Approved Retirement Funds (ARF’s), what are they and how do they work?
What is an Approved Retirement Fund (ARF)
When you retire, you may have a decision to make on how you wish to access your pension fund.
Do you go with an Annuity, Approved Retirement Funds or an mixture of the 2.
You may have the option to Invest in an ARF if you are self-employed, a company director, or if you have a PRSA. If you are a member of a defined contribution employer pension plan, you may also have this option, depending on the rules of your own pension plan
If you would like to have control over how your retirement fund is managed and what income you would like to help fund your lifestyle in retirement than an ARF (Approved Retirement Fund) might be the best option for you.
What is an ARF?
An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money invested after retirement, as a lump sum. You can withdraw from it regularly to give yourself an income, however you will pay income tax, PRSI and Universal Social Charge (USC) on any withdrawals
Any money left in the fund after your death can be left to your next of kin.
Investing in an ARF may be an option if you are self-employed, a proprietary director, or if you have a PRSA. If you are a member of a defined contribution employer pension plan, you may also have this option, depending on the rules of your own pension plan
What do I need for an ARF?
To set up an Approved Retirement Fund 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. This minimum requirement for an ARF is the current Revenue limit (Jan 2020) and may change in future.
How does an ARF work?
An ARF allows you to invests in various assets such as shares, property, bonds and cash so the growth of your ARF fund depends on the performance of the assets it is invested in.
ARFs are designed to grow in value but your original investment is not guaranteed. An your ARF can run out during your lifetime if:
- You make large, regular withdrawals from it
- Investment returns are less than expected
- You live longer than expected.
You can decide on the type of funds you would like to invest in, and the amount of risk you’re comfortable with. When deciding on your risk level, always seek independent advice.
It is worth remembering that since your pension fund is still invested, its value may go down as well as up.
Advantages of ARFs
- You keep control of your retirement money. This may be important if you are in poor health or want to leave this money to your dependants after you die.
- You have flexibility in terms of when and how much income you draw from your ARF in retirement.
- *You can choose how to invest your ARF and select the type of investments that suit your needs and attitude to risk. Seek advice on this one.
- *Any growth in your ARF is tax-free, but withdrawals from an ARF are taxable
- You can always use your ARF to buy an annuity later on, if you decide that you need a secure, regular income. By waiting, you may be able to get a higher annuity rate later on for the same lump sum, as you will be older.
*Please Note: if you do not withdraw any money from your fund, Revenue will assume that you have withdrawn 4% each year (for those under 71 years and with funds of under €2 million).
You will be charged income tax and USC on that amount. With all providers it is now mandatory to take this withdrawal and is payable to you annually, that is, if you are not already withdrawing more than 4%
Disadvantages of ARFs
- Your retirement money is not guaranteed to keep its value because the assets in which your ARF is invested may not perform as well as expected.
- There is a risk that the ARF could run out in your lifetime. This could happen if you:
- take income from your ARF at too high a rate,
- its investment performance is less than expected or
- you live longer than expected,
- You will have to pay for any ongoing investment advice about your ARF.
- Some ARFs have high ongoing charges, which will reduce the value of your fund.
- There is no guarantee that your ARF will be able to buy you a higher pension later on than you could have bought at retirement. Annuity rates could be lower in the future than they are today.
- Revenue will assume that you have withdrawn 4% each year (for those under 71 years and with funds of under €2 million) and you will be charged income tax and USC on that amount.
It is important to weigh up the pros and cons of both options, and consider your own personal circumstances, now and in the future, before you make a final decision. Always seek independent advice
Tools to help you choose
With so many different plans and options available you may need some help making the decision that’s right for you. Thankfully, you’re not alone. From pension calculators to financial advisors, there’s plenty of help available.
You can use this ARF or Annuity tool from Zurich Life to see which option might be more suitable for you at retirement. There’s no right or wrong answer as to which option is better – just which one is better for you (based on the information you provide).
Free Guide to ARF’s
Click on the link below to download free guide to ARF’s
If you have questions or need advice
Why not give us a call and we will be happy to assess your existing arrangements and or discuss your retirement goals.
Call us today in Letterkenny: 074 910 3938
Below is a wee video from Irish Life that offers some advice on the subject as well
The information contained in this article is based on Advice First Financials’ understanding of current Revenue practice as at January 2020 and may change in the future.
Advice First Financial Services Ltd trading as Advice First Financial is regulated by the Central Bank of Ireland. Registered in Ireland.