# Questions on Buy out bond: lump sum withdrawal, AMRF/ARF, imputed distribution



## David_Dublin (21 Aug 2020)

Hi All,

I have some questions on Buy Out Bond and things linked to it.

When does one have to do the AMRF/ARF think in relation to a Buy Out Bond? What determines the Age that this has to be done by?
Assuming one has enough income, is it best to put this off doing this until as late as possible to avoid the imputed distribution side of things from age 61?

I was kindly advised on here to avoid withdrawing the Tax Free Lump Sum at age 50, if at all possible to postpone this to allow the fund grow (25% tax free up to 200k, beyond that at 20%, the remainder converting to an AMRF/ARF).
Assuming one has enough income, presume it is best to put off withdrawing Tax Free Lump Sum as late as possible?

Is there anything I need to look out for when setting up a Buy Out Bond that may come back to penalise me in the future? I am late 40s now, would like to retire in 10 years or so, but the best laid plans and all that....I'd like to make sure I do things now that don't prevent/penalise me should I need to retire early, or wish to continue working later. My pension should be €1.1m by early fifties, in case that helps.


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## LDFerguson (21 Aug 2020)

David_Dublin said:


> When does one have to do the AMRF/ARF think in relation to a Buy Out Bond? What determines the Age that this has to be done by?
> Assuming one has enough income, is it best to put this off doing this until as late as possible to avoid the imputed distribution side of things from age 61?



The BOB will have the same Normal Retirement Age as the pension scheme where the fund came from.  But you can decide to retire it at any age from age 50 - 70.  

As a general rule, yes it's best to defer drawing down taxable income that you don't need, until you need it.  



David_Dublin said:


> Assuming one has enough income, presume it is best to put off withdrawing Tax Free Lump Sum as late as possible?



Yes, as the funds within the BOB grow in a tax-free environment, then it's best to leave drawing them down for as long as you can.

BUT

If your fund is of a size that you may be at or near the €200,000 upper limit for the tax-free lump, there is an argument in favour of drawing it as soon as you can - politics!  There are certain political parties who favour and have proposed a reduction in the maximum tax-free lump sum from €200,000.  So the argument would be to take the tax-free lump sum while you can get it tax-free.  That's a speculative position, which you might or might not agree with.  



David_Dublin said:


> Is there anything I need to look out for when setting up a Buy Out Bond that may come back to penalise me in the future? I am late 40s now, would like to retire in 10 years or so, but the best laid plans and all that....I'd like to make sure I do things now that don't prevent/penalise me should I need to retire early, or wish to continue working later. My pension should be €1.1m by early fifties, in case that helps.



As with any financial product, especially one which may involve a sizeable sum of money, shop around.  Things to look out for: - 


Some BOB products have early exit charges after 3 or 5 years.  Others don't.  
Compare other charges also, e.g. allocation rate in the first year and annual charge on fund.
Some funds have the possibility of a delay on exits, e.g. property funds.  Most don't.  
As with any investment, make sure that the chosen fund(s) for the BOB fit properly into your overall portfolio of investments (within and without your pension funds) and are suitable for your risk profile and needs.  Self-administered BOBs are available if that was of interest - allowing you to choose your own shares, ETFs and/or property as investments within the BOB.   
Regards, 

Liam
www.ferga.com


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## Sarenco (21 Aug 2020)

LDFerguson said:


> There are certain political parties who favour and have proposed a reduction in the maximum tax-free lump sum from €200,000.


Interesting. 

I know that the Greens and Sinn Fein called for a further reduction to the SFT in their most recent manifestos (and I think there is a real chance of that happening at some point - our SFT is much higher than the corresponding limit in the UK) but I don't remember any political party calling for a reduction to the TFLS.

As an aside, I've always thought that the principle of a TFLS is fundamentally inequitable but I can imagine the howls if any Government sought to abolish the TFLS completely.


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## David_Dublin (21 Aug 2020)

LDFerguson said:


> The BOB will have the same Normal Retirement Age as the pension scheme where the fund came from.  But you can decide to retire it at any age from age 50 - 70.
> 
> As a general rule, yes it's best to defer drawing down taxable income that you don't need, until you need it.
> 
> ...



Thanks for all the helpful info, much appreciated @LDFerguson 

If I withdrew lump sum at 55, is that considered retiring the BOB? And therefore would require me to set up AMRF/ARF at 55, and therefore would ensure imputed distribution kicks in at 61?

But I chose to retire the BOB at age 64, it would mean only having to set up AMRF/ARF at age 64, and therefore imputed distribution would only kick in at age 64?

Sorry if I am being thick here!


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## LDFerguson (21 Aug 2020)

David_Dublin said:


> Thanks for all the helpful info, much appreciated @LDFerguson
> 
> If I withdrew lump sum at 55, is that considered retiring the BOB? And therefore would require me to set up AMRF/ARF at 55, and therefore would ensure imputed distribution kicks in at 61?
> 
> ...



Not thick at all.  Everything you say is correct.  Withdrawing the lump sum is indeed considered to be retiring the BOB and therefore you must simultaneously move the rest into an AMRF/ARF (or buy an annuity).  So if you defer taking the lump sum, you are automatically deferring starting the AMRF/ARF and therefore deferring the imputed distribution requirements.


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## David_Dublin (21 Aug 2020)

Brilliant, thanks for the clarification, much appreciated.


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## LDFerguson (21 Aug 2020)

Sarenco said:


> As an aside, I've always thought that the principle of a TFLS is fundamentally inequitable but I can imagine the howls if any Government sought to abolish the TFLS completely.



Without wishing to derail the original post, I'd be curious to hear why you think that the tax-free lump sum is inequitable as a principle.  I can understand arguments that the current system of tax relief on contributions favours higher-rate taxpayers over lower-rate.  I can understand arguments that the current limits are too generous / about right / not generous enough.  I haven't yet heard an argument that singles out the tax-free lump sum as inequitable.


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## Sarenco (21 Aug 2020)

LDFerguson said:


> Without wishing to derail the original post, I'd be curious to hear why you think that the tax-free lump sum is inequitable as a principle.


Well, in general our pension system operates on the basis of deferred taxation - contributions are relieved, returns within the pension roll up tax-free and drawdowns are subsequently taxable.  

The TFLS is an exception to this and it seems odd to me that a comparatively well off person can accrue such a significant sum completely tax-free.  
All other drawdowns from a pension are subject to our highly progressive tax system - so the provision for a TFLS seems an anomaly to me.

Regardless, I don't see the TFLS being abolished or materially reduced any time soon.


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## Gordon Gekko (21 Aug 2020)

Just to highlight that it can make financial sense to “retire” a Buy Out Bond at age 50.

It can often make sense to earmark the lump sum for offset against one’s mortgage for example.

Given that the ARF/AMRF don’t have to be touched for another 11 years post 50.


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## Sarenco (21 Aug 2020)

Gordon Gekko said:


> It can often make sense to earmark the lump sum for offset against one’s mortgage for example.


Wouldn’t you expect an equity fund held within a pension wrapper to provide a higher return than paying down a mortgage over an 11 year period?


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## Gordon Gekko (22 Aug 2020)

Sarenco said:


> Wouldn’t you expect an equity fund held within a pension wrapper to provide a higher return than paying down a mortgage over an 11 year period?



There are other factors to consider.

e.g. will the person’s fund be >€800k (for the €200k tax-free) or >€2m


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## Sarenco (22 Aug 2020)

Are you arguing that it makes sense to retire a BOB at 50 to pay down a mortgage if total pension fund savings at that stage exceed €800k (or will exceed €800k after taking the lump sum)?


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## Gordon Gekko (22 Aug 2020)

Sarenco said:


> Are you arguing that it makes sense to retire a BOB at 50 to pay down a mortgage if total pension fund savings at that stage exceed €800k (or will exceed €800k after taking the lump sum)?



I’m not arguing anything. I’m merely highlighting that in certain circumstances it can make sense access a BOB at 50 to pay down a mortgage.

The average mortgage rate is circa 3% in Ireland. A higher rate tax payer needs to earn 6.25% to fund that from after-tax income. BOB providers don’t do these things for free, and charge around 1% on average.

€800k gets you €200k tax-free, yes, but it also leaves €24k of income coming out of the legacy ARF/AMRF at the 4% rate which, when combined with the State Pension, sends takes the individual over the 20% rate band.

And as we often highlight to people, markets don’t just go up, even over 10/11 year periods. Clearing one’s mortgage delivers a guaranteed return.


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## Sarenco (22 Aug 2020)

Gordon Gekko said:


> I’m merely highlighting that in certain circumstances it can make sense access a BOB at 50 to pay down a mortgage


Fair enough Gordon - I'm just trying to tease out what those circumstances might look like.

Let's say I've just turned 50, I'm in full time employment with a BOB of €400k and a €100k mortgage outstanding @3%.  I think you are saying that it would make sense for me to retire the BOB and pay off the mortgage with the €100k TFLS - right?

I personally don't think that would make sense.  My expectation is that the return on the €100k, net of costs and net of any tax on drawdown, will comfortably exceed the mortgage rate over the next 11 years. 

No guarantees, obviously, but that's my expectation.


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## Gordon Gekko (22 Aug 2020)

I can expect something to do 7% a year but still take your hand off for a guaranteed 5% (just by way of example).

I intend to retire a fund at age 50 as the final piece of my plan to be debt-free.


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## Sarenco (22 Aug 2020)

Would it not logically follow that you wouldn't contribute to a pension (at least above €800k) while carrying mortgage debt?

Another problem with your approach is that it reduces flexibility.  If you retire a pension at 50 then imputed distributions kick in 11 years later when you might still be working (by choice or necessity).

I agree with Liam that, in general, it's best to defer drawing down taxable income that you don't need, until you need it.

I don't think it makes sense to retire a pension early to pay off a mortgage that you can comfortably meet from earned income.


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## David_Dublin (22 Aug 2020)

Interesting tangent the thread has taken. I'll have a mortgage of about 120k, a tracker, when I turn 50. Assuming current situation prevails, I'll be able to make repayments comfortably, so don't plan to take the lump sum at 50.


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## Gordon Gekko (22 Aug 2020)

It’s a tracker, so there’s no debate.


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## Mechman (13 Sep 2020)

Regarding shopping around for buy out bonds, is there any provider which stands out as a go-to, assuming I already know what my attitude to risk is?


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## David_Dublin (22 Nov 2021)

David_Dublin said:


> Interesting tangent the thread has taken. I'll have a mortgage of about 120k, a tracker, when I turn 50. Assuming current situation prevails, I'll be able to make repayments comfortably, so don't plan to take the lump sum at 50.


My situation looks to be changing a little.

Planned job on house, looks like we may need to borrow 150k, to add to savings of 250k. Big-ish job!

I'll be 50 in a year and a half. I have some concerns about ability to pay back the additonal mortgage & sustain currently quality of life. The additional borrowing would mean additional circa 900 per month (18 year term). It's an expensive time of life, unpredictable outgoings sometimes, 2 kids in private school, then college. Want to keep on living a decent life too.

So, for peace of mind, I could have the 200k TFLS option available as a rainy day option - if we struggle to make repayments or impact of higher repayments is too impactful on quality of life. But ideally fund borrowing from salary and leave pension alone until as late as possible.

Anyone see any obvious issues with my plan? Apart from the idea of spening that much money (at this time) on a refurb!

Two questions

Can you take numerous tax free lump sums up to the max? i.e. could I take out 80k in 2 years to pay off some of the mortgage? And then leave the rest in the BOB until age 61? At which point my understanding is imputed distribution kicks in.
Looks like the TFLS from 200k to 500k is taxed at only 20%. Do "most people" take that withdrawal, or is it complex to work out when this would be advantageous? Presume it is to do with minimising tax while ensuring you have income to support lifestyle.


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## Steven Barrett (22 Nov 2021)

David_Dublin said:


> Two questions
> 
> Can you take numerous tax free lump sums up to the max? i.e. could I take out 80k in 2 years to pay off some of the mortgage? And then leave the rest in the BOB until age 61? At which point my understanding is imputed distribution kicks in.
> Looks like the TFLS from 200k to 500k is taxed at only 20%. Do "most people" take that withdrawal, or is it complex to work out when this would be advantageous? Presume it is to do with minimising tax while ensuring you have income to support lifestyle.


You get one go at the lump sum from your pension. If you have multiple policies, you can draw down your lump sum at multiple times. If you have one policy, you get one go at the lump sum. 

Everyone takes the maximum lump sum and pays 20% tax if over €200,000. Otherwise, the remainder will most likely be liable to income tax at 20% plus USC and PRSI if withdrawn before age 65. 


Steven
www.bluewaterfp.ie


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## David_Dublin (22 Nov 2021)

Thanks @Steven Barrett - that makes a massive difference to me so. I would definitely not want to use the max "tax efficient" TFLS withdrawal of 500k at age 50 to get my hands on 150k. It would leave my pension value halved, and I would have no use of the remaining 350k - I'd be re-investing where presumably any gains would be subject to CGT.

The alternative would be to "only" take out the 150k when/if I need it, and then to just accept being unable to take out the other 350k at favourable tax rate. Or the closer I get to retirement age, the more likely it is that I will take out the full 500k.

What do most people do with the 500k? As in, as you say, people generally take it out to benefit from the tax efficiency of it - if they have no immediate need for it, what do they do with it?


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## Sarenco (22 Nov 2021)

If you retire your BOB at 50, you could take the 25% lump sum and invest the balance in an ARF.  

Deemed distributions on an ARF don't kick in until the year you reach 61.

Mind you, I would query whether it is wise to spend €400k on house renovations given your circumstances.


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## Marc (22 Nov 2021)

I have teased out some of the arguments for taking a lump sum from a pension at 50 in this post 









						Can I Access My Pension Early? - Everlake
					

Taking retirement benefits early is only suitable for a limited number of people and circumstances




					globalwealth.ie
				




I think it makes perfect sense to use lump sums at 50 to repay debt rather than switch via a lifestyle strategy to low expected return bonds and this is particularly true if the surplus income is then directed towards additional pension provision via AVCs


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## David_Dublin (22 Nov 2021)

Sarenco said:


> If you retire your BOB at 50, you could take the 25% lump sum and invest the balance in an ARF.
> 
> Deemed distributions on an ARF don't kick in until the year you reach 61.
> 
> Mind you, I would query whether it is wise to spend €400k on house renovations given your circumstances.


What circumstances @Sarenco? My current mortgage is about 10% LTV and I have excess savings over spend month on month, I have a good job and decent salary. I have no other debt and I have 250k in cash savings. And I have a pretty strong pension for late forties.


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## Sarenco (22 Nov 2021)

David_Dublin said:


> What circumstances @Sarenco?


Well, you seem to be concerned about your ability to comfortably service an additional mortgage of €150k.

€400k is a pretty big budget for a house renovation - do you really need to spend that much?


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## 50andOut (22 Nov 2021)

David_Dublin said:


> Thanks @Steven Barrett - that makes a massive difference to me so. I would definitely not want to use the max "tax efficient" TFLS withdrawal of 500k at age 50 to get my hands on 150k. It would leave my pension value halved, and I would have no use of the remaining 350k - I'd be re-investing where presumably any gains would be subject to CGT.


In order to get 500K you need a fund value of €2m (25%) so you fund value would not be halved. it would be down to 3/4 and a healthy €1.5m

something is not adding up here.


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## David_Dublin (22 Nov 2021)

Sarenco said:


> Well, you seem to be concerned about your ability to comfortably service an additional mortgage of €150k.
> 
> €400k is a pretty big budget for a house renovation - do you really need to spend that much?



Extra outgoing of 900 a month is what I want to give due attention to. I'm not overly concerned, I guess we have always lived conservatively from a finances perspective, and we've always had lots of savings. So this is a bit of a big step - current mortgage is < 900. I just want to be all over any possible rainy day options. I still feel this will be do-able with existing salary, but am doing analysis of spending to validate.

We've been around the houses (excuse the pun) on the house renovations. It may not be as much as 400k but after all is done it probably won't be too far off. We have to spend a fair bit to address issues with the house - heating, insulation, wiring, damp. We could probably spend 200k to address issues plus small extension. I'd prefer to spend more and get some wow stuff. But I guess "no" is the actual answer - we don't need to spend so much.


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## David_Dublin (22 Nov 2021)

50andOut said:


> In order to get 500K you need a fund value of €2m (25%) so you fund value would not be halved. it would be down to 3/4 and a healthy €1.5m
> 
> something is not adding up here.


Sorry, that's my maths.....I neglected to limit the TFLS to 25% of the fund value. So it would be 250k max based on current fund value (1m)


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## 50andOut (22 Nov 2021)

David_Dublin said:


> Sorry, that's my maths.....I neglected to limit the TFLS to 25% of the fund value. So it would be 250k max based on current fund value (1m)


thats what I figured, just wanted to make sure you knew it was 25% of fund (capped at €500k) not a €500k lump sum option


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## Sarenco (22 Nov 2021)

David_Dublin said:


> I just want to be all over any possible rainy day options.


Ah, understood.

You could retire the BOB and drawdown the 25% lumpsum to partly fund the renovation costs and/or to clear your remaining mortgage.

I would agree with @Marc that it makes more sense to avoid or clear debt rather than transferring any of your pension assets to bonds/cash.

The only drawbacks with retiring your BOB early is that you will lose a period of tax-free growth and imputed distributions from the ARF will kick in at 61 when you may still be working (i.e. the distributions will be taxed at your marginal rate).


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## David_Dublin (22 Nov 2021)

Sarenco said:


> Ah, understood.
> 
> You could retire the BOB and drawdown the 25% lumpsum to partly fund the renovation costs and/or to clear your remaining mortgage.
> 
> ...


Thanks for the input. I'd be loathe to retire it early, would be very much the last resort.


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## David_Dublin (15 Feb 2022)

Marc said:


> I have teased out some of the arguments for taking a lump sum from a pension at 50 in this post
> 
> 
> 
> ...


.


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## jfrank (15 Feb 2022)

LDFerguson said:


> The BOB will have the same Normal Retirement Age as the pension scheme where the fund came from.  But you can decide to retire it at any age from age 50 - 70.
> 
> As a general rule, yes it's best to defer drawing down taxable income that you don't need, until you need it.
> 
> ...


Liam,

I have a small PRB in the UK that arose because my employer scheme was wound up 15-16 years ago. I have been told I have no options to access it earlier than 65, is this true?


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