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ARFs & Annuities

Once you reach retirement you may be able to choose what to do with your retirement fund depending on your individual circumstances. One of these options may be an Approved Minimum Retirement Fund (AMRF) or an Approved Retirement Fund (ARF).

How do they work?

With AMRFs and ARFs you re­invest you pension fund and take the money out when you need it.

In order to take out an Approved Retirement Fund you must have a guaranteed pension income for life of €12,700 per year (from other sources than your ARF investment). If you don’t you must invest €63,500 of your pension fund into an Approved Minimum Retirement Fund or buy an Annuity ( see below ) with that amount. Once you have put this money in an AMRF or an Annuity you can put any remainder into an ARF.

An Approved Retirement Fund (ARF) is a personal investment account into which you can transfer part of your retirement fund at retirement instead of using those funds to buy an annuity or take their retirement benefit as a pension. It is therefore an alternative option to an annuity or pension

An ARF, therefore, does not provide the longevity insurance provided by an annuity. On the other hand, the balance in the ARF on death is preserved and paid to the ARF holder’s estate. The following can avail of the option to transfer the value of part of their retirement benefits to an ARF at retirement, rather than taking the benefit as an annuity:

  • Personal Pension Plan holders.
  • PRSA holders.
  • Members of defined contribution occupational pension schemes, where the scheme rules provide the ARF option.
  • Proprietary director members of defined benefit occupational pension schemes.
  • Additional Voluntary Contribution (AVC) benefits.
  • Buy Out Bonds, which relates to a transfer value received from a former defined contribution occupational pension scheme or AVCs.

Only funds from the above arrangements can be transferred to an ARF, subject to first meeting the €63,500 AMRF/annuity purchase requirement, if applicable to that individual when they take their retirement benefits.

Benefits of ARFs

The main benefit provided by ARFs are:

  • Capital preservation; any balance in the ARF on death is preserved for dependants, less appropriate taxes.
  • Income withdrawal flexibility, subject to the minimum imputed distribution amount.
  • Tax free investment accumulation.
  • It provides a way to defer purchase of an annuity.
  • Wide investment freedom and flexibility.

The main risks of ARFs for consumers are:

  • The ARF could ‘bomb out’ , so that the ARF runs out of funds or the income reduces significantly during the ARF holder’s life.
  • If the ARF is used to defer annuity purchase, the annuity purchased later on might be lower than the Annuity which could have been secured at the time the funds were transferred to the ARF.
  • Defined contribution pension arrangements work by accumulating a capital lump sum by retirement age which is then used to provide:
  • A tax free lump sum, within certain limits.
  • With the balance of the accumulated fund then being used to purchase an annuity with a life assurance company.

Annuity

An annuity is a single premium insurance policy issued by a life assurance company where, in return for a lump sum payment now, the life company guarantees to pay a specified level of income for the remainder of the life of the individual insured by the policy.

Therefore while annuities provide a guaranteed income for life, they also carry the corresponding risk of the loss of a substantial amount of the money invested in the annuity if the individual dies shortly after purchasing the annuity.

Benefits of annuities

The main benefits to a consumer of investing retirement funds in an annuity are:

  • The annuity provides a guaranteed monetary level income for life, regardless of how long the consumer may live in retirement.
  • The consumer is not exposed to investment risk, as the annuity provides a guaranteed monetary level income for life.
  • The consumer can choose from many different types of annuity, to choose the one that best suits his or her circumstances. E.g. the consumer can choose to buy a level annuity or one that increases each year.

Risks of annuities

  • If the annuity payable is fixed, then its real purchasing power will decline with the impact of inflation.
  • The consumer could die in the early years after purchasing the annuity and consequently part or all of the sum used to purchase the annuity is lost.