Dear Members

If you plan to retire this year, you have a number of important decisions to make in respect of securing your financial future. To do so, you will need to be informed about the many post-retirement options available.

Usually, you will be able to take part if not all of your retirement fund as a tax free lump sum. Then, provided you meet certain criteria, you can use the remainder of your retirement fund in the following ways:

1. Approved Retirement Fund (ARF)

An ARF is a product held in your own name which, subject to income limits, allows you to maintain certain elements of your pre-retirement pension assets after you retire. An ARF can invest in various asset classes from deposits, property, bonds to equities.

You can transfer your money from one ARF to another, so unlike an annuity, you are not restricted with the ARF you set up initially.

You are required to draw a minimum of 4% pa from your ARF if you are under age 70 where the relevant ARF value is not greater than €2,000,000. The deemed distribution increases to 5% pa where the individual is aged 70 years or over.

For ARF fund values in excess of €2,000,000 annual deemed distribution is 6% pa. 

At retirement, if you do not have a pension income of at least €12,700 p.a., you are   required to   invest up to €63,500 of the balance in

• the purchase of an annuity
  or
• an Approved Minimum Retirement Fund (AMRF)

 

before being able to take the rest as a taxable lump sum or invest it in an ARF. You only have to meet this requirement once in your lifetime.

 

2. Approved Minimum Retirement Fund (AMRF)

An AMRF stands for an Approved Minimum Retirement Fund (AMRF). It is the same structure as an ARF except you can only withdraw up to a maximum of 4% of the fund value each year until age 75. However you can transfer your fund to an annuity at any stage.

An AMRF automatically converts to an ARF at age 75 or if you met the guaranteed income requirement of €12,700 before age 75.

Who can invest in an ARF & AMRF?

You are entitled to go down the ARF route when you take retirement benefits from:

• Your GMS Pension plan

• Your Private Pensions or Personal retirement Savings Account (PRSA)

Any employer defined contribution occupational pension scheme

3. Annuity

An annuity is a single premium contract (insurance contract), which provides you with a regular income for life during your retirement. You income is paid monthly and the amount of income depends on the options that are chosen at the time of purchasing the annuity and the size of your pension fund.

For example, you have the option to buy a dependant’s pension which ensures a specific proportion of your pension continues to be paid to your spouse/civil partner after your death in retirement.

You cannot change your annuity into cash, either in part of full. Unless you have built in a guaranteed period or a dependant’s pension is selected at outset, the annuity income will cease when you die.

Single Life 4.195%              - Male at age 65, level with 5 years guarantee

Single Life 3.292%              - Male at age 65, 2% indexation with 5 years guarantee

Joint Life   3.39% - Male 65 and Female 63 with 100% reversion on a level basis.

Joint Life   2.497%              - Male 65 and Female 63 with 100% reversion with 2% indexation.

(Annuity rates as 1^st January 2015)

4. Advantages/disadvantages of A(M)RF versus annuity at a glance

Buying an Annuity
Advantages	Disadvantages
§ You are buying certainty/security § You are guaranteed to be paid a known pension for the rest of your life § No investment risk. The only risk is the risk of the life company defaulting § You may select an option such as a guaranteed payment period or a dependant’s pension § Once set up, no professional advice is needed	§ Annuity rates are at a historic low § Loss of access to capital. You no longer have a pension fund invested which you have control over § Lack of flexibility. You cannot change the level of your pension once you take it out § Your pension will stop when you die, unless you have built in a dependant’s pension and/or a guaranteed payment period § You cannot pass it on as part of your estate on death

Investing in an ARF
Advantages	Disadvantages
§ You have flexibility and control how your fund is invested § You can invest in a wide range of assets, with the potential for your pension fund to continue growing (tax free) § When you die, the balance of your fund passes to your estate § Option to defer purchasing an annuity. You can decide at a later stage to use your ARF to purchase an annuity	§ Imputed Distribution– can impact on fund value over long term. If you withdraw more than the growth in your fund, your initial investment will reduce § You are taking on risk - which can be managed depending on your fund choice § Your pension fund could run out if returns from investment markets are poor, or if you live longer than expected § Ongoing and regular advice required to operate an ARF

5. GMS Retirement Options

Please note that rules of the GMS Superannuation Plan changed last year and members are now able to avail of the ARF option instead of buying an annuity. The ARF option had previously only been available in respect of AVCs.

Selecting the right post-retirement product that suits your circumstances is vital as your decision will have far-reaching implications on the quality of your retirement.

It is advisable to seek out financial advice from an expert who can explain the available options. Financial advisers will also guide you through the process of setting up your ARF or annuity and advise you on the various tax implications under each option.

They will also draw up an investment strategy for your ARF that is in line with your attitude to risk.

If you are interested in discussing your retirement options with one of our financial advisers, please contact us on imofs@imo.ie or call 01/6618299.

Please feel free to contact me on npaic@imo.ie if you would like me to cover any specific financial matters.

Nives Paic QFA
General Manager
IMO Financial Services