Retirement Options

When can I retire

Personal Pension Plans: Individuals with Personal Pension Plans can take their retirement benefits at any age between 60 and 75. You do not actually have to stop working. As soon as you reach age 60, you can take your benefits & continue working.  There are some circumstances where individuals can take your benefits before age 60.

  • You are seriously ill & due to your ill health you have to permanently stop working
  • You work in a specific occupation where it’s the norm to retire before 60. These types of occupations include professional sportspeople, pilots & fishermen.

 

Personal Retirement Savings Account (PRSAs):  Similar to a Personal Pension, an individual with a PRSA can take their retirement benefits at any age between 60 and 75. You do not actually have to stop working. As soon as you reach age 60, you can take your benefits & continue working. There are some circumstances where individuals can take your benefits before age 60.

  • You are seriously ill & due to your ill health you have to permanently stop working
  • You work in a specific occupation where it’s the norm to retire before 60. These types of occupations include professional sportspeople, pilots & fishermen.
  • Or, if you are an employee, you can take your benefits from the age of 50 if you stop working for that company. This will need to be verified by a copy of your P45 for that employment.
  • If you are an owner/director with a more than 20% of shareholding in the company, you will also have to sell those shares in order to retire early. This option does not apply to you if you are self-employed, a sole trader or a Company partner.

 

Company Pension Plans: If you are an individual who is a member of a company pension you can take your retirement benefits at your normal retirement age, this will have been set out in the particular companies scheme rules by the scheme trustees and is normally between the ages 60 & 70. There are some circumstances when you can take your benefits before your normal retirement age (NRA). You may take your benefits if:

  • You are seriously ill and due to your ill-health you have to permanently give up work
  • From age 50- if you stop working & both the trustees of your pension scheme & your employer agree.
  • If you own/control more than 20% of the shares in that company, you will also have to sell those shares in order to retire early.

 

Additional Voluntary Contributions or AVCs:  If you are a member of a company pension scheme, you may have paid additional voluntary contributions (AVCs). Your company pension scheme & AVC benefits will be linked & the retirement age for both will be the same. You must take your benefits from your AVC at the same time as you take your company pension.

What options are available when I retire

When you retire you have a number of Options:

This is a key time in the pension planning process and probably the most important time to get expect advice as the wrong decision could negatively impact your retirement income and cost you thousands both in terms of your tax free lump sum and your monthly / annual income. Making the right decision at this point is key to your lifestyle in retirement. Don’t make this decision without getting advice from a qualified financial advisor who is an expert in retirement options

 

Tax free lump sum

At Retirement you will be entitled to:

  • A lump sum, based either on your final salary in the relevant employment and your years of service, called the salary and service route.
  • A Maximum of 25% of the value of your accumulated fund.
  • The first method will apply if you are taking the balance of your benefits as an annuity; the second will apply if you intend to use the balance of your benefits to purchase an Approved Retirement Fund or Approved Minimum Retirement Fund.
  • €200,000 maximum tax free limit on either method.

 

For the fund that is left after the tax free lump sum has been taken 

  • A choice between an annuity, an Approved Retirement Fund or an Approved Minimum Retirement Fund for the balance
  • In certain circumstances the balance after your lump sum entitlement can be taken as taxable cash

 

This again is a really important decision and a number of factors should be considered.

Please find below a table of the pros and cons of choosing either an ARF or Annuity.

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Annuities v ARF/AMRF

Annuity rates are historically low at present. This is causing retirees to look at alternatives options for their pension funds. An annuity or income for life provides the retiring individual a guaranteed income normally on a monthly basis until death.

Types of Annuities

  • Unguaranteed
  • Guaranteed for 5 years
  • Guaranteed for 5 years with indexation @3%
  • Guaranteed for 10 years with indexation 5%
  • Overlap

 

In order to assess what vehicle you should choose, Annuities or an ARF (Approved Retirement Fund) it is prudent to look, in depth at the advantages and disadvantages or risks of both alternatives. The following outlines, for the individual what these two very different investment options offer. It would be essential to consider these before making a decision on which path to go down.

There are many different types of annuities as we have spoken about previously. For comparative purposes I will use a guaranteed annuity for consideration below.

 

ANNUITY

The advantages of a guaranteed annuity are as follows

  • It provides a guaranteed level of income for life. The risk of Longevity is covered. You are guaranteed to have an income from an annuity for the whole of your life. Long after your investment could have eroded in other investment vehicles, an annuity will continue to provide a guaranteed monthly income.
  • There is no investment risk, once an annuity is procured. The only risk of non-payment is the risk of the life company defaulting which is very unlikely. Your investment is
  • There is a wide choice of annuity types, to cater to different individual circumstances. You can guarantee the income to a spouse or children or the income can increase with indexation against the effects of inflation. Even if you are suffering from the effects of ill health you can secure a higher annuity rate that will improve the guaranteed income to compensate for the potential reduction in life expectancy.
  • The annuity simpler, safe option and easy to understand. The client does not have to worry about ongoing Investment advice or regular income payments. With an annuity there is little need for ongoing advice.

 

The disadvantages of a guaranteed annuity are

  • You lose access to your capital sum. Once a lump sum is invested in the annuity, it cannot be accessed in any other capacity. Once an annuity is procured that choice has been made and you are held to those conditions.
  • One of the Major issues with Annuities is the loss of the capital sum in the event of death to the individual, You can have a guaranteed period where the income will continue to be paid even in the event of death, it can also be reverted to a spouse for example but in certain circumstances a significant loss of capital to the estate can occur on death.
  • The % return on annuities is linked predominantly to long term fixed interest rates and is fixed for the life of the annuity; on the day that annuity is purchased. This means that at the time of your retirement rates could be low and this is going to have a considerable impact on the level of income you secure for retirement.
  • Within an annuity there is no inflation protection, Inflation will erode the actual value of the money – this is because the investment has no risk and has no participation in equity returns. You can add indexation to combat this issue but where indexation is chosen a lower annuity rate would be offered.

 

ARF (Approved Retirement Fund)

In the case of the ARF, the advantages  would be:

  • Within an ARF there is NO immediate loss of capital. ARF capital can be preserved for dependants and the inheritance of an ARF can be deferred until the 2nd death of ARF holder and spouse. The balance of an ARF on 2nd death is paid to children, less tax at max rate of 30%.
  • There is complete income flexibility; for an example during a period of ill health draw down of income could be increased to pay for medical expenses. You dictate the flow of income that comes from the investment at a minimum of 5%
  • If annuity rates at not competitive at the time of retirement an ARF is a suitable holding place with a view to annuity rates improving sufficiently to warrant the purchase of an annuity going forward. If annuity rates remain low you can stay within the ARF investment. ARF could be used to buy an annuity at a later more favourable date. E.g. when annuity rates may be higher.
  • Within the ARF there are more investment opportunities to participate in equity and property returns that offer higher potential returns and protection against inflation. Unlike an annuity an ARF has potential for good investment growth during retirement.

 

In the case of the ARF, the disadvantages would be:

There is a potential ARF bomb out risk. E.g. the investment will run out of money during your retirement. This would be a common occurrence as the minimum 5% imputed distribution would cause the investment to bomb out well within the average life expectancy of a retiree.

An ARF carries a heavy investment and longevity risk. Longevity risk is not being insured; therefore there is the risk of the ARF running out of money during the ARF holder’s lifetime or the ARF regular withdrawal minimum of 5% causing the investment to run out of money during the ARF holder’s life time. The investment could also perform poorly and reduce significantly in value.

  • If an ARF is used to defer annuity purchase for a period, there is the risk that annuity rates could be lower when the annuity is purchased, due to improved life expectancy and lower interest rates than currently apply.
  • When investing in an ARF there is a requirement unless income of €12,700 per annum can be secured in retirement to place €63,500 of the investment into an AMRF which cannot be accessed until age 75.

If an annuity is the simple, safe option then the ARF would be considered a riskier and more complex solution. Ongoing Investment advice would be required during investment in an ARF, as mentioned previously the 5% imputed distribution would mean most ARF’s bomb out before death.

In conclusion- there are no right or wrong answers; the key component to choosing what is the best route is for you depend of your individual circumstances goals and objectives. It is not a one right answer or fit for all,

As you can see there is much to consider when it comes to choosing either an annuity or ARF, I would very strongly recommend that you seek impartial advice from a qualified financial advisor. Someone you trust to have your best interests at the core of their advice and knows the advantages of each option.

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