Approved Retirement Funds (ARFs)
ARFs are often used by those who have money in an AVC at retirement. Firstly, it makes sense to take the maximum amount of tax-free cash possible from the AVC. If there is a taxable balance however you must typically choose between one of the following options:
- Taxable Cash - Take all the money at the point of retirement paying tax, PRSI and USC. Depending on your income and tax situation this can lead to being taxed at higher rates, though it does offer the benefit of giving immediate access to the monies.
- Buy an Annuity - This involves exchanging your sum of money for an ongoing income for life. Annuities are based on annuity rates, which in turn are based on interest rates and life expectancy rates. In the current climate, it means the amount of pension income that can be purchased is at historic lows.
- Invest in an Approved Retirement Fund (ARF) - This a post-retirement product to which you can move monies from your AVC, essentially keeping them in an investment fund.
There are advantages and disadvantages to each of these options and must be considered in the context of your overall financial situation. That said, the ARF is the most popular option in recent years.
Advantages of ARFs
There are various benefits to an ARF but key amongst them is the fact that the fund of money is always yours, it does not die with you. Instead, it forms part of your estate and passes to your family. Secondly, there is great flexibility to ARFs. Within certain limits, you can decide when in your retirement to withdraw money as income and thus when to pay tax on those withdrawals.
These advantages can be more or less beneficial to different individuals based on their particular circumstances.
Disadvantages of ARFs
A key disadvantage is that ARFs carry a "burn-out" risk, that is, that at a certain point on your retirement the fund can run out. Other considerations are the on-going management of the fund, including the attention that must be paid to generating returns, minimising charges, managing risk effectively, and deciding how and when to withdraw income.
Things you should know
If you have an AVC (or other form of pension eligible to invest in an ARFs) it is important to seek unbiased, individual advice. Your ARF does not need to be set up with your existing provider, though this is often not highlighted. The options presented to you may very well be inferior, both in terms of the investment funds and associated charges offered.