You have built up a pension fund and now you have to decide how best to use these funds to meet your needs in retirement. A key question for most people is whether to choose an annuity or an Approved Retirement Fund (ARF).
You will probably have the option to take a tax-free lump sum from your pension fund when you retire. Once you have taken your lump sum, you need to decide what to do with the rest of your pension fund. You can use the rest of your retirement fund to buy either:
- an annuity – a pension for life
- an Approved Retirement Fund (ARF) – an ongoing investment
If you have more than one pension plan, you may be able to opt for a combination of an annuity and ARF.
This is a big decision so we strongly recommend that you talk to your Financial Broker about which option would be best for you.
Here is our guide to annuities and ARFs to provide you with the main points for each option.
Annuity or ARF
Approved Retirement Fund (ARF)
What is it?
This is what people usually refer to as a pension. It is where your retirement fund is used to buy an agreed income for you for the rest of your life. The level of income is based on the value of your pension fund at retirement and the type of annuity you choose.
This allows your retirement fund to remain invested. Depending on how your investments perform, the value of your fund can rise or fall.
You must take an annual minimum withdrawal from your fund but you can also take additional withdrawals, which will affect the value of your fund.
What affects my level of income?
The income you receive will largely depend on the level of interest rates, bond yields and trends in life expectancy that are normal at the time you buy your annuity. It will also be affected by the type of annuity you choose.
The amount of income you can take is determined by the value of your fund. You must make a minimum annual withdrawal but you can make withdrawals at other times too.
Is there a minimum fund requirement?
No. You can buy an annuity with a pension fund of any size. It is not subject to a minimum requirement.
Yes. In an order to invest in an ARF, you must either currently:
- have a guaranteed income of at least €12,700 or
- invest the first €63,500 of your pension fund in an Approved Minimum Retirement Fund (AMRF) or an annuity.
What tax will I have to pay?
You will have to pay income tax and Universal Social Charge (USC) on the income you get from your annuity. Your pension provider will deduct any tax due based on the Tax Credit Certificate provided by Revenue.
You will have to pay income tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) on withdrawals from your ARF. Your ARF provider will deduct any tax due based on the Tax Credit Certificate provided by Revenue.
When does it run out?
The income you get from your annuity will continue for life. Depending on the type of annuity you buy, it may continue after your death for a guaranteed period or it may continue to a spouse/partner.
If the value of your ARF is reduced to zero due to withdrawals or poor investment performance, you can’t make any further withdrawals. This is often referred to as “bombing out”.
What happens when I die?
An annuity and the income it provides you stops on your death, and there is no fund value passed on to your estate. However, you can choose to purchase an annuity that will continue to be paid to a spouse/partner after you die.
The value of your ARF is passed to your estate or stated beneficiary on your death.
What are my options at retirement?
That will depend on the type of pension you have and whether or not you are self employed, an employee or a company director. At retirement, Friends First will send you your retirement papers outlining the different options that are available to you.
Talk to your Financial Broker to review all your options.
At what age can I take my retirement funds?
With a personal pension you can access your retirement fund from the age of 60.
With a personal retirement savings account (PRSA), group pension scheme or a pension transfer bond (buy-out bond), you may be able to access your retirement fund from the age of 50.
What is meant by ``tax-free cash``?
Tax-free cash is the amount of your retirement fund that you can take as a lump sum, free of tax. The amount of tax-free cash you can take depends on the type of pension you have and whether you are self employed, an employee or a director.
What options can I choose for my annuity?
An annuity can be set up using a variety of features that will affect the amount of income you receive.
- Single life (for you only) or joint life (for you and your spouse/partner)
- Different guaranteed periods (for example, your annuity payments will continue even if you die during that period)
- Level or increasing in payment (for example, your annuity payments can increase at 3% a year to take into account inflation (the rising cost of living)
- Payable monthly or annually
What is an ARF?
An Approved Retirement Fund (ARF) is an investment fund into which you can transfer some or all of your pension fund at retirement instead of using it to buy an annuity. An ARF allows you to manage and control your retirement fund and invest it in a wide range of different investment funds.
You are required to make at least one withdrawal annually from your ARF. You can make additional withdrawals from your ARF as you need them, however, you will have to pay income tax, Pay Related Social Insurance (PRSI) and Universal Social Charge (USC) on all withdrawals. Because you own the ARF, you can leave it to your dependents when you die.
Before you can invest in an ARF you currently must have a guaranteed income for life of at least €12,700 a year. This can include the State Pension.
If not, you must use the first €63,500 of your pension fund to buy either a guaranteed income for life (an annuity) or an Approved Minimum Retirement Fund (AMRF). Learn more about ARFs.
What is an AMRF?
An Approved Minimum Retirement Fund (AMRF) is like an ARF except you can only withdraw a maximum of 4% of your fund per annum, until your reach the age of 75 or until you start receiving a guaranteed income of at least €12,700 a year). At that stage, your AMRF will become an ARF and you can make withdrawals as you need them.
Talk to your Financial Broker
We strongly recommend that you talk to your Financial Broker when you are making decisions about your retirement benefits.