Our guide to Approved Retirement Funds (ARFs) is all about understanding how an ARF works, which is essential when it comes to drawing down your pension benefits in Ireland.
This comprehensive guide to Approved Retirement Funds (ARFs) covers everything ARF-related, from:
- ARF access,
- ARF plan types,
- ARF drawdown,
- ARF taxation,
- ARF inheritance.
Guide to Approved Retirement Funds – What is an ARF?
An ARF is a personal, tax-efficient investment fund into which you can transfer all or part of the balance of your pension fund after you receive your tax-free pension lump sum. It allows you to remain invested and grow your retirement fund, with the ability to control your underlying asset choices, whilst also being able to draw down a flexible regular income.
Guide to Approved Retirement Funds – Age-Related Access
When it comes to accessing your pension benefits, you don’t always need to have stopped working altogether, but you need to have left that pension-related employment if taking benefits from age 50 and before age 60 where permissible.
In occupational pension schemes, early retirement is generally possible with the employer’s and/or trustees’ consent from age 50 onwards. This includes a one-person Executive Pension Plan where you’re also the employer.
Individuals can also draw down their benefits from a Personal Retirement Bond or PRSA from age 50, but only if your PRSA was employer-sponsored and you have left that employment.
Otherwise, the minimum drawdown age is age 60 from a Personal Pension Plan or a PRSA.
Exceptions only apply to ill health early retirement and to certain occupations like professional sportspeople.
Note for Business Owners
Interestingly, you don’t need to have retired from your business to access your pension from age 60, no matter whether you’re self-employed or a company director/owner.
However, if you die before drawing on your Executive Pension Plan, the value of your plan is payable in full to your estate, up to a limit of four times the level of your final salary from the company at that time. Any balance is currently required to be used to buy an annuity for your surviving spouse or partner and/or other dependants, or it can be invested in an ARF.
Pension Draw-Down Options
Once you have taken your tax-free cash (up to 200k tax-free), an alternative to buying a regular pension payment for life called an “Annuity” is to reinvest your balancing pension pot in an ARF, and then use it to make withdrawals to support your lifestyle.
When reinvesting in an ARF, with the aid of your financial broker, you decide on the type of funds you would like to invest in, and the amount of investment risk that you’re comfortable with.
How an ARF Works – Rules on Withdrawals
ARF Withdrawal Rules
There is no limit on the level of withdrawals that you can make from your ARF, but minimum amounts must be withdrawn at certain age brackets:
If your total ARFs are under €2 million, you must withdraw:
- 4% of the value of your fund, from age 61
- 5% of the value of your fund, from age 71
If your total ARFs exceed €2 million, you must take out 6% of the value of your fund each year.
Once you have taken your minimum withdrawal, you can take any additional income as you need it.
Capital Preservation
A key tip is to set your withdrawals at a fixed percentage, rather than as a monetary amount where possible, as this will help in the preservation of your ARF capital for future family inheritance.
Calculating the distribution
Distributions albeit the minimum 4% or 5% or higher amounts, are calculated based on the ARF value on the 30th of November in that year. If payments are made before 30th November e.g. quarterly or half yearly, then the date of actual distribution is used.
Tax on Withdrawals
You will have to pay income tax, Pay Related Social Insurance (PRSI), and Universal Social Charge (USC) on any money you take out of your ARF.
(USC reduces at age 70, provided income outside your state pension is less than 60K ).
Effective from 1 January 2024 the upper age limit for the PRSI exemption was changed by legislation from 66 to 70. This change applies to all ARF holders born on or after 1 January 1958, aged between 66 and 70, and who have not been awarded the State Pension (Contributory).
This means that ARF holders who turn 66 from 1 January 2024 onwards, will have to pay 4% in PRSI on their ARF withdrawals unless they confirm that they are receiving the State Pension (Contributory).
How an ARF Works – ARF Plan Types
You have total control over the investment of your ARF and can opt for a self-administered, self-directed, or go down the more traditional Insurance company route and invest in mutual funds.
Self-administered ARFs allow you to make your own individual stock, deposit, or bond selections as well as to invest in your own selected property. If you opt to go the self-administered route you are obliged to hire an independent Trustee to have official oversight of the scheme and to ensure timely annual reporting.
There are set-up fees, as well as annual reporting costs on top of transactional costs, under this type of arrangement, and although from a control perspective, this option appeals to a lot of high-net-worth individuals and some company directors, a level of personal investment expertise is needed to avoid a lack of investment diversification, as well as the ability to quickly react to changing market conditions.
Self-directed ARFs are very similar to self-administered ARFs, only for the fact that you use an insurance company to act as the Qualifying Fund Manager, so you can choose between both their mutual fund offerings, as well as direct investments as you would under a self-administered ARF. Compared to a self-administered option a self-directed ARF generally leads to greater investment diversification which is always a good thing, especially for any long-term investment vehicle like an ARF.
Having the insurance company involved removes the need for an independent trustee, but you may have to pay two sets of annual management charges plus transactional costs.
If considering a self-directed ARF, it’s important to note that on top of the Annual Investment Charge, levied against your ARF fund value, your broker will add a percentage charge and then on top of this, there will be trading charges. Such platform providers will often emphasize cost transparency, but people forget about the imputed distribution part. Withdrawals of 4% minimum must be taken from age 61, rising to 5% minimum from age 71. This means either holding this money in cash to cover each year’s withdrawals or incurring additional trading costs.
Mutual Fund ARF or “pooled” ARF investments, better known in Ireland as unit-linked funds are one of the easiest and least costly ways to invest in the stock market, as well as to gain access to Bonds, Property, Alternatives, and Cash Deposits. Mutual funds are a good way for ARF investors to experience the stock market while reducing risk through professional portfolio management and a selection of asset classes which include, active and indexed funds, shares, property, bonds, cash, commodities, and alternatives.
This cost of ARF investment may involve a small setup fee, but generally, only a single charge annual management charge is known as the AMC applies. However, it’s important to be aware that some financial brokers or advisors will set high support-based commissions adding to the AMC, so it’s important to shop around to get the best value.
How an ARF Works – Constructing a low-cost robust portfolio
Most people choose unit-linked funds provided by life companies, as they offer diversified risk across the different asset classes, but also because they are lower in cost and less time-consuming to manage. When it comes to investment risk, the higher the risk the greater the potential reward but as you’re not adding monies but making withdrawals over time, it’s generally best to opt for a medium-risk (ESMA 4) portfolio approach, unless perhaps where you are closer to age 50 at set-up.
Remember, once you reach age 61 you must make minimum annual withdrawals of 4%, and because you will want to pass on the ARF should you die, you will want to achieve returns to counter these withdrawals. We recommend that you consider (were available) guaranteed cash-deposit funds, alongside medium-risk multi-asset funds in some cases.
How an ARF Works – Passing it on
ARF Inheritance
The tax treatment of ARF when the holder dies depends on who inherits the ARF and in what manner.
If the ARF transfers into the name of the holder’s spouse, then no income tax or Capital Acquisitions Tax (CAT) is payable. However, the spouse will pay income tax on any withdrawals from the ARF.
If the ARF monies are inherited by the holder’s child, who is under 21 at the time of the holder’s death, then no income tax is payable, although CAT may be payable depending on the total amount inherited – see current inheritance tax-free thresholds.
If the ARF monies are inherited by the holder’s child, who is 21 or over at the time of the holder’s death, then income tax at a rate of 30% is chargeable. However, CAT is not payable.
If the ARF monies are inherited by any other person (not being your surviving spouse or child) both income tax at the marginal rate and CAT is payable.
For more ARF information
Contact: Ken O’Gorman QFA, SIA, RPA, Chartered Banker – Director – Pensions & Investment Specialist – One Quote Financial Brokers on: 01 845 0049 or call me directly on: 087 665 8516.
