# Approved Retirement Fund (ARF)



## Bernie Cunna (27 Oct 2007)

I have €23,000 invested in ARF with Hibernian since 2003, with no withdrawals. Now I'm told that 3% of the value of the fund will be liable to tax each year from Dec 31 07, phased in at 1% on 31 Dec 07, 2 % on 31Dec 08 and full 3% on 31Dec 09 and each year thereafter. 
What should I do? Should I withdraw it all, in part or leave it? Bernie


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## oldtimer (28 Oct 2007)

Hibernian should have written to you about this. I have one with Eagle Star and they certainly pointed out the implications. As far as I know you will have to withdraw 1% or it will be deducted anyway. You should ring Hibernian and they should guide you on what to do.


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## ClubMan (28 Oct 2007)

Or better still get advice from somebody independent from _Hibernian_.


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## LDFerguson (29 Oct 2007)

In most circumstances, you should withdraw 1% of your fund this year, 2% next year and 3% per year from 2009 onwards.  Otherwise you may be double-taxed on these amounts.

Who sold you the ARF in the first place?  They should be able to advise you on this.


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## Perplexed (30 Oct 2007)

AFAIK you will not be double taxed. The amount of tax already deducted on the "deemed encashment" will be taken into account when you do encash some of the funds.


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## LDFerguson (30 Oct 2007)

Perplexed said:


> AFAIK you will not be double taxed. The amount of tax already deducted on the "deemed encashment" will be taken into account when you do encash some of the funds.


 
No, you do not receive any credit for the income tax and PRSI deducted on the imputed distribution.


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## MMilken (31 Oct 2007)

LDFerguson said:


> No, you do not receive any credit for the income tax and PRSI deducted on the imputed distribution.


As long as the person encashes the appropriate percentage (1%, 2%, 3% etc...) they would not be taxed other than the normal tax that would apply to an encashment anyway.


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## LDFerguson (31 Oct 2007)

MMilken said:


> As long as the person encashes the appropriate percentage (1%, 2%, 3% etc...) they would not be taxed other than the normal tax that would apply to an encashment anyway.


 
That's correct.  My point is that if someone *doesn't* take the 1%, 2% or 3% withdrawal, their ARF will get taxed on such amounts as if they had.  Then if they subsequently do withdraw the same money, it will be taxed again, with no credit gioven for the tax/PRSI already deducted.


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## MMilken (31 Oct 2007)

If the 1%, 2%, 3% does not take them over their tax-free threshold they would still not pay tax (even if they did not make any encashment).


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## LDFerguson (31 Oct 2007)

MMilken said:


> If the 1%, 2%, 3% does not take them over their tax-free threshold they would still not pay tax (even if they did not make any encashment).


 
That's also correct.  Tax on both the imputed and actual withdrawals will be at the individual's normal rates.  So if the individual is exempt from Income Tax altogether, there will be no liability.  Which is why I said in my earlier post "Otherwise you _may_ be double-taxed on these amounts."


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## MMilken (31 Oct 2007)

You also said "In most circumstances"!

I would not think that most pensioners have income in excess of €35K a year (their tax-free threshold)..."In some circumstances" would be more appropriate.


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## LDFerguson (1 Nov 2007)

> I would not think that most pensioners have income in excess of €35K a year


 
That's not my experience of customers who are eligible to, and choose to invest in ARFs.  Have you any statistical evidence to back this up?


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## MMilken (1 Nov 2007)

Yes I do have evidence to back it up.

The average industrial wage is about €30K.

Most pension schemes target a max of 2/3rds of salary.

That would be €20K.

€20K < €35K.

ARFs are available to all self-employed and people with PRSAs, Personal Pensions and AVCs, so should provide a good representation of typical Irish workers.


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## LDFerguson (1 Nov 2007)

The average industrial wage tells us absolutely nothing about how many people who purchased ARFs have a household income (including spouses if relevant) of greater than €38,000.  The Income Tax exemption threshold for a married couple where one partner is over 65 is €38,000; the threshold for a single person over 65 is €19,000.


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## MMilken (1 Nov 2007)

Of course it tells a lot about it - the number of ARF holders is such that the average wage would be as good a proxy as one could find for their average income pre retirement.

Which in turn could be used to give as good an estimate (with sufficiently large sample data) as possible of the average pension.

It does not matter anyway - the basic point is that telling someone to encash because they will be hit by tax without assessing their personal situation would be very very poor advice.


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## Conan (1 Nov 2007)

MMilken,
Your understanding of how ARFs operate is a bit wide of the mark (IMHO):

It clearly makes sense to extract the full 1%, 2% 3% , pay the tax and retain the balance personally. If one simply pays the tax on the deemed distrubution -but leaves the balance of the 1%, 2% or 3% in the ARF- then this will be taxed again on eventaul withdrawal. A no-brainer.
Access to ARFs (in the main) is open only to Self-employed and Company Directors (who own more than 5% of the share capital). The average industrial wage (I would suggest) is certainly not a reasonable proxy for the earnings of this group. In my experience, those who do effect ARFs do so because they have other income, do not require the certainty of buying an annuity and require the flexibility of income drawdown that ARFs offer. Because they have other income they can "afford" to take the inverstment risk inherint in the ARF structure.
In terms of advice, if a retiree does not have significant other income (say over €38k p.a.) then it may be more prudent to buy an annuity (an income certain) rather than invest in an ARF (where the same level of certainty of income does not exist).
The only other category that can invest in an ARF are those who have funds coming from AVC investments. By the very nature of AVCs, it means that they must also be members of an occupational pension plan which will in itself pay a pension. In my experience, those who invest in AVCs tend to be more highly paid than the average industrial wage and therfore their basic occupational pension is likely to be higher than the average.


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## Protocol (1 Nov 2007)

Most of the people buying ARFs are not industrial workers, and so earn more than the GAIE.

Average income per head is about 36k.  Note that is per person.

Average income per worker would be higher.


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## MMilken (1 Nov 2007)

Conan said:


> It clearly makes sense to extract the full 1%, 2% 3% , pay the tax and retain the balance personally. If one simply pays the tax on the deemed distrubution -but leaves the balance of the 1%, 2% or 3% in the ARF- then this will be taxed again on eventaul withdrawal. A no-brainer.


*This is not true.*
*Tax will not apply if the person would not be taxed on that income.

*


Conan said:


> Access to ARFs (in the main) is open only to Self-employed and Company Directors (who own more than 5% of the share capital). The average industrial wage (I would suggest) is certainly not a reasonable proxy for the earnings of this group. In my experience, those who do effect ARFs do so because they have other income, do not require the certainty of buying an annuity and require the flexibility of income drawdown that ARFs offer. Because they have other income they can "afford" to take the inverstment risk inherint in the ARF structure.


Most people do not get a pension of 2/3rds of salary - so my argument that a lot of pensions would be less than €30K is most definitely true.



Conan said:


> The only other category that can invest in an ARF are those who have funds coming from AVC investments. By the very nature of AVCs, it means that they must also be members of an occupational pension plan which will in itself pay a pension. In my experience, those who invest in AVCs tend to be more highly paid than the average industrial wage and therfore their basic occupational pension is likely to be higher than the average.


Yes but not likely to be 2/3rds


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## MMilken (1 Nov 2007)

Protocol said:


> Most of the people buying ARFs are not industrial workers, and so earn more than the GAIE.
> 
> Average income per head is about 36k. Note that is per person.
> 
> Average income per worker would be higher.


 
Most pensions are not 2/3rds of salary - my point was that vague advice is worse than no advice.


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## LDFerguson (1 Nov 2007)

> ...the basic point is that telling someone to encash because they will be hit by tax without assessing their personal situation would be very very poor advice...


 
Of course it would.  You seem to be confusing Askaboutmoney with real life.  Askaboutmoney is a chat board.  In real life, I wouldn't give advice without obtaining a fact-find first.  I'm hardly going to do that on Askaboutmoney.

I repeat my original point - my experience of ARFs is that a majority of them are purchased by people who will be within the tax net in retirement, mostly for reasons outlined by Conan above, so my original statement stands - In most circumstances, you should withdraw 1% of your fund this year, 2% next year and 3% per year from 2009 onwards. Otherwise you may be double-taxed on these amounts.


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## MMilken (1 Nov 2007)

You seem to be taking this personally.

I was merely trying to help the OP by clarifying very vague advice from your post.

Whether or not they will be taxed is circumstance-specific.
Therefore, I would think that advising someone that tax may apply and that this would depend on the level of their income would be much better advice through a webiste - given that, as you said, this is just a website.


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## LDFerguson (1 Nov 2007)

With hindsight I agree that your suggestion below would have been more precise than my reply.  My original reply was correct but I failed to include some additional provisos that might have been useful to the original poster.    



> You seem to be taking this personally.




Not at all.  But this did irritate me..."the basic point is that telling someone to encash because they will be hit by tax without assessing their personal situation would be very very poor advice." because it clearly showed that you hadn't read my original post in this thread properly.


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## MMilken (1 Nov 2007)

Ok, agreed.

OP is probably more confused than ever now...sorry!

Basically, in very general terms, if the ARF holder has a decent size private pension (€20K+) then they should usually encash 1%, 2%, 3% etc to avoid double taxation.

However, in most cases they may wish to consider independent advice because the circumstance of their case will determine whether or not they could face double taxation issues.


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## Bernie Cunna (1 Nov 2007)

Thanks guys!


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