Before Charlie McCreevy’s budget in 1999, the main decision pension scheme members pondered over when they were about to retire was whether or not they exchanged some of their pension for a tax free lump sum. If they were in a Defined Contribution pension arrangement, they may have considered if they wanted to provide a pension for their spouse or include pension increases. The introduction of the option to transfer pension funds to an Approved Retirement Fund (ARF) revolutionised the way members now draw down their benefits at retirement.
Who can take this option?
Initially, the ARF option was only available to proprietary directors and so did not affect the vast majority of members. In 2008, the option was extended to all Defined Contribution members and proprietary Directors of Defined Benefit arrangements. Currently, the following pension members qualify:
• Members of Defined Contribution pension arrangements who have reached retirement age
• Proprietary Directors with more than 5% shareholding over the age of 60 (Defined Benefit or Defined Contribution)
• Members of Personal Retirement Savings Accounts (PRSAs)
The ARF option did not replace the pension option and indeed members can retire with a combination of both. However, it did introduce a new formula for calculating the tax free lump sum available and provided members with more choice. With choice comes the need for members to be better informed about the options available. Even before retirement, members need to know exactly how this option works as it will impact on how they invest their pension savings in the years approaching retirement.
What is AMRF/ARF?
Approved Minimum Retirement Funds/Approved Retirement Funds (AMRF/ARF) are available as an alternative to the pension option at retirement. So instead of using your pension savings to get a guaranteed income for life, you move the money to a new policy called an AMRF/ARF which is invested for you beyond your retirement date. You can decide on how much income you take out each year as income from the AMRF/ARF but there are regulations around minimum amounts you must withdraw and the amount you must transfer to the AMRF. On death, the AMRF/ARF is transferred to your spouse/partner and on the death of both the AMRF/ARF holder and the spouse/partner; the money can be transferred to the estate (i.e., your children).
How does ARF option compare to the option of a pension?
The table below provides a quick comparison. However, every individual pension plan member is different and it is worth discussing your own requirements with your pension provider and/or a financial adviser.
| Issue | AMRF / ARF Option | Pension |
|---|
| Tax Free* Lump Sum available at retirement |
25% of Pension Account |
25% of Pension Account or an amount based on salary and service
with a maximum of 1.5 times salary available for members with more than 20 years’ service
|
| Monthly Income |
Drawdowns are required at a rate of 4% of fund value from age 61 to age 71 and from age 71, at the rate of 5% per annum. However, the amount you are paid is flexible and can be higher than this minimum drawdown if required. For members with funds in excess of €2m, 6% drawdowns are required |
The income is determined at the time you retire and is guaranteed payable for life. It is usually paid monthly and you can opt at the time you retire for the pension to increase in payment |
| Will it be paid for life? |
Your fund is not guaranteed to last for your lifetime and could “bomb out” before you die. This might be due to poor fund performance or excessive withdrawals. |
Your pension provider will continue to pay the pension for your lifetime. There may also be a guaranteed period built in. You are buying certainty regardless of how investments perform or how long you live. |
| What happens when I die? |
Any residual balance on your fund will pass to your spouse. If your spouse is also deceased, the residual value will pass to your children (if any) or your estate. |
You may have provided for a guarantee period or a pension to be paid to your spouse on your death. However, if your spouse is also deceased and the guarantee period has elapsed, there is no further benefit payable |
| Can I change my mind later? |
Yes. You can decide to use your AMRF/ARF assets to buy a pension at any stage in retirement. You need to watch out for possible investment surrender penalties The pension that will be provided will depend on your age, the funds available and annuity rates at the time. |
No. Once you opt for the guaranteed pension for life, you cannot transfer the value of this pension to an AMRF/ARF at a later stage. |
*The amount available tax free is currently limited to €200,000. More can be provided as a lump sum but it will be subject to tax.
When do I need to consider my choices?
Circumstances change continually throughout our working lives and after retirement. However, you should start considering your options in the 10 year period before your retirement. As I mentioned earlier, the investment paths before retirement can be different for members who will be going down the annuity route compared to those going down the ARF route. Without going into too much detail in this article, I suggest you discuss you own personal requirements and options with your pension provider. They will guide you through the choices available in respect of investments and retirement options. Essentially, it is your pension savings and your pension provider is waiting for you to engage with them so that they can help and guide you through the decision making process.
And one rule does not fit all. For example, it is often said that the ARF option is not suitable for members with small sums of money. However, consider the member who at age 65 is a widow and is in poor health. In this situation, if she goes down the pension route, there is no spouse to make provision for and if she dies within a short period of retirement, the pension will die with her. Even if there was a guarantee built in, she will have got very poor value. However, if she was in the ARF, she could drawdown more funds earlier and on her death, any residual balance would be available for her children. Once again I will stress that ever member is different so good financial advice in the years to and at retirement is essential.
Paula Thornton