# Converting PRSA to ARF



## tester12 (12 May 2011)

Does anyone know what the charges are or would be for converting a PRSA to an ARF with the same Insurance Company and using the same fund.

Thank you


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## StevieC (12 May 2011)

There is eligilibity conditions for entering an ARF. 

You have to be retirement age. 
You have to have a guaranteed income of €12,700 or else put €63,500 in an AMRF (Approved Minimum Retirement Fund, this money is locked away until age 75) with the balance going to an ARF.

Charges are based on the company selected and the fund choice so there is no one answer to this.

Also bear in mind there are tax implications and you are effectively forced to draw down 3% of the fund each year.

Consult a good independent financial advisor before going this route to ensure its the right move for you and because there may be cheaper options available to you than just sticking with the one company. 



www.CheaperLifeAssurance.ie


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## Baracuda (12 May 2011)

*Do not convert PRSA to AMRF/ARF*

StevieC figures are out of date. The AMRF figure is c.120,000 and the imputted distribution charge is 5%p.a. for the balance invested into an ARF


Now on to the main point; The benefits of a PRSA is that when you draw down your TFLS you can leave the remainding fund in the PRSA. This is then known as a Vested PRSA. A lot of brokers advise people to transfer the remaining fund to an AMRF/ARF (if not indeed the vast majority) as it generates a commision for them despite this being wrong advice, indeed some of the life companies even advise this as it creates "new business" for them. 

The added benefit of leaving the remaining fund in the PRSA is that this not considered a ARF for inputted distribution purposes which is currently 5%. Inputted distribution is where the Revenue assumes that you cash in 5% of your ARF fund and charge you income tax, PRSI and USC on that amount whether you want that money of not.

So do not transfer your PRSA to an AMRF/ARF


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## StevieC (12 May 2011)

Apologies, was reading from Zurich literature which is out of date on their website.

And yes Baracuda has alluded to tax implications. Its not cut and dry whether you are better off.


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## tester12 (12 May 2011)

Thank you all.

1. I qualify on the Age grounds.

2. I already have an AMRF for 63K this was taken out just before Finance Bill changing amount was published.  This should mean on my 2nd PRSA I have the ability to convert to ARF or a vested PRSA as detailed above.  When I took this out I found I had lost 5% when transferring to AMRF even though it was the same Company and same Fund.

3. Reason for converting to ARF would be to avoid the new levy which presumably would apply to a vested PRSA as well as normal PRSA.  The 5% withdrawals I would put into a new PRSA.


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## murp (12 May 2011)

It may be worth considering converting to a vested PRSA, depending on how the legislation is actually drafted, as it may be possible that a vested PRSA will not be subject to the Levy


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## LDFerguson (17 May 2011)

tester12 said:


> Thank you all.
> 
> 1. I qualify on the Age grounds.
> 
> ...


 
Depending on what details emerge in the Finance (Number 2) Bill on Thursday, this may become a popular course of action. As you say, current information is that PRSAs are subject to the levy while ARFs are not. 

If you deal directly with an insurance company, they will usually deduct normal commission from the ARF. Although yours is a straight like-for-like transfer, in "sales" terms an ARF is a brand new product. You should be able to negotiate a better deal with a broker if you've already decided on your course of action. 



tester12 said:


> The 5% withdrawals I would put into a new PRSA.


 
This would only be advisable if you have other pensionable income to offset for tax purposes. Pensions (including withdrawals from ARFs) are not pensionable in themselves. So if your only income is from pensions, you can't claim tax relief against further contributions into a pension. 

Liam D. Ferguson


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## eirefinq (20 May 2011)

as far as i am aware you can take your TFLS and maintain your PRSA without going into an ARF thereby avoiding the 5% Imputed distribution. obviously there are certain rules around this but it can be done.


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## Baracuda (20 May 2011)

FYI...Dept of Finance confirmed yesterday 19th May that "Vested PRSA's" are to be exempt from the 0.6% pensions levy. 

(Sorry but I cannot post a link to this information as I received this through internal e-mail)


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## boaber (20 May 2011)

page 2 on this document [broken link removed]


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## monagt (6 Jun 2011)

Then is it better now to go from PRSA to ARF (planned to go in 3 years and ARF eligible now) to save the levy for the next 3 years, 3 x .6%?


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## Duke of Marmalade (6 Jun 2011)

Fergie and others:

1)  Is it possible to take out an AMRF even if one is eligible for an ARF (i.e. enough income)?

2)  Is it possible to convert (part of) an ARF into an AMRF?

I presume that AMRFs escape the imputed distribution.


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## LDFerguson (6 Jun 2011)

Duke of Marmalade said:


> 1) Is it possible to take out an AMRF even if one is eligible for an ARF (i.e. enough income)?
> 
> 2) Is it possible to convert (part of) an ARF into an AMRF?


 
No and No. If you have an AMRF and subsequently qualify on the income requirements, you're supposed to notify your ARF QFM and they convert it into an ARF. 

I saw a recent letter from Revenue to the IIF and Revenue were a bit milk-and-watery on this. IIF asked how QFMs are supposed to know if an AMRF holder later qualifies on income. Revenue suggested that QFMs should write to all AMRF holders telling them to get in touch if they subsequently qualify on income. 



Duke of Marmalade said:


> I presume that AMRFs escape the imputed distribution.


 
Correct.

To avoid an imputed distribution, a vested PRSA is your only man.


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## Duke of Marmalade (6 Jun 2011)

Thanks Fergie

Shows how messy these things can become.  AMRFs were originally inferior to ARFs because of the Age 75 rule, so there was no issue, everyone wanted an ARF instead of an AMRF.  

But now that AMRFs escape the deemed distribution they are now superior to an ARF so we have the silly situation where the Revenue are trying to limit the use of AMRFs.   Seems to me they should have allowed 5% distributions on AMRFs and that AMRFs should be subject to imputed distribution.


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## LDFerguson (6 Jun 2011)

monagt said:


> Then is it better now to go from PRSA to ARF (planned to go in 3 years and ARF eligible now) to save the levy for the next 3 years, 3 x .6%?


 
If you've no need for the income from an ARF for the next three years, why don't you just vest the PRSA, i.e. withdraw the tax-free lump sum from it?  Vested PRSAs are exempt from the levy also, but the vested PRSA idea also avoids having to take taxable 5% annual income if you don't need it.  

(There may be specifics of your personal situation that render this plan inadvisable.)


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## monagt (23 Oct 2011)

When the PRSA is vested, does that means its closed for further investments?

What does "vested" mean in layman's language?


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## Baracuda (23 Oct 2011)

“Vested PRSA” means that you have claimed part of your retirement benefits and have not decided whether to invest in a annuity or a AMRF/ARF. As benefits have been part drawn Revenue treats vested PRSA as a holding account and therefore escapes imputted distribution charges and pensions levy.

Technically a vested prsa is open to new funds but you cannot claim a second TFLS for the new funds, so you are better off investing in a new prsa contract.


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## monagt (23 Oct 2011)

Thx B


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## monagt (25 Oct 2011)

Apologies, if this is a repeat.

Can anyone confirm this?

If I vest my PRSA before the end of June 2010, I do not have to pay the Levy?

(I am just making sure thats its not connected to the Tax Year in case I must Vest before the end of 2011 to avoid the Levy.) 

The Levy is very heavy on a fund that has not moved in years, actually is at a loss viz funds paid in and a Heavy Loss viz Funds paid in and Inflation.

M


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## boaber (25 Oct 2011)

If you vested your PRSA before 30 June *2011* then you would not have been subject to the levy this year.


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## monagt (25 Oct 2011)

Oops, I mean't: 


> If I vest my PRSA before the end of *June 2012*, I do not have to pay the Levy?


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## boaber (25 Oct 2011)

If you vest your PRSA before 30 June 2012 then you will not have to pay the levy next year


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## monagt (22 Feb 2012)

> If you deal directly with an insurance company, they will usually deduct normal commission from the ARF. Although yours is a straight like-for-like transfer, in "sales" terms an ARF is a brand new product. You should be able to negotiate a better deal with a broker if you've already decided on your course of action.



So can I get a better deal than with my Insurance company and with who. I would like to vest or arf with cheapest annual charges.


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## LDFerguson (23 Feb 2012)

A broker has a certain amount of discretion with regard to charging structures on products.  A lot would depend on the amounts involved and the amount of work the broker is required to do.  

For example, we have an ARF product with 100% investment, no bid/offer spread, no policy fee and fund charges from 0.75% per annum.


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## monagt (3 Mar 2012)

I cannot ask a direct question so indirect. 
How can one know that the fee broker is not getting a % commission + his fee for the same transaction? - so doubling up.

And second, given that ILife want to send out a rep who is on a salary - is it just as € efficient to use a commission based broker for an ILife ARF?

Thirdly, would it be more € efficient to use an independent fee based advisor?


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## LDFerguson (3 Mar 2012)

monagt said:


> How can one know that the fee broker is not getting a % commission + his fee for the same transaction? - so doubling up.


 
If you've agreed a "fee and no commission" arrangement with the broker, you can ask for a an illustration prior to point of sale - commission disclosure should be on any illustration and should therefore be zero in all years.  You'll also get a similar illustration directly from the ARF QFM along with a copy of your policy document after the event.  



monagt said:


> And second, given that ILife want to send out a rep who is on a salary - is it just as € efficient to use a commission based broker for an ILife ARF?


 
I don't know what sort of charging structures Irish Life's direct sales staff offer.  Ask the rep for a breakdown in writing of what charges will apply to the ARF - allocation rate, annual management fee etc.  Then compare.  



monagt said:


> Thirdly, would it be more € efficient to use an independent fee based advisor?


 
Depends on the advisor.  While all financial advisors in the country are closely regulated, the regulator does not dictate what level of fees one can charge.  So some commission-based advisors may be offering more competitive charges than some fee-based advisors and vice versa.  

All other things being equal, paying an advisor via commission for setting up an ARF is more efficient than paying a fee directly, for two reasons.  (1) If your advisor gets paid by commission, the commission is ultimately deducted from your pension fund.  You've already received tax relief on the contributions that made up that fund.  If you pay the advisor a fee, the fee is coming out of your after-tax income.  (2) Some fee-based advisors are registered for VAT.  If your fee-based advisor is registered for VAT, then you'll have to pay the fee plus VAT.  If you agree that the exact same fee can be deducted by commission from your ARF, commission is not VATable.


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## monagt (3 Mar 2012)

Liam, You continue to be very generous with your time and advice, Thanks again, M


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## tester12 (9 Apr 2012)

Currently I have an AMRF taken out before budgetary changes for specifified minimum amount c 65K.  I am now interested to activate my main PRSA(2nd PRSA) and how a couple of questions relating to ARF versues leaving it as a preserved PRSA.

If I opt for a preserved PRSA assuming I have to withdraw 5% annually is there any downside in relation to not going the ARF route.

The reason I ask is that with my AMRF I have a penalty of 4% of fund if I encash within 3 years?  I also had quite a few percent charge for going from PRSA to AMRF.  Given that I stayed with same Company and stayed in same fund I did'nt think this was fair.  Any idea if I went the same route for my main PRSA what charges I could expect for a preserved PRSA versus ARF route.


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## LDFerguson (20 Apr 2012)

What's the amount in question?  Depending on the amount, it may be possible to arrange an ARF with 100% investment, no early exit penalties and an annual charge of <1%.  This would compare with leaving it in the vested PRSA where you'd still have 100% invested, no early exit penalties but the annual charge is presumably 1%.


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## tester12 (21 Apr 2012)

The sum involved couple hundred k.  I have an  arf quoted that will give me 100% value for transfer into a 5 year deposit bond/fund providing 5.4% aer less 1% management fee giving annual return nett to me of 4.4% guaranteed for the 5 years.  So looks like I am losing .6 of the fund annually which is the same the Government takes without anything in return.  probably go with this.


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## LDFerguson (21 Apr 2012)

Sounds like an Aviva ARF with an EBS deposit - 5.45% AER?  Are you dealing directly with Aviva?  If so, push them for better than 100% - it can be done.  



> So looks like I am losing .6 of the fund annually which is the same the Government takes without anything in return. probably go with this.


 
I don't undertand this point.  How are you working out .6 of the fund?


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## Marc (22 Apr 2012)

5.4% less 1% annual fee less 5% imputed distributions less say an average of 3%pa inflation.

How long do you think you might live?

Over 25 years you would lose about 60% of the real value of your fund in today's terms from this strategy if inflation averaged 3%.  Higher inflation would be even worse.

Of course this assumes that you can continue to obtain cash deposits paying 4 half percent above base for the next 25 years which isn't a very realistic assumption. 

which is the greater risk? The absolute certainty of loss of purchasing power or some short term volatility from having some risk assets like equities?

A better strategy would be a more balanced portfolio with some fixed interest some equities global real estate etc.


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## tester12 (22 Apr 2012)

The investment is only for 5 yrs after which I will still be able to avail of 100% transfer to any fund I want.  I loose 0.6% value of fund which compounded over 5 yrs equals 3.3% approx of the fund. I will have obtained income of approx 23% of funf as income.  Inflation maybe an issue but not significant over 5 yrs.  If you look in todays Businerss Post at the Balanced Funds Managed Funds and Managed Dynamic Funds about 100 plus funds.  None have returned a + over 5 years most have between -4 t0 -5% return annualised over the last 5 years.  They have done not bad this year but overall poor performance but maybe that will change.


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## Marc (22 Apr 2012)

Ok so a few questions for you

Firstly how much of your investment is protected and by who if the bank goes bust? If you are buying a cash deposit through an insurance company you are no longer a retail investor. Professional investors such as insurance companies do not have the same protection as retail investors.

By investing through an insurance company your investment will be held on the balance sheet of the insurance company and if they go bust you would be a creditor of the insurance company. How financially sound is the proposed insurance company?

If you are holding cash in your ARF why are you using an insurance company at all? Why not use an independent QFM and get the ARF for 0.25%pa instead and keep the extra 0.75%pa?

Have you had a look at a range of risk rated index portfolios rather than the insurance company managed funds reported in the SBP? These index strategies have been positive over the last 5 years.
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Or over the longer term 

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This is a relevant study I conducted on real returns for cash vs balanced strategies for ARF investors that you may find interesting 

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or this article

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This video makes the same point

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Finally, the latest data for inflation in Ireland can be found here 
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## Dave Vanian (23 Apr 2012)

Marc said:


> If you are holding cash in your ARF why are you using an insurance company at all? Why not use an independent QFM and get the ARF for 0.25%pa instead and keep the extra 0.75%pa?


 
Hi Marc, 

Would there be an additional fee for establishing the ARF on these terms and if so, what would it be for, say €200,000?

I agree that risk assets will be more likely to outperform cash over the long-term and that cash will probably underperform inflation over the long term.  But if a client tells you that they simply cannot stomach the volatility associated with risk assets, even for short periods, and want a fund that will not drop in absolute value at any time, what would you suggest?


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## Marc (23 Apr 2012)

Dave,

There is an establishment fee for an ARF of €1000.

For a €200,000 ARF, this would equate to 0.5% of the initial amount or just 0.1%pa expressed over 5 years. If the ARF remains in place for the whole of an investor's retirement then the set up cost clearly becomes relatively insignificant.

Your second question is a common one that we see every day. If a client cannot face volatility risk they should actually first consider if an Annuity might be a better solution for them - at least for some of their fund.

All retirees face longevity risk that is to say the risk that they live "too" long and they run the risk of outliving their money. This is a very significant risk for an ARF investor who remains in cash for the whole of their retirement.

An annuity is a perfect hedge against longevity risk since the capital cannot run out. An annuity pays out for the whole of your retirement however long that is.

By definition half of us will live for longer than our average life expectancy. The real question that nobody can answer for certain is which half?

Retirement planning isn't a simple problem that can be distilled into a one size fits all solution and far too many people look at this too simplistically. If I earn 3% on my money pay 1% in charges but take out 5%pa then I am only losing 3%pa. 

This fails to consider the loss of purchasing power on the pension fund and the ultimate impact that this will have on the standard of living of some retirees. 

My recommendation is that ANYONE contemplating taking out an ARF and EVERYONE already in an ARF should obtain competent financial planning advice preferably from an independent and fee-only financial planner who operates as the clients fiduciary adviser. This is too complicated to arrange on a DIY basis.

I'm happy to offer a second opinion to anyone with an ARF or considering taking out an ARF and I have produced a detailed guide which I am happy to provide on request.

Marc Westlake CFP, TEP, APFS, Grad Dip, QFA
Chartered and Certified Financial Planner and Registered Trust and Estate Practitioner.


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