Date at which ARF needs to be drawn down

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Sharpie

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I understand that if I have an ARF with a retirement age of 60 that I , as the owner must draw down 4% at the age of 60, otherwise 4% of the value of the ARF will be taxed in any case , so better to draw it even if a person would prefer it to continue to grow and could manage without it for a year or two.

If a person was hypothetically , born on say , 12/6/1962 , would that mean it would make sense to draw this 4% on 12/6/22 , on his her 60th birthday or can this be left until 31/12/22 ?

Thanks in advance for any replies
 
Where the ARF owner reaches 61 years of age or over during the tax year

We generally advise taking a monthly payment to reduce timing risk - see tedious discussion on another thread

Should I switch some of my pension fund to cash as I approach retirement?

Hi , my intention is to finish work next year (at 55) but not draw down my pension (currently >900k) till i am 60. My DC pension is currently invested at Risk level 6 global equites and i was wondering : should i keep my pension at level 6 to age 60 and then derisk as part of the ARF with a...
www.askaboutmoney.com
 
Sharpie said:
I understand that if I have an ARF with a retirement age of 60 that I , as the owner must draw down 4% at the age of 60, otherwise 4% of the value of the ARF will be taxed in any case , so better to draw it even if a person would prefer it to continue to grow and could manage without it for a year or two.

If a person was hypothetically , born on say , 12/6/1962 , would that mean it would make sense to draw this 4% on 12/6/22 , on his her 60th birthday or can this be left until 31/12/22 ?

Thanks in advance for any replies
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The legislation is typically complex in the way it’s written. The mandatory drawdown kicks-in for the first full calendar year in which the person is at least 60.

Which in layman’s terms means the calendar year in which the person turns 61, as during the year a person turns 60, they’ll be 59 for some of that year.

The weird outlier is where a person turns 60 on 1 January, as in that case they’re subject to the mandatory drawdown a year early.
 
I'm not sure that everyone agrees you should withdraw it even if you don't need it.
 
if you don't retire a DC pension plan ( don't take 25% lump and start an ARF) do you still get taxed 4% from 61?

say if you have plan A ( 400k) and plan B ( 600k):
Plan A is retired at age 50, 100k tax free lump with 300k in ARF but leave Plan B until age 65. Is your 4% from age 61 just on the 300k in the ARF or based on amount of all plan totals?
 
The compulsory drawdown only applies when you have transferred the funds into an ARF and have reached age 61 (and after taking the 25% lump sum). If you have different plans, then you can stagger the accessing of such plans.
 
So, am i correct in saying. in reality, you could be 65, and still not have transferred from a DC plan into an ARF,
however, if you do transfer out of DC into an ARF(&AMRF if applicable)in that calendar year that you reached 65, you have to either

1)withdraw 4% of the ARF value in that calendar year, be taxed at source with Life/Pensions company, and have no further tax liabilities.

or

2)don’t withdraw anything from the ARF, and be faced with a tax bill, based on a notional 4% of the ARF fund value.

is that all correct ?
 
fayf said:
So, am i correct in saying. in reality, you could be 65, and still not have transferred from a DC plan into an ARF,
however, if you do transfer out of DC into an ARF(&AMRF if applicable)in that calendar year that you reached 65, you have to either

1)withdraw 4% of the ARF value in that calendar year, be taxed at source with Life/Pensions company, and have no further tax liabilities.

or

2)don’t withdraw anything from the ARF, and be faced with a tax bill, based on a notional 4% of the ARF fund value.

is that all correct ?
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Correct. But I think you are always better drawing down the full 4% (and having tax deducted at source) rather than just paying the tax equivalent without actually receiving the net. That’s because if you only pay the tax equivalent, then the net amount remains in the ARF (thus increasing the ARF value) and therefore future drawdowns are 4% of a slightly higher figure and equally the tax bill is higher.
 
Absolutely, plus one is availing of that years tax credits and standard rate cut off, makes total sense.

my current plan is to t/f DC into an
ARF just before 60, when i won’t be working and immediately, drawing at least the bare minimum 12,500 p.a, to have all PRSI boxes ticked off, and withdrawing at least that much, even though i probably won’t need it.
 
But Is keeping it in the 4p.c. tax regime worse than withdrawing and investing?

Imagine you don't need the money, and want it to continue to grow.
 
It’s a really good question.

Say you’ve an ARF worth €1m and your marginal rate of tax is 50%.

Do you take out €40,000, net €20,000, or just pay €20,000 over to Revenue?

I think the salient point is that the €20k you leave in the ARF is subject to the drawdown again.
 
so after the tax free 25% drawdown, where does the 20% tax rate up to 500k come in?
Is the reduced tax rate only on lump sums before it is in a ARF?
 
Ndiddy said:
so after the tax free 25% drawdown, where does the 20% tax rate up to 500k come in?
Is the reduced tax rate only on lump sums before it is in a ARF?
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My understanding is that:

The current Standard Fund Threshold (SFT) is €2,000,000.

If you have a fund (occupational fund or PRSA, so not an ARF as the SFT test is done pre transfer to an ARF) of €2m, and you are taking a 25% lump sum of €500,000, up to €200,000 of that €500,000 is tax-free.

The balance (between €200,000 and €500,000) is referred to as the 'Standard Chargeable Amount' and is subject to tax at the prevailing standard rate of income tax (currently 20%). Therefore, tax in the amount of €60,000 is due on this (€300,000 x 20%).

As a result, in this example, the net lump sum received into your hand is €440,000 (€500,000 lump sum less tax payable of €60,000).

This tax is payable under Schedule D Case IV. No reliefs, deductions or tax credits may be set against this amount. However, standard rate lump sum tax paid on or after 1 January 2011 may be credited against the tax payable on a chargeable excess occurring on or after that date.

The Revenue Pensions Manual has more information and examples on this area. See Chapter 27:

 
Gordon Gekko said:
It’s a really good question.

Say you’ve an ARF worth €1m and your marginal rate of tax is 50%.

Do you take out €40,000, net €20,000, or just pay €20,000 over to Revenue?

I think the salient point is that the €20k you leave in the ARF is subject to the drawdown again.
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Agreed. And that 20k left inside and it's future suffers a 2 p.c. tax 'wealth tax' pa. (Assuming marginal tax at 50%).

We would need to model that vs shares, exit tax, and ETF regimes to answer the question. I guess a lot will depend on what assumptions you make for future market returns and how long you plan to invest for.
 
SPC100 said:
Agreed. And that 20k left inside and it's future suffers a 2 p.c. tax 'wealth tax' pa. (Assuming marginal tax at 50%).

We would need to model that vs shares, exit tax, and ETF regimes to answer the question. I guess a lot will depend on what assumptions you make for future market returns and how long you plan to invest for.
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  1. Option 1 - take the €40,000 withdrawal, pay the €20,000 tax and invest the remaining €20,000. Pay tax on the growth of that investment.
  2. Option 2 - don't take the withdrawal, pay the €20,000 tax and leave the remaining €20,000 in the pension. It enjoys tax-free growth. But as soon as you want to take it out to spend it, you get taxed again on the same €20,000, which feels like double-taxation, although your tax rate might or might not be 50% in retirement. If you're going to be paying high-rate tax in retirement, then that €20,000 (+growth) is going to be halved again. As you say, you'd have to model it but I suspect that you'd have to be making an awful lot of growth over an awfully long time before the tax on growth would be greater than tax on both the original capital and the growth.
  3. Option 3 - take it and spend it. You've retired!
 
Marc said:
Where the ARF owner reaches 61 years of age or over during the tax year

We generally advise taking a monthly payment to reduce timing risk - see tedious discussion on another thread
Click to expand...
Thanks Marc. So are you saying the year that the ARF holder turns 61 ( we'll say born on 12/6/1962 and 61 on 12/6/2023) he/she should draw 1/12th of 4% of his/her ARF pot for each of the twelve months of 2023 . I don't understand what you mean by timing risk but I will take your learned advice on it. Thanks in advance.
 
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