The mycash.ie quick guide to ARFs

So, you are coming up to retirement. You have made your contributions and – hopefully – have a large pension fund to work with. But you still have some work to do: that is, making the decision how best to manage the fund so that you achieve your objective of living in comfort for the rest of your days.

When you retire you have three options. You can withdraw your fund in cash, getting the first 25% tax-free but paying tax at 41% on the balance – not the wisest option. You may also either elect to purchase an annuity or invest in an Approved Retirement Fund (ARF).

Approved Retirement Funds (ARFs)
Just the same as withdrawing your fund in cash, you will be able to get 25% of your fund tax-free. Investing the balance in an Approved Retirement Fund (ARF), however, allows you to do a number of things.

An ARF invests your money in a range of asset classes (shares, bonds, property, cash) according to your preferences. You can take an income from that fund on a regular basis or as and when you need to (you will be taxed on this income in the usual way).

Not only that, you will be able to provide for succession and if you die your surviving spouse or children benefit from the fund.

The mycash.ie Defined Contribution simulator includes an ARF and you can see the effect of taking an income from your fund.

Annuities
When you purchase an annuity with your retirement fund, you have a guaranteed income for life. The larger your fund, the bigger your monthly pension (you can use the whole fund or you can take 1.5 times your final salary tax-free and use the balance to purchase your annuity).

An annuity brings you certainty with regard to your pension but you need to look very closely at what you are getting for your money: a low interest rate environment has meant that the level of guaranteed income in relation to fund size has been low.
For example, if you have a fund with €1 million and you purchase a 5% annuity, you will have an income of €50,000 per annum before tax. Also, when you die your annuity dies with you and your pension and capital is lost (unless you build in a spouse’s pension in which case your annuity rate will be reduced).

Of course, an annuity might suit some people; for example, a relatively young retiree in good health with longevity in the family and who has a fairly conservative approach to expected returns.