# Retirement Options - ARF, AMRF and PRSA



## Scot (6 Sep 2011)

Hi,

I could do with some help understanding the pension options on maturity of a pension plan.

A family friend has a Personal Pension Plan that will expire on his 60th birthday which contains approximately €100k. At this stage he would like to take the 25% tax free lump sum.

The question therefore lies around what to do with the remaining 75% in the plan. He would ideally like to hold the investment in the short term and purchase an annuity in say 5 years time. I have reviewed a number of different websites and my understanding is that ARF or AMRF are the main options he has. 

The questions I have are as follows:

1) If due to the restrictions he is forced to use an AMRF, does this actually represent a disadvantage if his intention is just to delay the purchase of annuity? Are these particularly disadvantageous due to the nature of the investments they use or the administrations costs? I appreciate that flexibility is the primary disadvantage.

2) Do you have to pay tax on a minimum withdrawal when using an ARF even if you don't withdraw any funds? Therefore can you just withdraw the value of the tax payable so that you are not out of pocket in the short term?

3) Can you have a PRSA to hold the 75% balance in which the value could grow prior to the purchase of an annuity?

4) Finally, what type of information is required to demonstrate the €18k per annum guaranteed? If you have a separate pension plan that will mature when you are 65 then does this not qualify as guaranteed income?

Thank you in advance for your help.


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## Conan (7 Sep 2011)

To answer your questions:

Unless he is in receipt of a "guaranteed income" (i.e. a pension for life) of at least €18k p.a. he will have to invest the first €120k into an AMRF (in this case all the remaining €75k). In say 5 years he could convert the AMRF into an annuity.
No deemed drawdowns are required from an AMRF (but are from an ARF). In this case he will not have an ARF (unless he satisfies the €18k pension requirement at the time of drawing down the €100k
Going the "vested PRSA" route may be the better option. In this case he transfers the €100k into a PRSA, then "retires", takes the 25% lump sum and simply leaves the remaining €75k invested. There is no minimum drawdown from a "vested PRSA" (similar to an AMRF). The "vested PRSA" can be converted into an annuity at a later stage (before age 75)
To satisfy the €18k pension requirement, you must do so at the time you start to draw down the €100k. The fact that you might be able to satisfy it at a later stage is not taken into account.
So I suggest (based on the information you supplied), that:

He invest the €75 into an AMRF, or
Invest in a "vested PRSA".


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## Baracuda (7 Sep 2011)

> 1) If due to the restrictions he is forced to use an AMRF, does this actually represent a disadvantage if his intention is just to delay the purchase of annuity? Are these particularly disadvantageous due to the nature of the investments they use or the administrations costs? I appreciate that flexibility is the primary disadvantage.


No disadvantages except that he may face early surrender charges if he decides to but an annuity within 5 years of purchace. There are all kinds of funds to chouse from low risk to high risk, depending on his risk tolorence's. Admin costs usually about 1%p.a. but do vary from provider to provider. 


> 2) Do you have to pay tax on a minimum withdrawal when using an ARF even if you don't withdraw any funds? Therefore can you just withdraw the value of the tax payable so that you are not out of pocket in the short term?


Subject to having met the minimum guaranteed income requirements of 18000 p.a. and that he can invest in a ARF; All withdrawals are subject to income tax at the persons marginal tax rate. Under current tax treatment of ARF's, The Revenue assums that you are encashing 5% of your ARF and charges income tax of upto 41% on the encashment. A person can allot part of their taxcredits and tax bands to the ARF and if appicable tax will be charged at 20% and tax credits can be used to off set. Otherwise a preson can do a tax balancing statement at the end of the year. Most ARF providers usually set up an auto income facuility of 5% so the customer can get the balance after tax.



> 3) Can you have a PRSA to hold the 75% balance in which the value could grow prior to the purchase of an annuity?


 This is best practice in the majority of cases. This aviods the need to set up a new contract that may have encashment penalities, commisions etc etc. PRSA's are not subject to 5% notional encashments tax. Charges are capped on PRSA to a Max of 5%contribution charge and 1% AMC, transfers in from other pension arrangements are free. 


> 4) Finally, what type of information is required to demonstrate the €18k per annum guaranteed? If you have a separate pension plan that will mature when you are 65 then does this not qualify as guaranteed income?


Letter from the Social welfare detailing a persons contributary/transition pension. Proof of overseas pension payments and letter from life office detailing annuity payments. Other than this all other incomes is excluded as they may stop or reduce in the future. Even though the person may have a pension fund that may mature in 5 years, this cannot be taken into account as the fund may drop in value e.g. Person held a self invested pension fund valued at 500,000 in 2006 that invested in AIB, BOI, PTSB and Anglo. Care to guess what it would be valued today...See my point. When the person reaches 65 then they can convert the fund to an Annuity and then this will become guaranteed income at that stage.

Barcuda.


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## Scot (7 Sep 2011)

Conan, Baracuda

Thank you very much for clarifying on my queries, this information is really helpful in understanding the options that are available. From the letters my friend had received it suggested that the AMRF/ARF route was the only options, bar an annuity. However from the information you have provided it is clear that the PRSA is a viable solutions also.

Thank you again for your help.
Scot


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## Baracuda (7 Sep 2011)

No problem Scot. Just remember that your friend will have to transfer the value of the pension to the PRSA before he can take the TFLS. You cannot take the TFLS and then transfer the remainder.


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