When you retire you have a number of options to choose from. These are outlined below:
- Your Retirement Lump Sum: The amount of money that you may take as a retirement lump sum will be subject to Revenue limits. The maximum amount of lump sum that you may take is 25% of the value of your fund at retirement. Up to €200,000 can be taken tax-free (August 2012). The rest of your fund can then be used to purchase an annuity or invest in an ARF/AMRF or take an additional taxable lump sum, subject to restrictions.
- Purchase an Annuity: You can purchase an annuity which will provide you with an income for the rest of your life – or an income that will continue to be paid, after your death, to your spouse/civil partner.
If you choose to purchase an annuity, you may ‘shop around’ at retirement – and buy an annuity from any authorised annuity provider.
- Invest in an ARF/AMRF: You can also fully or partially invest the balance of your fund in an Approved Retirement Fund (ARF) – a more flexible arrangement that allows you to continue to invest in funds after retirement and withdraw money as and when you wish. To choose an ARF, you must have a guaranteed pension income of €18,000 per annum. If you don’t you will have to invest €119,800 in an annuity, an Approved Minimum Retirement Fund (AMRF), or a combination of both.
An ARF is an investment just like your pension fund except you can take money out of it. You can invest it in cash, equities, bonds and property. Just like a pension plan, the fund grows tax-free but when you take your money out, you are taxed under PAYE.
A Guaranteed Income for Life, or annuity, may be the right option for someone who needs their pension to provide them with a steady income in retirement. However, if your circumstances are such that you do not require a regular income for life in retirement, you could consider purchasing an Approved Retirement Fund (ARF) As you manage the money yourself, there are no guarantees unlike the annuity option. If you take too much money out too quickly or your investments perform poorly, you may run out of money.
An Approved Minimum Retirement Fund (AMRF) was introduced at the same time as the ARF. If, when investing in an ARF, you are not age 75 or older and do not have a guaranteed income of €12,700, you have to do one of the following:
- Purchase an annuity for that amount (or shortfall)
- Invest €63,500 into an AMRF
There are a number of reasons why you might choose to use part of your pension to purchase an ARF or AMRF rather than an annuity. These include:
- An ARF or AMRF can be inherited
- An ARF or AMRF can continue to provide tax free investment growth
- Income can be drawn from an ARF (but not from an AMRF) as and when needed
An ARF can be used to provide income, and indeed from age 60 onwards it is effectively obligatory that 5% of the fund value be drawn down as income every year. You should note, however, that unlike annuity income, ARF income is not guaranteed to last forever. If the speed at which money is taken from an ARF outpaces the growth that it achieves, then the ARF could ultimately be reduced to nothing.
ARFs can be a smart investment but they are not suitable for everyone. While there are tax advantages to purchasing an ARF, as well as flexibility and the potential for future gains, it is important to realise that an ARF does not provide a guaranteed income for life. As with all major investments, you should be well informed before making a decision.
An annuity will provide you with an income for the rest of your life – or an income that will continue to be paid, after your death, to your spouse/civil partner. You give an insurance company your pension pot and in return they promise to pay you an agreed amount for the rest of your life.
If you choose to purchase an annuity, we will help you shop around at retirement – and buy an annuity from any authorised annuity provider.