Pensions FAQ
Your options at retirement might include:
- taking a tax-free lump sum, (this is subject to revenue limits)
- receiving a pension (sometimes provided by an annuity)
- transferring some or all of your retirement savings to an (ARF) Approved Retirement Fund or an(AMRF) Approved Minimum Retirement Fund
- providing for any dependents
- taking a lump sum (this is taxable)
The answer to this is up to you and depends on your aspirations. We will need to determine what your day-to-day living costs are for you and your partner in retirement. Also what will you want to do now you have time on your hands and what expenses will disappear such as children and mortgage repayments etc.
Once you come up with a figure, we will help ensure it provides a buffer against the unforeseen and unexpected. Now you will have arrived at the amount of pension that you should ideally be planning for. Also, bear in mind that pensions are taxable, so you will need to allow for payment of Income Tax when arriving at your final pension figure.
Planning for our financial security after retirement is one of the most fiscally responsible things a person can do. The advantages of a pension are clear: a comfortable retirement, tax savings and the peace of mind of knowing your financial future is secure. However, so many of us still put off starting a pension.
Citywide Financial Solutions’s Do I need a Pension blog outlines why you should start a pension immediately and the advantages of selection the right type of pension.
Under the present legislation, you need to be 50 years of age to draw down from an occupational pension scheme. There is a possibility that this could change depending on the individual scheme rules and it will be necessary to get your employer’s consent.
In regards to Buy Out Bonds, the age limit of 50 is also applicable.
In relation to a PRSA , you must be 60 years of age (this can be reduced to 50 when you are an employee and you are terminating service).
If you are leaving your employment, Personal Pensions can be accessed at age 60.
Certain professions such as sportspeople can also access their pensions early.
If you are permanently unable to work due to serious or critical illness, Revenue rules will also permit you to access your pension early.
Yes is the short answer. An increasing number of people decide to back to work as they need a little extra income to add to their pension. Generally there is no set rule to prevent people over the normal retirement age from going back to work or becoming self employed.
Generally, the retirement age is outlined in your contract of employment usually the age being set at 65. Normally included, however, are provisions for earlier retirement from as young as 50.
With the state pension now adjusted to age 68 depending on the year of birth, there are a number of new schemes available with a normal retirement age to allow for this.
In certain professions, whilst there is a required statutory age limit, it does not mean that you are prevented from taking up a different job when you retire. In the majority of situations, you will no longer be able to pay contributions to an occupational scheme after the normal age of retirement.
If you are self employed there is no set retirement age. For company directors, the company’s articles of association may set a maximum age for retirement.
If you are entitled to gain access to your pension funds in accordance with the rules of the scheme, you can instantly withdraw a maximum of 25% as a tax-free lump sum up to €200k with the next €300 at the lower tax rate of 20%
After that, the remaining funds must be invested into an Approved Minimum Retirement Fund (AMRF) or Approved Retirement Fund ( ARF). Another option is to purchase an annuity which is a guaranteed income for the remainder of your life.
Amendments to Irish Pension legislation back in June 2016, permits individuals with Buy Out Bonds (also known as Personal Retirement Bonds) that derived from a defined benefit scheme or a defined contribution scheme to now access the flexible option of an Approved Retirement Fund (i.e. take 25% in a tax-free lump sum and then invest the remaining amount in an ARF).
● If you make the decision to go with the annuity option (annual income), the earlier you take your benefits the lower the annual income is likely to be as it would need to be paid for a longer period.
● If you take your pension benefits early, you may not be able to work in employment related to that particular pension.
An individual is required to invest in an Approved Minimum Retirement Fund (AMRF) if they cannot provide proof of a guaranteed income of €12,700 per annum (including the state pension). In this situation, €63,500 needs investing in an AMRF which must remain in place until age 75, with the residual amount being invested in an ARF.
However, recent changes that came into effect in 2019, means that anybody who has full state pension entitlement should be over the €12,700 limit and should be able to go directly into an ARF.
It is also important to note that those who may have been confined to an AMRF up to now may also be able to convert to an ARF, thus giving them more access to their funds.
An ARF is a special personal retirement tax-efficient fund which gives you increased flexibility on how you control your pension fund after taking retirement. You can withdraw funds from your ARF when you require on a regular or ad hoc basis which are treated as income; ...thus you pay income tax, PRSI and USC. A minimum withdrawal limit of 4% will apply from the age of 61 and increases to 5% of the fund value when you reach the age of 70.
The significant difference between the two structures is access to your funds.
You can access your ARF funds at any time.
The funds in an AMRF, however, are not so readily available because you can only make 4% withdrawals from an AMRF per annum.
You cannot access the full amount of your AMRF until you are 75 years old.
● You have full control over your pension funds allowing you to take as much or as little as your financial position dictates.
● When you die, you can leave any remaining funds of your ARF to your spouse/ civil partner free from inheritance tax, but will be taxed as income in the course of payment, or else distributed to your estate in accordance with your will. If distributed to children, and depending on their ages it can form an integral part of inheritance tax planning, as the rates applicable to ARF holdings are different than other inheritance distributions.
● An ARF retains the major advantage of tax-free investment growth
● If you decide you would like a guaranteed income, you can use your ARF to buy an annuity later. Annuity rates are very low at the minute so individuals can wait for these rates to increase.
● There is always an investment risk that your post retirement fund could run into difficulties due to poor investment performance.
● With an ARF, you take investment risks and it can effectively ‘ bomb out’ This is where the ARF runs out in your lifetime. This can be caused by either taking too much income, the poor performance of the underlying investments or you live longer than expected.
● Some occurring costs associated with ARF’s which will reduce the overall value of the fund.
● Annuity rates are not expected to go up anytime soon with the expectation that they will go down if anything in the near future.
● From the age of 61, you are compelled to take a minimum amount of income from the ARF every year which can be a disadvantage in a situation where you not require the income.
Similar to a Personal Pension, a person with a PRSA ( Personal Retirement Savings Account) can take their retirement benefits at any age between 60 and 75.
However, if you are retiring from employment, you can take the benefits of your PRSA from age 50. Various pension administrators have certain interpretations of this ruling so you should seek advice on the rules of your PRSA scheme.
We would always recommend trying to avoid early retirement as the longer you leave the funds, the longer the fund has the chance to grow. If you access early, you will need to start drawing down on the fund and you could risk bomb out if you go the ARF route or you will get a lesser annuity as it will need to be paid out for a longer period.
Should you have a personal pension and you are terminating employment, you are entitled to access benefits whenever you wish from age 60.
As financial advisors, we would always advocate postponing early retirement as the longer you leave the funds, the longer the fund has the chance to grow.
The implications are that if you decide to access early you will need to start drawing down on the fund. This could risk ‘bomb-out’ if you go the ARF route or you will get a lesser annuity as it will need to be paid out for a longer period.
Provided it is permitted in rules of the scheme, an individual should be able to take early retirement from a defined contribution scheme any time from age of 50.The amount you will receive will be determined on the current value of your holding at that time, along with your service and salary at date of employment termination..
We would always advise trying to avoid early retirement if at all possible as the longer you leave the funds, the longer the fund has the chance to grow. If you access early you will need to start drawing down on the fund and you could risk ‘bomb-out’ if you go the ARF route or you will get a lesser annuity as it will need to be paid out for a longer period.
From the age of 50 onwards, these pension holders can access their benefits like any other occupational pension once the scheme rules permit it.
Generally the objective of a DB scheme is to provide a set pension for the remainder of an individual's life. This can alternate between 2/3rds of final salary or 1/2 of final salary depending on what sector you work in. A tax free lump sum of 150% of final salary can also be taken up.
Should you prefer your Defined Benefit to be treated like a Defined Contribution scheme and go the ARF option, the scheme administrators will give a transfer value and the scheme can be transferred to a Buy Out Bond / Personal Retirement Bond
. Upon retirement, the individual is allowed to access 25% of the fund as a tax-free lump sum with the remainder invested in an annuity (guaranteed income) or an ARF. It is essential that you seek independent financial advice in this regard for a number of obvious reasons.
An emerging situation where pensioners are now living longer,low-interest rates and lower investment returns are resulting in schemes having liabilities outweighing their assets causing a funding deficit.
Some schemes have been wound up and some have reduced benefits. This is causing many employers to contact former employees and offering a transfer value to transfer out to an alternative pension arrangement.
Firstly, consider the funding level of your DB scheme and look closely at the overall financial health of the scheme.
Even if the scheme is fully funded now, it doesn’t necessarily guarantee that it will be in the future. You should look at the underlying assets, previous performance of the funds, the make-up of the pensioners are drawing from the fund as well as the ones who are due to draw down the line.
An assessment will need to be made on whether the fund will be around for the duration and be able to offer the quoted pension when it comes to retiring.
Enhanced transfer values are often offered to employees in order to entice them to leave the scheme.
Another important consideration is what investment growth you will need if you took the transfer value to provide you with the same….. or a higher level of income should you stay in the DB scheme and it provides the quoted income.
You have to decide if you have the inclination for risk and that you can stomach the investment journey to reach the required level of growth. The investment risk passes from your employer to you personally.
Above all, personal circumstances will play an important role here, in terms of health, life expectancy, dependants and future retirement expectations.
Retirement income is treated like normal income which meaning income tax must be paid on it. This includes annuities, withdrawals from ARF’s,AMRF’s, taxable cash payments, trivial pension payments, dividend income, and rental income. This will be subject to income tax at your marginal rate, PRSI, and USC.
There are however some exceptions with tax reliefs for older people.
When you reach 65,it is possible that you may be exempt from paying income tax altogether if you elect to avail of the exemption limit.
The threshold allows a single person to earn up to €18,000 or a married couple to earn up to €36,000 without being subject to income tax. This amount can be increased if you still have dependent children (including those in universities). You will still be subject to USC at the full rate while availing of the exemption limit.
You will not qualify for the exemption limit if your earnings are in excess of the rates stated above however you will be entitled to an age-related credit of €245 per year for a single person (double for a married couple). This credit will be applied when you or your spouse/ civil partner reaches the age of 65.
When you reach 66, you’ll also stop paying PRSI giving you another saving.
This saving may be determined that earlier if you draw down from a private occupational pension as some private pensions are not subject to PRSI regardless of age. There is also a reduction in USC when you turn 70.
After taking early retirement, should you decide to continue to work in another capacity, it may seem advantageous to draw benefits from one of your pension funds. It is important to ensure that this additional income doesn’t move you from the lower tax bracket to the marginal tax bracket.
Realistically, it probably makes more financial sense to defer drawing these benefits and this should be an integral part of your overall financial plan.
Should you be in receipt of social welfare payments, they could be affected by taking early retirement. Some social welfare payments are not means tested whilst some of them are means tested.
If you take early retirement from your pension plans, there is the possibility of you failing the means test and thus having your social welfare benefits reduced.
Remember that if you retire early, you will not be accumulating ‘contributory pension’ credits because you will not be paying PRSI from earned income…. this could effectively result in a reduced pension in the future.
To benefit from the maximum contributory pension, the individual must have accrued the required 30 years.
There is no single retirement age as such in Ireland, although 65 is generally regarded as the age that most people retire at.
Many people focus on a certain amount... i.e. how much they need to have in their pension pot before they can retire.
This is obviously important, but another big but less spoken about consideration is if you are emotionally ready for retirement.
Questions to ask yourself are…
Am I prepared financially for my retirement? Have I settled any outstanding debts? Have I a plan in place to cope with emergencies? Have I adequate health insurance before I retire? Have I a social network to interact with people? Have I something else to do with my time?
This is a massive transition period and one which many people don’t deal with very well as they are faced with a major upheaval to their daily routine.
Individuals are faced with a lot of spare time which they aren’t used to and can find themselves without purpose as they stare at the walls in their home
. From the outset, there is also a change in an individual’s social networks as they no longer have the interactions they forged within the workplace. Another issue that people are faced with is what role they now play in society.
A high percentage of people define themselves by their career and can feel a little lost when they no longer have this associated with them which can lead to issues with their identity and purpose. Failure to recognise and plan for these lifestyle changes can lead to difficulties during this transitional period.
There is considerable research which suggests that a planned retirement is a more enjoyable and fulfilled one and that those that do put plans in place live longer and more fulfilling lives.
Plans should be made in conjunction with your family, friends and your employer. Individuals should put in place some structures around this new spare time by pursuing interests and hobbies as this will keep you mentally engaged and will also allow you to substitute the human interaction you are accustomed to through the workplace.
It can also help reinforce feelings of self-worth. Looking after health should also be a priority ensuring regular exercise paired with maintaining a healthy and balanced diet.
The Retirement Council of Ireland can assist and guide to prepare people for the transition to the next stage of living. They provide vital support, information and guidance to those approaching retirement.
They offer practical courses and seminars which talk through the financial and lifestyle changes retirement brings to prepare people before the time ahead.