Approved Retirement Funds (ARFs)

An Approved Retirement Fund or ARF, is a post-retirement investment plan, where you can invest all or part of your pension fund after taking your tax-free lump sum on pension benefit drawdown, including early retirement.

ARFs offer increased flexibility in terms of how you use your pension fund, as once your fund is invested, you can make withdrawals as often as you wish. Most people will look to preserve the original capital amount for as long as possible and do so, by taking a minimum regular income amount of 4% from age 61 and 5% from age 71.

ARF income withdrawals are subject to income tax, PRSI, and Universal Social Charge (USC).

Any money left in the fund after your death, can be left to your next of kin, and it can pass tax-free to your spouse.

If you have a Company Pension, PRSA or Personal Retirement Bond from previous employment, you can generally access a lump-sum from age 50, and leave the balance be invested and to grow tax-free in an ARF.

At age 61 when you must start drawing an income at a minimum required level of 4% PA.

If you were a member of a Defined Benefit (DB) occupational pension scheme, then an ARF may only be suited in special circumstances and will need to include Trustee approval.

Through an ARF, you can invest your pension pot in a wide range of assets like stocks, bonds, property, commodities, and cash. The underlying investments you choose depend on the level of risk that you are comfortable with and your financial goals. The key to choosing the right investment is to get specialist ARF advice, to ensure to appropriate risk strategy is applied in the construction of your ARF fund portfolio.

After taking your cash lump sum (some or all of which may be tax-free), you can choose to invest the remaining  pension monies in an ARF. The process involves investment risk profiling, before constructing a long-term ARF investment strategy. This option can be accessed at retirement or from age 50, if you have previously left the employment associated with the pension plan in question.

The firm who looked after your employers pension scheme, will tell you that it will be quicker and easier to use them for your ARF, but in truth, the process will be no faster. In fact, existing brokers tend to offer less value, than if you’re seeking independent financial advice, choosing a financial broker, to compare the market on your behalf. 

With the help of your financial broker, you firstly need to establish your investment risk tolerance and ESG preferences.

Notably, from age 61 you must make minimum withdrawals of 4% per annum, so this must be accounted for.

Once the above parameters are established, you should choose a well-diversified portfolio of funds designed to meet your return expectations, whilst being fully cognisant of cost and volatility, and not just past performance.

There is no single investment fund manager or fund, to suit every ARF investor, age as well as investment risk tolerance, other assets, and ESG, must also be considered. 

That said, a 50-year-old ARF investor may choose higher risk funds, at least initially, than someone arranging their ARF from age 60 or older, as withdrawals must commence form age 61.

The most important thing is not to put all your eggs in one basket and not to chase high returns, without being clear about both volatility and cost impact.

The key thing is to diversify across different asset classes (asset allocation) and then to allow the fund managers to further diversify within these asset classes.

This typically means using  what are called multi-asset mutual funds, because of their low costs, A medium risk ESMA 4 portfolio, is the most typical approach (although every mu ARF investor must be assessed individually).

ARF charges play a huge part in the performance of your ARF, and high charges will negatively impact on its investment performance and on your ARF funds longevity.

This refers to the way in which your income is paid to you from your ARF.

• From the year you turn 61, tax is payable on a minimum withdrawal amount each year of 4% of the value of the fund at that date. This withdrawal is liable to income tax, Universal Social Charge and PRSI (if you are liable for this). From the year you turn 71 the minimum withdrawal is increased to 5%.
• Where a greater withdrawal is made during the year, tax will be paid on the greater withdrawal amount. The minimum withdrawal rate is set in line with the required imputed distribution amount which may be altered to reflect changes in legislation. You can choose to take a higher withdrawal amount if you wish. 

If an ARF-holder is survived by a spouse or civil partner, then there are no tax implications on the passing of the ARF to the surviving spouse, to be then transferred into their name. However, the new owner will pay income tax on any withdrawals from the ARF.

Where a child has not attained 21 years of age; ARF monies inherited will be subject to inheritance tax at 33%, should their overall inheritaces exceed their CAT tax-free threshold.

Where a child has attained 21 years of age; ARF monies inherited will be subject to a once-off income tax deduction at 30% and this will not affect their CAT tax-free threshold in respect of othe inheritances.

An ARF paid to anybody else (other than a Surviving Spouse or Children) then Income Tax at source and CAT apply.

There are many reasons you may be unhappy with your existing ARF. These can be:

• Excessive Fees
• Poor or erratic Investment Performance
• Poor or no Communication from the ARF Provider / Insurance Company
• Poor or no Communication from your Financial Advisor
• Lack of expertise from your Financial Advisor

If this is the case, you can transfer the agency form your existing financial advisor to a newly appointed one. Then, your new advisor can alter the underlying portfolio as appropriate, as well as outline a service level agreement, to probably meet your expectations. 

An ARF is designed to automatically provide your with a regular income from age 61 onwards, but you are entitled to make additional withdrawals as and when you require.

However, long term management of your ARF, considering not only the possibility of bleeding your ARF dry much too early, but also managing the tax payable on your withdrawals is imperative, and this should be discussed with an impartial financial advisor at set-up.

A properly appointed financial advisor, will automatically review your ARF annually to check both its investment performance and the impact of withdrawals to ensure that its kept-on track to match your requirements.

It is also important to understand that you can never take a tax-free lump sum from an ARF at any point, and that all withdrawals will be subject to your marginal rate of income tax.

At the point of setting up an ARF however, if you are existing an Occupational Pension Scheme, Executive Pension Plan, PRSA or Personal Retirement Bond on leaving that employment you can, from age 50, take a 25% tax-free lump form those plans proceeds prior to investing the balance in an ARF.

When you’re ready to drawdown your retirement benefits, having taken your tax-free lumps sum, the traditional alternative to investing in an ARF, is to buy an Annuity, which is a regular pension payment for life. However since the Finance Act 2023, those with PRSAs can now choose to take their lump sum and leave the balance in their PRSA to vest at age 75, from when withdrawals must be taken each year (imputed distribution then applies).

To find out more about this alternative please visit retirement annuities, where you can also read about their advantages and disadvantages.

Whereas all investing carries a level of risk, ARFs also offer much more flexibility than the alternative annuity option, as well as full tax-free inheritance between spouses. The key is to diversify to manage risk and review your situation annually, with the help of your financial advisor.

It’s important to understand that annuity rates are dependent on long-dated bond rates, which are influenced by interest rates, so annuity rates need to be high at the time of purchasing an annuity, to offer any real value.

Remember also,  if you go the ARF route you can still return to the annuity route down the road, but once you’ve purchase your annuity that’s it.