Accessing your Private Pension can be a daunting experience. You will have the option of taking at least 25% of the value of your Pension fund as a tax free cash lump sum. However, there are important decisions to be make when it comes to deciding on how best to use the remaining 75% of the pension fund. It’s crucial you understand what these options are and the long term implication of your decisions.
You will have the option of:
- Purchasing an Annuity or
- Investing in an Approved Retirement Fund (ARF)
What is an Annuity?
An Annuity is a financial product whereby after taking your tax-free lump sum from your pension fund you allow the insurance provider /pension provider to retain ownership of your residual pension fund and in return they will give you a guaranteed income for the rest of your life. Sometimes this annuity income will also allow a partial income payment for your spouse in the event of your subsequent death.
What is an Approved Retirement Fund? (ARF)
The ARF option allows you to retain ownership of your funds. An ARF is established with your pension / insurance provider or another provider on the market if you so wish. These funds are then invested in much the same way as your original pension. You then have the option of taking income from the ARF fund as and when you see fit (subject to a minimum of 4% per annum from age 60). You own the ARF fund. The ability of the ARF to generate income for you depends on the investment performance of the fund and your yearly need for income drawdown.
The pros and cons of the Annuity vs the Approved Retirement Fund route are numerous. Ultimately the difference rests in the degree of control and responsibility you wish to have in retirement. For example:
Investment Decisions – An ARF by virtue of the fact that you retain ownership of the funds requires you to make investment decisions as to how you wish the ARF to be invested. With any investment decision there is always the possibility that you might lose money. However, an annuity takes this responsibility away from you in that you are giving your pension provider the residual balance of your pension fund of €375,000 and in return they are committing to giving you a guaranteed income to you (and in some case your spouse) for the rest of your lives.
Income for Life – An annuity gives you a guaranteed level of income for life so even if you live to be a very old age you will always be in receipt of the annuity income. However, an ARF on the other hand includes the risk that you will either spend the ARF to quickly or that if you live to be a very old age you will spend the ARF funds completely whilst you are still alive.
Income Flexibility – An ARF allows income flexibility in that you can vary the income you wish to receive but an annuity has a fixed income level for life.
Inheritance – An ARF allows the possibility that on your death any remaining value in the ARF is available to be passed to your estate. An annuity only allows the option of setting up a guaranteed income for you and your spouse. Once you and / or your spouse have passed away there is no residual fund that can be left to your estate.
Aside from the above, there are a number of other considerations involved with regards to the most appropriate and tax efficient way in which to access your pension. Remember you are not just making decisions with regards to your own standard of living in semi retirement but also need to consider the knock on effect these decisions might have on your spouse / partner and children.
For more information or if you have any questions, you can contact Joanne on 01 5267770.