Retirement Options: Approved Retirement Funds (ARFs) vs Annuities

Retirement Options: Approved Retirement Fund (ARF) vs Annuities?

Broadly speaking, if you have a private pension, PRSA or a Defined Contribution work pension you have 2 main options on how to invest the balance of your pension pot after you take your tax free lump sum:

  1. Buy an annuity, which pays you a guaranteed monthly income for life.
  2. Or continue to Invest your pension pot into an Approved Retirement Fund (ARF) & draw money out of the fund as required.

This decision shouldn’t be taken lightly, as it will have a huge effect on your finances for the rest of your life.

What is an Approved Retirement Fund (ARF)?

  • An Approved Retirement Fund continues to invest your money after you retire.
  • You draw an income from the fund.
  • You can increase or decrease the amount you withdraw per year depending on your requirements (subject to a minimum of 4% of the fund value per year).
  • When you die, any remaining funds in your ARF are left to your estate.

What are the benefits of an Approved Retirement Fund (ARF)?

  • You can draw down as much or as little as you like to a minimum of 4% of fund.
  • On death any remaining money in your ARF will go to your surviving spouse or to your estate.
  • The ARF can be used to purchase an annuity at a later date. This allows you to hold off investing in an annuity if the annuity rates are poor at the time of retiring.
  • You have wide selection of investment choices to suit your appetite for risk and return. You can change these at anytime to suit your attitude to risk and market movements.

What are the disadvantages of an Approved Retirement Fund (ARF)?

  • Poor performance in the fund coupled with your regular drawdowns of pension income can cause your fund to run out sooner than expected.
  • You need to regularly review the performance of your fund with your advisor.
  • Your ARF is an ongoing investment. Some clients find anything linked to the market and its volatility too stressful to deal with.
  • Unlike an Annuity, there are no guarantees with an ARF. Diversification of your investments and picking the right risk strategy is key.

What are the benefits of an Annuity?

  • Provides an income for the whole of your life.
  • There are many annuity options for all different types of clients. For example you can allow for a Spouse Annuity in the event of your death, you can also protect it against inflation etc. However, the monthly income you receive will depend on the options you choose.
  • Safe and easy option to understand
  • Once in place, you do not have to worry about investment risk or market movements
  • You are investing in the provider giving you the annuity so the financial strength of the provider chosen is important.

What are the disadvantages of an Annuity?

  • The price of your annuity is correlated to long term fixed interest rates on the day you retire or purchase the annuity.
  • Your long term retirement income depends on current market conditions.
  • If you do not protect your annuity against inflation, the real value of your money will be eroded over time.
  • Once you purchase the annuity with your pension capital sum you can never access that money again.
  • An Annuity cannot purchase an ARF.
  • If you do not choose a guaranteed period at the outset or a spouses annuity or you are single, your annuity will die with you.
  • Annuity rates are near an all time low.

Retirement Options: Tax Free (and Taxable) Cash:

At retirement, you can claim a lump sum either:

  • Based on your final salary and years of service (if you are buying an annuity with the balance of your fund). The maximum is 1.5 times your final salary.
  • A maximum of 25% of your fund (if you are investing the balance of your fund in an ARF)
  • The maximum tax free lump sum in either case is €200,000
  • If you have a pension fund in excess of €800,000, you also have the option to take an additional taxable lump sum of up to 25% of the balance over €800,000 and pay 20% tax.

Why should you speak to Irish Pensions?

  • We will help you choose the right retirement option depending on your personal circumstances. We look at a wide range of factors before we make a recommendation including health, family circumstances, attitude to risk, tax free and taxable cash options etc.
  • Once you’ve decided on the right direction, we’ll shop the market for you to find you the best annuity rate or the most suitable ARF for you.
  • You’ll have access to hundreds of funds from many of the leading fund managers in Ireland and internationally.
  • We have a very competitive and transparent fee structure.

Request a Pre-Retirement Review:

  1. Have a chat with an Irish Pensions advisor – call (01)8570655, fill in the form below to arrange a call, or start a conversation using our Online Chat (click the icon on the bottom right of the screen).
  2. The advisor will ask you a series of questions to identify your circumstances, including target income in retirement and attitude to risk.
  3. They will provide you a report with your options and our recommendations.

Request a callback:

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Irish Pensions

Parkside 11, Mulhuddart, Dublin 15.

(01) 8570655