There are a number of options available to you at retirement, but typically the maximum tax free lump sum will be taken and the balance of the fund will either be transferred to an approved retirement fund or used to purchase and annuity depending on your circumstances. The key to maximizing the potential of your retirement fund is to understand the implication of the choices you make earlier in the process and to dove tail your retirement planning with the other relevant tax concessions that may be available to you.
At Declan Maher Financial Services Ltd, we actively manage our client towards retirement with all of the relevant business exit and estate planning considerations in mind. There are many revenue rules and regulations that govern this area which is why it is vital to get good advice as early as possible, some of the key things for consideration and relevant revenue rules are:
Approved Retirement Fund (ARF)
ARF’s are post retirement plans which allow individuals to maintain control over their pension funds beyond retirement, without the requirement to purchase an annuity payment for life. The ARF option is generally available to all pension assets with the exception of those arising from Defined Benefit Pension Plans. At any time the assets held within an ARF can be used to purchase an annuity if so desired. Investment growth or any income earned from the fund will accumulate in the fund free of capital gains or income tax up to age 75. You will however pay income tax on withdrawals from the fund.
Approved Minimum Retirement Fund (AMRF)
If you choose to invest in an ARF at retirement you must have a guaranteed pension or annuity of €12,700 per annum. If this is not the case then you must invest €63,500 in an Approved Minimum Retirement Fund until age 75 otherwise known as an AMRF. The idea here is to insure you have a protected minimum fund until age 75 which can then be used to generate a regular income thereafter.
Tax free lump sum
Those who are in employer sponsored defined contribution group pension schemes can take up to 150% of their final pensionable salary as a once off tax free lump sum. Those who qualify for an ARF will have the option to take 25% of your retirement fund as a tax free lump sum. We can’t think of any cases where it does not make sense to take this option when it becomes available, which is only once, giving that the balance of your fund will eventually be subject to income tax on drawdown.
If you are a member of an Employer sponsored defined contribution group pension scheme you will be required to use the balance of your retirement fund (after you take your tax free lump sum) to purchase an income for life through an Annuity, this is called compulsory purchase annuity or CPA.
In simple terms an annuity is an exchange of a lump sum for a regular income from an authorized annuity provider. The rate which you will be offered will depend on a number of external factors such as current interest rates and personal factors including:
- Your age when you purchase the annuity, this can range from age 50 to 75
- The type of annuity you want, i.e. single life or if it includes spouses pension when you die.
- The guaranteed period of payment, this insures payment for a minimum term regardless of when you die.
- Whether or not you want escalation in payment.