# ARF v Annuity......Fair Deal implications



## elacsaplau (3 Mar 2019)

Is there any research available in relation to the Fair Deal implications of the ARF v. Pension decision?


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## Slim (3 Mar 2019)

Could you clarify your question a bit? An ARF will be assessed at 7.5% and 80% of any drawings too. Pension Annuity will also be assessed at 7.5% plus payout/dividend assessed at 80%. Does that address your query?


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## elacsaplau (3 Mar 2019)

Hiya Slim,

Thanks for your reply.

I understand what you're saying re ARF but don't agree with your comment re annuity. The in-force annuity is just an income stream - there should not also be an asset-based contribution charge on the annuity value (i.e. the 7.5%) for the Fair Deal. Agreed?

The question is if you take a couple, at age 65, with say a million to invest in either an annuity or an ARF, there will be many factors which influence their decision as to which route to follow. My question is if the couple felt that it there was a chance that one of them would end up in a nursing home and were cognisant of the Fair Deal scheme, how would that consideration influence the ARF/annuity decision? Then, I'd be interested in the same question for available funds of €500k and €2m...….it may not be the same answer. By "answer" I mean the approach that appears best for most people. The "answer" may also be different if the sum to invest "belongs" to just one of the couple compared with each _partner_ having an individual pot, etc.

Overall, I suspect that there's a lot of moving parts here and wonder has anyone tried to join the dots! I don't recall ever seeing any analysis/commentary on this? My sense is that it might be quite (or very) complex!


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## Slim (4 Mar 2019)

Right, l think the answer is the same. If a couple has €1m in a private pension to invest and they have 2 options, an ARF, which is an extension of the private pension, or purchase an annuity, how can the scheme work if they can avoid the FD financial assessment by choosing the latter? I think not but will look into it further. It doesn't matter which of them has the most money, it's all added up for the purpose of FD.


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## elacsaplau (4 Mar 2019)

Slim said:


> ….how can the scheme work if they can avoid the FD financial assessment by choosing the latter?



Hey Slim,

They are not avoiding the FD financial assessment. The annuity income is taken into account. It may be helpful for you to consider the income from an annuity in the same way that the pension income of a public sector employee would be treated.


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## Sarenco (4 Mar 2019)

elacsaplau said:


> The in-force annuity is just an income stream - there should not also be an asset-based contribution charge on the annuity value (i.e. the 7.5%) for the Fair Deal. Agreed?


Are you saying that the value of an A(M)RF is assessed as an asset and any drawing from same are assessed as income (whereas the actuarial value of a DB pension or annuity is simply ignored)?

If true, that looks like double counting to me.  An ARF is just an account at the end of the day.


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## elacsaplau (4 Mar 2019)

Hi Sarenco,

Yes that's my understanding and yes it's at least to some extent double counting!

That's my baseline understanding. My question is about the implications of this in the ARF v. Annuity "decision"!! I've been think about it and my head hurts!


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## Sarenco (4 Mar 2019)

elacsaplau said:


> Yes that's my understanding and yes it's at least to some extent double counting!


That's bizarre if true.

Are deposit accounts treated as assets, with withdrawals treated as income?  If not, what's the justification for treating an ARF any differently?


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## elacsaplau (4 Mar 2019)

Hey! I'm not defending the system! And I get your scepticism! The lady from the HSE who explained this to me got a similar reaction from me! Also, requests to show where this is prescribed were not fruitful!!

My guess: Deposits are treated as assets and that withdrawals would not be treated as income because they are not _potentially_ subject to income tax. One of very many complicating factors is deemed distributions on the ARF!


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## RETIRED2017 (4 Mar 2019)

Sarenco said:


> That's bizarre if true.
> 
> Are deposit accounts treated as assets, with withdrawals treated as income?  If not, what's the justification for treating an ARF any differently?


 ARF were allowed by FG for paye private sector workers, some party who claim to to be on the side of the people who get up to the morning and go to work,


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## Slim (5 Mar 2019)

Sarenco said:


> That's bizarre if true.
> 
> Are deposit accounts treated as assets, with withdrawals treated as income?  If not, what's the justification for treating an ARF any differently?


Yes, a deposit account counts towards total assets. For an individual, any assets over €36k are assessed at 7.5% p.a. subject to the PPR limitation of years. Interest earned on the deposit is regarded as income and assessed at 80%.


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## Sarenco (5 Mar 2019)

Slim said:


> Yes, a deposit account counts towards total assets. Interest earned on the deposit is regarded as income and assessed at 80%.


That seems perfectly logical but wouldn't you expect an ARF to be treated in a similar manner?


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## RETIRED2017 (5 Mar 2019)

Sarenco said:


> That seems perfectly logical but wouldn't you expect an ARF to be treated in a similar manner?


An ARF could well be a couples pension for life ,if one gets sick and enter a nursing home it could well wipe out the others income,same money given to a Insurance Company to buy an annuity ,why should the annuity be treated better than an ARF


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## AlbacoreA (5 Mar 2019)

Two different things. A couple (married) assessment is split. Only 50% is assessed for each person.
Also if its their home, the other person can continue to stay in it. The FD isn't due until that person leaves.
If you sell the house it becomes cash and is assessed differently. I assume Pensions are income unless they are cashed. At which point they become cash.
So the advice is be careful what you liquidate. Also you might want to use any tax free gift allowance you can before entering the FD. Also any inheritance tax allowance.

The actual rules seem to be poorly documented, and the advice from the HSE while well intention-ed can be vague. A tax consultant might be a wise planning move.

As for pension not being the same as cash. Not sure why that is unfair.


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## Slim (5 Mar 2019)

Sarenco said:


> That seems perfectly logical but wouldn't you expect an ARF to be treated in a similar manner?


It is! The ARF is assessed as an asset at 7.5%, subject to the exemption limits(€36k pp), and any drawings are assessed as income, at 80%.


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## elacsaplau (5 Mar 2019)

Slim,

Do you know how all this works tax-wise? Would you be able to do an example? Maybe we could start with a single person with say, €500k in the ARF. Lets assume also that AMRFs don't exist for now!

How does someone pay the 7.5%? Does one, for example, simply sell 7.5% of the fund? Does "selling" 7.5% end up with a lower net amount after tax? Is this ok or is there a special "transfer" to the Fair Deal allowed whereby the 7.5% is transferred gross?

On the income side, what happens with imputed distributions, etc.? Is the required contribution adjusted annually. Is it calculated on a specific date?

Sorry for all the questions!

Thanks....


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## AlbacoreA (5 Mar 2019)

What happens to the arf if a person dies.

The fair deal is paid from the estate. The asset rate is simply how the bill is calculated. You could pay it from cash if the estate had it. Fair deal just raises an invoice that the estate has to settle. 

That's my understanding.


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## Sarenco (5 Mar 2019)

Slim said:


> It is! The ARF is assessed as an asset at 7.5%, subject to the exemption limits(€36k pp), and any drawings are assessed as income, at 80%.


But drawings aren't income!  If you withdraw money from your bank account you don't consider that to be income, do you?

That's my point - it's double counting.

I've absolutely no problem with any drawings being treated as cash, with the asset assessment taking place on the residue (if any) of the ARF on the demise of the person.  TBH that's how I thought it worked.


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## Slim (5 Mar 2019)

But that's how the private pension works. It earns interest/dividends and these are drawn as income, hopefully while preserving the capital. A pension schemes produces 'income'. Income is assessed at 80%. Question arises as to why anyone would draw down any income while in à nursing home!


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## AlbacoreA (5 Mar 2019)

Which is why renting out their empty houses, makes no sense. It wouldn't cover the cost, and certainly not the risks.


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## Sarenco (5 Mar 2019)

Slim said:


> But that's how the private pension works. It earns interest/dividends and these are drawn as income, hopefully while preserving the capital. A pension schemes produces 'income'.


No, that's not how ARFs work. 

There's no requirement or ability to limit withdrawls to interest/dividends (i.e. income) earned on your ARF.

An ARF may or may not produce income, gross or net of costs.  It may equally incur losses.

Regardless, apparently withdrawals are treated as income for the purposes of the Fair Deal assessment.


Slim said:


> Question arises as to why anyone would draw down any income while in à nursing home!


Because you have no choice in the matter.  You are required to withdraw 4/5/6% from your ARF on an annual basis depending on your circumstances.

Regardless of the fact that your ARF may have incurred a loss in that particular year.


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## Slim (5 Mar 2019)

Sarenco said:


> But drawings aren't income!  If you withdraw money from your bank account you don't consider that to be income, do you?
> 
> That's my point - it's double counting.
> 
> I've absolutely no problem with any drawings being treated as cash, with the asset assessment taking place on the residue (if any) of the ARF on the demise of the person.  TBH that's how I thought it worked.



I agree with you but an ARF is not a deposit account. It's a pension scheme which generates income. As you draw down income, it's taxed which a deposit withdrawal would not be.


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## Sarenco (6 Mar 2019)

@Slim

I think we're starting to go around in circles here.

An ARF may very well be 100% cash.  It might or might not generate income/gains, net of costs, in any given year.

I've no problem with _income_ generated by an ARF being treated as such.  My problem is that _capital _drawn from an ARF is treated as income in circumstances where it has already been assessed as an asset.

If an ARF was treated simply as a pension/annuity there wouldn't be a problem.


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## AlbacoreA (6 Mar 2019)

Where large assets are in play it might be best to pay for nursing home care yourself, and gift them to family where you might be paying less tax overall then that asset being in the fair deal scheme and taken at 7.5% every year for the lifetime of the person in care. Only the family home is limited to 3yrs everything else isn't.

Nursing home fees are about 80-100k a year. With 2 million you could pay that for until transfer of assets are excluded from the Fair deal back dated period (5yrs?)

You have to be practical. How long is the person likely to live for. How much income will they need in a nursing home.


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## AlbacoreA (6 Mar 2019)

As for ARF maybe ask revenue for classification. Fair deal is HSE but I don't get the feeling anyone with a lot of assets uses it.


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## elacsaplau (7 Mar 2019)

So after 20+ posts, we don't even know all the rules here! Pretty difficult to work out best strategy without knowing the rules!


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## AlbacoreA (7 Mar 2019)

It would be more correct to say. We know the rules. We just don't agree with them. 

The fair deal is really only designed for people with no assets other than their home to contribute to their costs. 

Once you have more assets than that, the FD scheme requires some planning. For example it would be stupid to sell the primary home and leave the proceeds in a bank. As that will cost vastly more than not selling it. 

So the example of having 2m in a fund that gives you income that you don't need. Is a little strange. Also people might live 3 months, 3yrs or 15yrs in a nursing home. The planning for each is very different.


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## elacsaplau (7 Mar 2019)

Hi AlbacoreA,

I'm not sure that we definitively "know" the rules in respect of ARFs. There has not been uniform acceptance of the precise terms. Can you authoritatively answer the following!  

If I have €500k in my ARF:

1. What is my capital assessment each year?

2. How is this amount paid to the HSE. If, for example, 7.5% of the fund is liable and is calculated as €37,500, how precisely is this amount paid? Do I withdraw €37,500 from the ARF and pay tax on it? Do I then treat this €37,500 as a nursing home expense and claim the tax back? What are the PRSI/USC implications here?

3. How is the income element on the ARF calculated? How is the imputed distribution treated?

My sense is that when we know this, it will help clarify the best strategic approach at an individual level based on current rules.


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## AlbacoreA (7 Mar 2019)

Its assessed at 7.5%
But pay €37,500 after tax. That will be the invoice. You then reclaim what you can from revenue.



Consider if was a NPR property you would pay CGT, fees etc. Then out of whats left pay €37,500. Then the balance would be assessed at 7.5% the following year.

The actual Nursing home fees will be 80-100k. So the state will be paying the difference.

Maybe I'm mistaken if so someone please correct me.


https://www.askaboutmoney.com/threads/arfs-and-the-fair-deal-scheme.204507/
http://myfairdeal.ie/?page_id=133


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## twofor1 (7 Mar 2019)

elacsaplau said:


> Is there any research available in relation to the Fair Deal implications of the ARF v. Pension decision?


I don't know.
Playing around with the Pension and ARF/AMRF settings on the calculator of Ges’s excellent Fair Deal site might help you decide the best way to go in your circumstances.

http://myfairdeal.ie/


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## fattruck (8 Sep 2021)

Hoping to give this a bump!

So, when we submitted fair deal info, my Father was 62. He has an income from his then job. He owed €200k on a property then worth €120.

When he reached retirement age, we opted for an ARF rather than an annuity. We paid off the mortgage.

We mailed the fair deal folks a number of times, but got no reply.

We recently passed at 69, so he had an ARF asset for 4 years.

Any idea if they will reassess some or all of the fair deal calculations.


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## AlbacoreA (8 Sep 2021)

Sorry for your loss. 

I would expect so. They basically send you an invoice. We had a couple of adjustments and a bit too and fro with it.


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## fattruck (8 Sep 2021)

AlbacoreA said:


> Sorry for your loss.
> 
> I would expect so. They basically send you an invoice. We had a couple of adjustments and a bit too and fro with it.


TY.

Any idea if the adjustment will consider the ARF from when it arrived. I.E - he was in the home for 3 years before the ARF came into existance.


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## AlbacoreA (8 Sep 2021)

Sorry I know nothing about ARF.


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