How an ARF Works
th Apr 2020 |
Understanding how an ARF works is essential when it comes to drawing down your pension benefits. This comprehensive ARF guide covers everything ARF related, from early ARF investment access to, ARF plan types, ARF income withdrawals, and withdrawal taxation, as well as ARF family inheritance.
How an ARF Works – 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. An ARF 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.
How an ARF Works – 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.
You can also drawdown 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 from a PRSA.
Exceptions only apply to ill-health early retirement and to certain occupations like professional sportspeople.
How an ARF Works – Note for Company Directors/Owners
Interestingly, you don’t need to have retired from your business or employment to access your pension from aged 60, no matter whether you’re an employee in a private company, 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, thereby losing out on your ARF option.
Annuities currently offer poor value for money in this low-interest-rate environment, so if you have reached age 60 and are a company director/owner now it the time to be considering an ARF!
How an ARF Works – Pension Draw Down Options
Once you have taken your 25% tax-free cash (optional and up to 300k 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 you decide on the type of fund you would like to invest in, and the amount of investment risk you’re comfortable with. Withdrawals from your ARF fund on a regular or ad hoc basis are subject to regular PAYE.
How an ARF Works – Income Related Eligibility
Before you can set up an ARF you must have a guaranteed pension income of at least €12,700 per annum or have invested €63,500 in an Approved Minimum Retirement Fund (AMRF) and/or Annuity.
So, if you’re already in the receipt of the state pension or indeed a private pension that’s paying you a guaranteed income of €12,700 per annum an AMRF is not required, but otherwise €63,500 must be invested in an AMRF, before investing any balance in an ARF.
If your investible fund is less than €63,500 then you can’t invest in an ARF, but you must invest your available fund in an AMRF.
If you have an AMRF and then reach state pension age and start receiving a state pension, your AMRF will automatically turn into an ARF, meaning your withdrawal rules then change, but your underlying investment remains the same.
How an ARF Works – Rules on Withdrawals
ARF Withdrawal Rules
There is no limit on the level of withdrawals that you can make form your ARF, but minimum amounts must be withdrawn at certain age brackets, with this known as “imputed distribution”.
If your total ARF’s are under €2 million, you must withdraw:
4% of the value of your fund, if you are over 60.
5% of the value of your fund, if you are over 70.
If your total ARF’s 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.
AMRF Withdrawal Rules
AMRF’s are treated differently, as an AMRF is designed to stop you spending all your pensions money to quickly! The maximum income you can take is 4% of your AMRF each year. Any distribution is taken from the AMRF can be used to reduce the minimum distribution amount from the ARF assets in that year.
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 and AMRF. (PRSI ceases at age 66).
How an ARF Works – ARF Plan Types
You have total control over the investment of your AMRF/ARF and can opt for a self-administered, self-directed or go down the more traditional Insurance company route and invest in mutual unitised funds.
Self-administered ARF’s 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 over-sight on the scheme and to ensure timely annual reporting.
There is are set-up as well as annual reporting costs involved on the 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 company directors, a level of personal investment expertise or experience is needed to avoid a lack of investment diversification as well as the ability to quickly react to changing market conditions.
Self-directed ARF’s are very similar to a self-administered ARF only for the fact that you use an insurance company to act as the Qualifying Fund Manager so you can choose between both their own mutual fund offerings and direct investments as you would under a self-administered plan. 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 ling term investment vehicle like an AMRF/ARF.
Having the insurance company involved removes the need for an independent trustee, but you will have to pay two sets of annual management charges plus transactional costs.
Mutual Fund ARF’s or “pooled” ARF investments better known in Ireland as unit-linked fund investments 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 AMRF/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 AMRF/ARF investment may involve a small set up fee, but generally, only a single charge annual management charge known as the AMC. 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 – Passing it on
The tax treatment of AMRF’S/ARF’s 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 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 – Director – Pensions & Investment Specialist – One Quote Financial Brokers on: 01 845 0049 or call me directly on: 087 665 8516.
Or enquire online and give us a quick outline of how we can help.