What are my options when I retire?
Now that you are at retirement you have an important financial decision to make regarding your pension fund and how it could be used to meet you and your family’s needs in the future.
Two of the most important factors you should consider are the way in which you wish to use your pension fund to provide an income in retirement, and whether you wish to pass the balance of your fund to your dependants after your death.
Most people will choose to take the very attractive tax-free lump sum option of up to 25% from their pension fund (subject to Revenue rules) and then use the balance to meet their financial needs in retirement through one of three further retirement options:
• Investing in an Approved Retirement Fund (ARF)
• Purchasing a Pension (also known as an Annuity),
• Taking a taxable lump sum
Approved Retirement Fund
An option available to you at retirement is to invest your pension fund in an Approved Retirement Fund (ARF). ARFs are special investment funds which can give you increased flexibility in terms of how you use your pension fund after retirement. With an ARF you manage and control your pension fund. You can be happy in the knowledge that you can withdraw as much of this as you wish, should you ever need to. Any withdrawals you take from your ARF will be subject to income tax, the Universal Social Charge and PRSI (if you are liable for this). In the meantime, the fund will continue to be invested in funds of your choice.
To find out if you are entitled to the ARF options please contact MC Financial on 01 822 8022.
Important points to consider before buying an ARF
• Your fund can continue to increase in retirement
• Your fund passes to your estate on your death
• You are in control of the fund and can take as much or as little from the fund as your financial situation requires
• You can manage your total retirement income to maximise the amount that is taxable at the lower rate
What are the disadvantages of an ARF?
• Risk to future income
• Investment risk
Conditions for investing in an ARF
Before an individual can take out an ARF (Approved Retirement Fund), up to €63,500 of their fund must be used to purchase an Approved Minimum Retirement Fund or AMRF. Only the investment growth can be accessed or drawn down on an AMRF before the age of 75. In certain circumstances, an individual can take out an ARF without having to also take out an AMRF. If the person has a guaranteed income of over €12,700 per annum including the state pension then an AMRF is not required.
One of the rules governing ARFs is that tax, Universal Social Charge and PRSI, if applicable, must be deducted as if income were taken, even if no income is taken in a particular tax year. Below we explain how this is applied to an ARF.
- If the ARF’s asset value is less than €2 million, every year 5% of the ARF’s asset value as at 30th November is liable to income tax, Universal Social Charge and PRSI, if applicable. The 5% is inclusive of any income you actually take.
- If the ARF’s asset value is greater than €2 million or you own more than one ARF, where the total value of the assets in those ARFs exceeds €2 million, every year 6% of the ARF’s asset value as at 30th November* is liable to income tax, Universal Social Charge and PRSI, if applicable. The 6% is inclusive of any income you actually take.
- This applies when the ARF owner is 60 years or over for the whole of the tax year and where an ARF is set up after 6th April 2000.You should seek advice on whether it is appropriate to drawdown the 5% or 6% of your fund value.
- Annual imputed distribution reduces the benefit of gross roll up**. This means the investments are allowed to grow tax-free until such time as a chargeable event occurs
* These amounts and the valuation dates may change in the future. The information is correct as at January 2014.
Approved Retirement Funds (ARF)
Due to the imputed distribution requirements introduced by the Finance Act 2006, your pension provider will deduct a minimum withdrawal of 5% of the value of the ARF during December each year. This is automatically deducted from your ARF and paid to you net of income tax, PRSI (if applicable), Universal Social Charge (USC) and any other charges or levies (tax) due at the time on the withdrawals you make. This applies from the year you turn 61.
Where the total value of your ARFs and vested PRSAs exceed €2 million then a withdrawal of 6% from your ARF must be made each year. It is your responsibility to let us know if you have other ARFs and vested PRSAs with a total value greater than €2 million.
Annuities – a pension income for life
When you retire, some or all of your pension fund can be used to purchase a lifetime retirement pension which is also called an annuity. The purpose of this pension annuity is to provide an income for the rest of your life. An annuity provides an income for life, no matter how long you live. An annuity suits those who have a low appetite for risk and demand certainty of income in retirement.
There are generally two types of Annuities:
• Fixed Pension
• Inflation Protected Pension
The following options can be added to any of the above mentioned annuities, at an extra cost:
• Dependants’ Pension
• Minimum Payment Period
• Investment Protection
All annuities are subject to income tax in the same way as any other income you receive. They may also be subject to Pay Related Social Insurance (PRSI) and Universal Social Charge (USC) deductions.
Taxable Lump Sum
After you take your tax-free lump sum, you may be able to take the rest of your fund as a cash lump sum. You will need to pay income tax at the marginal rate and Universal Social Charge (USC) under the PAYE system on this lump sum.
In order to invest in an ARF or take a Taxable Lump Sum, you must have a guaranteed income for life from all sources of currently €12,700 per annum in payment at the time the ARF begins. This can include your State pension benefits (single person rates only), a Pension from a company pension plan or a Pension bought with the proceeds of another pension plan.
If you do not have this minimum pension income then you must either:
a) use all or part of your retirement fund to purchase a Pension (annuity) to bring your pension income up to €12,700, or
b) Use an amount equal to 10 times the Social Welfare pension (currently €63,500) of your retirement fund to invest in either an AMRF, purchase a Pension or a combination of both. If your retirement fund is less than €63,500, then the whole amount must be used in this way.
So if you’re located in Dublin or the greater Dublin area and are in need of professional and reliable retirement advice, don’t delay; contact our Pensions expert Robert O’Neill today on 086 229 3032 or by email at email@example.com
All figures are correct as at 30th November 2013. All information is used for illustration purposes only.