ARF or annuity - pension advice
Pension advice - When you want to access your pension pot, you can either choose flexible or guaranteed income or a combination of both.
The right choice depends on a lot of things such as:
do you have a spouse and/or other financial dependents?
what other income do you have and how long is it projected to last?
income requirements to meet the ongoing costs of living after your earned income ceases.
your current health status and your tax position.
your attitude to risk.
what would happen if your pension income ceased before you die?
What is an Annuity?
An annuity is ‘your pension’ – which pays you a retirement income for the rest of your life. It is the only product that ensures you receive a secure income - for life. An Annuity is a contract with a life insurance company that will pay you a guaranteed, regular pension income for life in return for you paying a fixed sum of money to an insurance company from your retirement fund. The income that you receive will be subject to income tax and Universal Social Charge (USC). Once you have taken the decision to buy an annuity it cannot be reversed.
What is an Enhanced Annuity?
With an Enhanced Annuity, the life assurance provider will assess your health and give you a quote based on your individual health circumstances.
Unlike with traditional insurance applications where medical conditions may go against you, with an Enhanced Annuity if you have an underlying medical condition (or some lifestyle factor such as smoking) the life assurance provider may be able to offer you a better deal.
Examples of conditions that may qualify for an enhancement if you (or a second annuitant) have suffered or are living with a condition or lifestyle that may reduce life expectancy, you may qualify for an enhancement.
The following are examples of the type of lifestyle or health conditions that may qualify for an enhancement:
If you have had any heart conditions in the last five years
If you have been a regular cigarette smoker (10+ per day) for the last 10 years
If you have high blood pressure
If you have been diagnosed with cancer in the last five years
If you have had a stroke in the last ten years resulting in ongoing disability
If you are diabetic – treated with tablets or insulin
If you are overweight
Please note that the above list is not exhaustive. You (or a second annuitant) may be living with a condition that is not mentioned above that will qualify for an enhancement.
What is an Approved Retirement Fund? (ARF)
An ARF is a personal retirement fund where you can keep your money invested after retirement.You can withdraw from it regularly to give yourself an income, which will be subject to income tax, PRSI (up to age 66) and USC. Any money left in the fund after your death can be left to your next of kin. There are certain restrictions to investing in an ARF.
Advantages of Annuities:
Annuities provide certainty.
You have a guaranteed income for the rest of your life. You will know exactly what you are paid and when.
An Enhanced Annuity gives you better income if you are in poorer health and takes into consideration lifestyle factors such as smoking.
You can build in extra options, the following options are available at an additional cost:
Minimum payment period. Your pension payment can have a guaranteed period for up to 10 years regardless of whether you die within that period.
Dependents’ Pension: a spouse/civil partner/ dependent’s pension, in the event of death, is paid for the life of the dependent. You can choose % payable i.e. 100%, 75% or 50%.
Inflation protection. Fixed increases annually/inflation linked increases in line with CPI or a fixed percentage annually.
Disadvantages of Annuities:
You cannot reverse your decision to buy an annuity.
The annuity rate is fixed at the time you buy the annuity and is not affected by later changes in interest rates or life expectancy.
You use your retirement fund to buy an an income for the remainder of your lifetime. You will no longer have a pension investment fund.
Your pension income will stop on death, unless you have chosen an additional option such as a minimum payment period or reversion to a dependant (see above).
The cost of all the additional options reduces your annuity income that is payable. The amount of this reduction depends on your particular circumstances and the options you choose.
Advantages of ARFs:
ARFs give you flexibility and control over your pension fund during retirement.
You can choose the level of income/withdrawals you want to take each year. (See warning below). However, a minimum income of 4% of the value will be paid each year from age 61.This increases to 5% from age 71.
ARFs can invest in a wide range of assets, with the potential for the fund to continue growing.
On death the fund value at that date passes to the estate.
You can use your ARF to purchase an annuity at any stage.
Disadvantages of ARFs:
There is a risk that your fund may not provide an income for the rest of your life and the fund may be depleted before you die – “bomb out”. This may be due to poor fund performance and/or if you take excessive levels of income from the fund or you live longer than expected.
You take on investment risks. This means that your fund could do down as well as up. Your income may fall or rise and cannot be guaranteed.
You have to meet certain requirements before you are eligible for an ARF. (€63,500 into an AMRF or guaranteed pension income each year of €12,700).
From age 61 you must take a minimum level of income from the ARF every year. Currently this is 4% of the value of your fund, but this may change in the future. This increases to 5% from age 71.
Want to know more? We are available to discuss your options, and we look forward to hearing from you.
Our job is to help you choose a product and structure that will help you meet your goals.
telephone | 091441188 and/or email | office@nelsonlife.ie
RETIREMENT & PENSIONS | INVESTMENTS | FINANCIAL PLANNING | LIFE INSURANCE
Nelson Life Limited trading as Nelson Life is regulated by the Central Bank of Ireland.
WARNING: Past performance is not a reliable guide to future performance. WARNING: The value of your investment may go down as well as up. WARNING: You may lose some or all of the money you invest. WARNING: These funds may be affected by changes in currency exchange rates. WARNING: If you invest into this product you will have access until you retire (Pension Products). WARNING: The above content does not constitute investment advice, as it does not take into account the investment objectives, knowledge and experience of financial situation of any particular person. Prospective investors are advised to make their own assessment of the information contained herein and to obtain professional advice suitable to their own individual circumstances. WARNING: The information contained in this document is based on our understanding of current tax legislation and the current Revenue Commissioners interpretation thereof and is subject to change including retrospectively without notice. This is intended as a general guide only and is not a substitute for professional tax, legal and investment advice.