ARF(deposit account) versus Deposit account.

[demoivre]

Is there any advantage of an ARF, where the funds are invested in deposit accounts, over a straight deposit account? As I understand it ARF funds grow tax free but withdrawals are subject to PAYE taxes and there are early encashment penalties in the first 6 years. Straight deposits accounts are subject to DIRT but you can withdraw funds as you want with no further taxes due.

 

[boaber]

The investment premium of an ARF must come from a pension/PRSA policy.

If you have a personal pension/PRSA/AVC/are a propriety director, then you would be able to invest some of your pension scheme proceeds (after a tax free lump sum) in an ARF (subject to certain criteria). Yes, withdrawals from an ARF will be subject to PAYE, but you can allocate some or all of your Standard Rate band & tax credits to this income.

If you do qualify for an ARF, but decide to take the proceeds as a lump sum, it will be subject to PAYE - so you will have a lot less to invest in in your straight deposit account.

 

[demoivre]

Thanks boader but the qualification criteria for the ARF aren't an issue. The bottom line question is why would a top rate tax payer be better off investing a lump sum in an ARF ( where the funds are placed in deposit accounts because the investor is risk averse ) over simply depositing the lump sum themselves in a deposit account?

 

[DerKaiser]

Thanks boader but the qualification criteria for the ARF aren't an issue. The bottom line question is why would a top rate tax payer be better off investing a lump sum in an ARF ( where the funds are placed in deposit accounts because the investor is risk averse ) over simply depositing the lump sum themselves in a deposit account?

Well the proceeds either came from a pension, in which case you can't simply withdraw them to put them on deposit, or from elsewhere, in which case you wouldn't have any reason to put money into an ARF.

 

[Marc]

The op is really asking a question about net returns here.

The arf has an annual fee whereas a bank deposit does not.

So the after costs return needs in the arf to compensate for this.

If you take out the whole fund you pay an upfront tax charge at your marginal rate of tax.

Whereas if you wait, you only pay tax on imputed distributions of 3%pa of the value of the arf.

Is paying dirt on all the capital better or worse than paying a fee on all the capital and marginal tax on 3%pa?

Simply if you have you arf with an insurance company you will typically pay 1%pa for the arf and a deposit fund would be typically making less than 1%pa at present.

So under the typical arrangements we see day after day leaving cash in the arf is a poor decision.

However fundamentally this is true anyway. The mistake most risk adverse investors make is to assume that cash deposits are the only low risk option for an arf.

This is simply not the case. If you take professional fee based advice from a competent adviser you can make an arf work perfectly well for a conservative investor.

However if you have an arf in cash for your retirement under most circumstances you would be better off purchasing an annuity. The reasons for this are extremely complex but largely involve the risk of underestimating life expectancy in retirement.

Taking out the cash paying an upfront tax charge and holding the proceeds in cash for retirement is an invitation for poverty in retirement for many people.

Always seek professional advice in these matters.