To date I’ve written on pensions in general, the EU Directive IORP II which could still disrupt the Irish pension market in a really negative way and Personal Retirement Bonds (PRBs), so now Frank decided it was time I jumped the fence and talked about ARFs (approved retirement funds), what you can, and most do, with their retirement funds when they actually draw pension benefits.
Cast your mind back to 1999, April 6th 1999 to be exact, the economy was growing nicely, there was no pension fund threshold, no limit on your tax free lump sum and we still paid for stuff in punts – overall life was good.
Charlie McCreevy was Minister for Finance and he had decided on a radical change on how we got access to our pension benefits. He decided we were all grown up’s, wore big boy pants and should be allowed manage our retirement fund as we wished – pre and now post retirement.
Charlie introduced the ‘ARF, all hail the ‘approved retirement fund’. Now prior to ARFs, at retirement, you took a tax free lump sum based on your salary and service (if in an employer pension scheme) or a 25% tax free lump sum (if invested in an RAC) and you bought an annual income (AKA an annuity) for life with the remainder of the fund.
Charlie’s introduction of the ARF was radical move in an industry where the word ‘radical’ doesn’t get a lot of mileage, instead of the old annuity route you could actually take the balance of the pension fund (subject to the silly AMRF conditions) and invest the funds yourself – create your own portfolio for yourself.
So ARF versus an annuity?
Fast forward to today, after you take your lump sum, you have the option between an ARF and an annuity, essentially they are retirement polar opposites, apples and oranges.
With an annuity you buy an annual income for life, i.e. you essentially swap the capital amount of the pension funds and get an annual income in return. If you live a long time you’ll probably come out a winner, if you die relatively quickly after buying the annuity you’ll lose the ‘bet’ (unless you say bought a spouses annuity etc.). The annual income is fixed, if albeit increasing by a fixed amount or inflation every year, you don’t make an investment decisions and how much you get paid each year is not related to investment returns, and on death there is no ‘left over’ fund.
An ARF on the other-hand is the orange to the annuity apple, you don’t buy any form of guaranteed income, the value of the ARF is ‘beneficially’ yours, i.e. in the event of death it forms part of your estate and you can invest the funds as you so wish; either through an insurance company ARF or through self-directed ARF, income is not guaranteed and it can ‘bomb out’, i.e. you can run out of money in an ARF.
Really the only similarity between an ARF and an annuity is its tax treatment, an annuity payment is treated as income and is taxed under the PAYE system and so are payments from an ARF – tax is deducted at source like salary and you receive the net after tax payment.
Which one you chose will depend on factors such as your risk profile, health, desire to access capital and inheritance wishes.
So how much can I draw from my ARF?
The rules around ARF drawdowns have gone through a number of iterations over the years, from no obligatory annual drawdowns to the situation we have now;
– 4% p.a. of the value of the ARF if you are over 60
– 5% of the value of the ARF if you are over 70
Note however that if you are lucky enough that the total of you ARFs exceed €2 million, you must take out 6% p.a.
You can potentially take all of your ARF in any year, simply the withdrawal would be fully taxable as income, so the above 4%, 5% and 6% figures above are the minimum that must be taken each year.
You can invest in a wide range of investments but there are some investments that tax legislation doesn’t like and will tax you for being naughty – these are contained in Section 784A Taxes Consolidation Act 1997, in broad terms you can’t buy from, sell to, let to or lend funds from your ARF to anyone connected to you or invest in a close company (actual or deemed) that someone connected to you is already invested in.
One Quirk – ARFs are not considered pensions
ARFs and AMRFs (I’m touching on these in a line or two), are not pension schemes and as such do not fall under Revenue rules or the overseas transfer regulations re pension transfers, any transfer abroad is treated as payment to you and will be taxed as income in your hands. Strangely enough PRBs are also treated differently to employer pensions and PRSAs as they can only be transferred to the UK and no further.
So if you are contemplating moving abroad and are in receipt of ARF income professional advice is needed as it is a very complex area that can create unexpected and unrecoverable tax liabilities due to most DTT (Double Taxation Treaties) being silent on ARF income versus annuity income.
Let’s close this article out with a small bit on AMRFs, AMRFs (approved minimum retirement funds) were a strange idea Charlie McCreevy had that required you originally to invest £50K (now €63,5K) in an investment vehicle you couldn’t access until age 75, or death if earlier.
You didn’t have to invest this £50K/€63,5K if, at the date you drew down your pension benefits, you had a guaranteed income of £10K / €12,7K p.a. or bought an annual income with £50K/€63,5K. So in practice if you qualify for a full age pension there is no longer a requirement for an AMRF.
Now at least
A) You can draw 4% of the AMRF as income ever year (it is taxed), and
B) The €12,7K guaranteed income test is available anytime, so whenever you reach that threshold after drawing your pension benefits your AMRF becomes an ARF and you can draw from it annually or access it all (don’t forget the PAYE bit I’m mentioned earlier)
Fingers crossed you
1) Survived reading to this point, and
2) Managed to get a little information about ARFs than you had before you started this article
Author: Paul Murray is a Director at Quest Capital Trustees, www.qct.ie, 9 Fitzwilliam Square, Dublin 2