The annuity rate is fixed at the time the annuity is purchased and is not affected by later changes in interest rates or life expectancy.
- The pension fund no longer exists because it has been changed into an income for life.
- The options chosen under the annuity cannot be changed once purchased.
- The pension income will stop on death unless the individual chose a dependent’s pension or extended guarantee period.
Approved Retirement Fund (ARF)
Before an individual can invest their retirement benefits in an ARF they must meet one of the following requirements
- Be in receipt of a guaranteed pension Income for life of at least €12,700 per year
- Have invested at least €63,500 in an Approved Minimum Retirement Fund (AMRF)
- Have used €63,500 to purchase and annuity or a combination of an annuity or (AMRF)
An Approved Retirement Fund (ARF) is a post retirement investment fund. It is beneficially owned by the individual but is managed by a Qualifying Fund Manager. Only the proceeds of retirement benefits not taken in the form of a lump sum from eligible contracts can invest in an ARF. The assets are invested in a tax-exempt fund.
An imputed distribution requirement applies to all ARFs from the year the ARF holder turns 61. The current imputed distribution rate is 4% of the fund value. This increases to 5% from the year the ARF holder turns age 71. However, for individuals with ARFs with a total value of €2 million the imputed distribution rate is set at 6%.
Advantages of an ARF
- Gives the individual control over their pension fund in retirement
- They can choose the level of income they want to take each year, however, depending on age, a minimum of 4% or 5% of the value will be paid each year.
- ARF’s can invest in a wide range of assets with the potential for the fund to continue growing.
- On death the value of the ARF at the date of death passes to your estate.
- An ARF can be used to purchase an annuity at any stage
Disadvantages of an ARF
- There is a high risk that the fund may not provide an income for the rest of your lifetime.
- The individual takes on investment risk. The capital can go down as well as up.
- The individual may have to put €63,500 into an AMRF if they do not have a guaranteed pension income of €12,700 a year
- The Pension Fund no longer exists because it has been changed into an income for life.
Approved Minimum Retirement Fund (AMRF)
Similar to an ARF an AMRF is beneficially owned by the individual but is managed by a Qualifying Fund Manager. It is treated almost exactly the same as an Approved Retirement Fund (ARF) with a few key exceptions
- You can only have one AMRF
- The maximum capital which can be invested in an AMRF is €63,500
- Only one withdrawal of up to a maximum of 4% of the AMRF can be taken each tax year
- The imputed distribution requirement does not apply to AMRFs
- An AMRF becomes an ARF on the earliest of
- The individual reaching age 75, or
- The individual having the minimum specified income of €12,700 per year, or
- The death of the AMRF holder