What is an Approved Retirement Fund (ARF)?

An Approved Retirement Fund (ARF) is a post-retirement financial product that offers the opportunity to reinvest your pension value after retirement and after you draw down the initial tax-free lump sum.

It allows you to take a portion of, or the entire remainder of, your pension and invest it in the new fund to accrue additional value through your retirement years.

Investing your pension in an ARF is often attractive as it allows a lot of flexibility in how your fund is invested. Any funds you accrue through the investment are allowed to grow tax free. You do pay income tax on any withdrawals you make however. It will be treated as normal income and you must pay income tax, USC and PRSI (if applicable in your case).

ARFs vs. Annuities

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If you have any of the following types of pension, you are eligible for an ARF 

Is in a defined contribution scheme

Holds a Personal Retirement Savings Account (PRSA)

Holds a Retirement Annuity Contract

A member of a trust RAC

A member of a defined benefit scheme and meets the proprietary director test

Holds a buy-out bond/personal retirement bond

Pros and Cons of an ARF

Advantages Disadvantages
✅ The value of an ARF on death is preserved and paid out to the ARF holder’s estate ❌ An ARF does not provide insurance against the risk of outliving the value of your pension
✅ An ARF has the potential (but is not guaranteed) to provide retirement income in excess of what an annuity could provide ❌ Can be subject to unfavourable tax treatment if certain minimum ARF withdrawals are not made each year
❌ ARFs are heavily reliant on investment performance when it comes to their ability to help the retiree to maintain their standard of living throughout retirement

Conditions to invest in an ARF

An Approved Retirement Fund comes with certain conditions that must be fulfilled before you can invest in one. The main factor is that you need to already be in receipt of a guaranteed income of at least €12,700. Luckily, the State pension in Ireland will ensure you receive that amount so the majority of people are covered.

Your additional pension pot then will add to that amount. In addition to the threshold amount of €12,700 (now covered by the State Pension) you will need to be a member of a contributory pension, a personal pension, a personal retirement bond and be at retirement age or be about to take early retirement.

state pension

What is an AMRF? (no longer in existence)

In 2021, legislation was enacted to remove the AMRF requirement, since the State pension ensures that everyone has the basic income level required to reach its threshold. Consequently, all AMRFs became ARFs automatically from that date. If you hold an AMRF you do not need to do anything to make the transfer. It is automatically applied by the enactment of this legislation. If you are unsure of your AMRF or ARF status then connect with a pension advisor here for independent advice. They can help you understand your options and assess your particular pension requirements relative to your age, stage of career, dependents and other personal factors.

What about an Annuity?

Should it be considered instead of an ARF?

What is an Annuity?

An Annuity is a simplified pension arrangement that guarantees you a set monthly payment in retirement. It is essentially a contract between you and an insurance company over a long period of time that manages your contributions to a fund that ultimately pays out a monthly retirement payment. It is often an alternative to an ARF. You have the option to purchase an annuity with your pension fund and this determines the value of the annuity overall and consequently the value of the income you can take from it. The value of the annuity is dependent on the value of the pension fund AND the annuity rate offered by the life company. The annuity rate is the percentage value applied to your pension fund in order to work out the annual income received. Many factors influence the annuity rate (age, health, interest rates etc.) and so this will have a huge impact on the value of the income

How long does an Annuity last for?

An annuity can be for a whole life period or for a fixed period. If you choose the fixed period, for example 10 or 15 years, the annuity will continue to pay to your dependents if you die within that period. To determine the correct annuity type and duration for that suits your particular situation, make sure and take independent advice from a pension provider. 

Pros and Cons of an Annuity

Advantages Disadvantages
✅ Pays a fixed amount per month ❌ Your estate will lose out if you die early
✅ No worry of running out of funding ❌ Subject to inflation risk as payouts are fixed
❌ Subject to timing risk (ie. when the annuity is agreed)

Description of a person who would benefit from an Annuity 

The kind of person who would benefit from an annuity is someone who wants to remove the doubt in their retirement planning. Because it is based on a fixed amount you can enjoy the freedom of knowing that your monthly income will be paid and that you don’t have to manage it each month or worry about it changing. 

Choosing between an ARF and an Annuity is complicated.

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Withdrawing from an ARF

How often can I withdraw from my ARF?

You can withdraw from your ARF as often as you need to. This is one of the benefits of this type of fund as it allows you complete flexibility and freedom to withdraw as required. However this is also one of its downfalls for some people. Because you can withdraw at will you need to manage your fund carefully to ensure that you don’t use up its value too early, leaving you without an income at a late stage in life.

What is imputed distribution and what does it mean for my ARF?

Imputed distribution refers to the mandatory withdrawal of at least 4% per annum. This withdrawal is subject to income tax, PRSI and USC. It becomes active at the age of 61 with an increase to a minimum of 5% at the age of 71. If you have a particularly high value fund that goes over the €2,000,000 mark then the initial minimum withdrawal or imputed distribution is set at 6% at the age of 61.

The taxes imposed by the imputed distribution system are in addition to the taxes you suffer when you do eventually make a withdrawal from the ARF, with no tax credit available for offset. In effect, this means your ARF is being taxed twice on the same income. Therefore, it’s in the ARF holders best interest to meet the minimum withdrawals each year.

What happens when ARF fund value exceeds €2 million?

There is a €2 million threshold for large value funds. Once your fund reaches or surpasses this amount it changes the imputed distribution rate. In these high-value fund cases the entry rate is 6% at the age of 61. As outlined by revenue here.

Cashing in my ARF

Can I cash in my ARF? 

An ARF is designed to allow you to withdraw from its value at any time. It is completely flexible in its withdrawal procedures, even to the point of allowing risk. If you don’t manage your withdrawals carefully you may end up bleeding your ARF dry much too early.

It’s important to consult with an independent pension advisor regularly to assess where your fund stands, how much impact your withdrawals are having and to help you manage your fund value into the future.

Many individuals decide to take an early pension withdrawal from their ARF in the form of a 25% tax-free lump sum. This can be done from age 50.

How much guaranteed income do I need to cash in my ARF?

Taking out an Approved Retirement Fund in the first place is based on a guaranteed financial threshold of €12,700 per annum plus your contributory pension pot. Your State pension generally will cover the minimum threshold allowing you to withdraw from your fund to above that level.

Where can I get advice on what to invest in?

ARFs are set up and managed by financial institutions such as insurance companies. There are many avenues for advice but the best first step is to contact an independent pension advisor who can outline your options and draw up choices based on your personal circumstances. Everyone’s pension landscape is different, depending on your years in service, the pension type that you have been a member of and the number of dependents and other outgoings that you need to provide for.

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If I receive a windfall can I add it to my ARF?

The short answer is no.

An ARF is a post-retirement fund that is built upon your retirement package. The value you have left in your pension pot after you draw down your tax free lump sum is the value that is invested in the ARF. It then has the opportunity to grow depending on the amount of risk you have chosen to take when setting it up. If you have an unexpected sum of money, for example from an inheritance or a property sale, that you want to invest you will need to find another investment vehicle for it. A pension advisor can help you with this.

What happens to my ARF after I die?

Does my retirement fund pass onto my spouse or children? 

An ARF is a retirement fund and you are free to leave it to a dependent such as a legal partner or one or more of your children.

While it is not always pleasant to consider what might happen to your fund when you die it is important to plan for it. There are different tax implications for people who are not your immediate dependents so if you plan to leave the value of the fund to another person or entity then make sure and take advice on the implications of this.

If you don’t then you may also be leaving a hefty tax situation that might negatively affect the value of the fund to the recipient.

Here are the tax implications of your ARF should you pass away:

  • Spouse: ARF can be passed to your spouse upon death free of income tax and capital acquisition tax
  • Child over 21: income tax is charged at a flat rate of 30%. There is no further liability to tax and it does not eat into the child’s capital acquisitions tax threshold from their parent
  • Child under 21: liable to tax under capital acquisitions tax as per any normal inheritance
  • Anyone Else: treated as a distribution to the deceased, with marginal rate income taxes operated at source via PAYE. Inheritance will subsequently be taxable under capital acquisitions tax

Unsure of how best to invest your ARF?

The European Risk Rating is a scale that determines risk in investment. An Approved Retirement Fund is an investment vehicle like all others. Its value can rise or fall depending on the performance of the markets it trades within. When you are setting up your ARF you will have the freedom to choose a risk level that suits your appetite for risk and your personal drive to achieve greater value in your fund. The higher the risk, the higher the potential for profit and growth. However, the higher the risk, the higher the chance of losing money also.

Consequently, the risk levels available and the opportunity to offer them to customers is highly regulated at the EU level. To better understand risk we use the European Risk Rating. It is a sliding scale of risk that clearly illustrates the potential and pitfalls of taking on greater risk. It helps a potential investor make an informed decision around the type of risk they are entering into with their ARF.

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Planning for the future

Planning for retirement is an essential but complicated business. The younger we begin the better the outcome but for the majority of us the younger we are the more likely we are to ignore our future. 

Having worked throughout our lives it’s crucial that we do everything we can to create a stable and enjoyable retirement period. It should be stress-free and a time when major purchase debt is behind us. Many people will have paid off a mortgage, and perhaps own a second home. They will have the time and the inclination to travel and to fulfill this ambition they will need to have a secure retirement plan in place. 

As we are living longer than ever, the retirement period is already extended and predictions maintain that as long as we stay in good health we have every opportunity to live much longer than our parents and grandparents. Consequently, making the right decisions around your pension planning now will pay dividends in the future. 

4 great places to invest your pension

At the heart of this is finding the best financial and pension advice for your particular circumstances. An independent pension advisor is the very best place to start and you can contact one right now. There are pension solutions for all stages of life and the best way to access them is by seeking expert advice. Simply follow this link to reach out to a professional pension advisor who can assess your situation, regardless of age and current pension status, and advise on your very best next steps.

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