Understanding Pensions
Could you live today on €230 per week?

I didn’t think so! Which is why we all have to take responsibility for our future. Individuals pay into pensions so that they won’t have to live on €230 per week. The younger you start to save, the easier it becomes. Pensions attract tax relief, making saving even more attractive. For example, Michael, aged 35, earns €45,000 per annum. He saves €250 per month into his pension. Michael is on the higher rate of PAYE, currently 40%. Because of the effect of tax relief, the cost to Michael to put away €250 for his retirement is actually only €150, the other €100 comes from tax relief.

Your Options at Retirement
The options available to you at retirement will depend on a number of factors.

1. Your employment type
2. Your pension type
a. Employer Defined Benefit Scheme
b. Employer Defined Contribution Scheme
c. Personal Pension
e. Your employment status, this may also dictate your drawdown options

In general, a pension pot will be drawn down at normal retirement age in the following manner:

1. A tax free lump sum (normally maximum 25% of fund value, tax free up to current lifetime limit of €200,000), or;
2. A tax free lump sum based on maximum 1.5 times final salary, tax free up to current lifetime limit of €200,000), with the balance used to purchase an Annuity.
3. The balance is normally used to purchase;
a. An Annuity (guaranteed pansion for until death)
b. An Approved Retirement Fund (ARF)
c. An Approved Minimum Retirement Fun (AMRF)
d. A taxable lump sum (subject to certain Revenue criteria being met)

Approved Retirement Funds
An Approved Retirement Fund, commonly referred to as an ARF, is a retirement product which can be purchased from an Insurance Company. The funds are invested as per the client’s fund choice. Every person is different, and Keenan Financial Planning conducts a thorough Risk Analysis to establish the individuals tolerance or aversion to risk and advises the client in selecting an appropriate fund or range of funds.
The ARF is designed to provide a fund from which the client can make withdrawals to supplement their other retirement incomes such as rental income and the state contributory pension. Once over the age of 60, an ARF is taxed as if the client were taking an annual withdrawal of 5%, so in nearly all cases the client will do so.
Like all investment products, fund values can fluctuate, and ultimately the ARF funds can be completely depleted if the client makes significant withdrawals.
The ARF passes to the individual’s estate on death.

Approved Minimum Retirement Fund
An Approved Minimum Retirement Fund (AMRF), is a proportion of an individuals pension pot that under certain circumstances may have to be purchased with a proportion of your pension fund. Similar to an ARF in that a fund or range of funds in which to invest is chosen, but they key difference is that a client only has access to the capital portion of the funds when the sooner of:
1. Their guaranteed income at retirement is above €12,700 per annum, or
2. The reach the age of 75, whereby the AMRF converts into an ARF from which withdrawals can be made. Recent amendments to legislation has resulted in access to a maximum of 4% of fund value per annum if required.

An annuity is a fixed sum of money paid to an individual over the course of their life, with payments ceasing on death. When you purchase an annuity from an Insurance Company, they in return pay you a fixed amount until you die. In certain circumstances an annuity purchase is compulsory, this can depend on the scheme rules of you pension. Keenan Financial Planning can compare the annuity rates of the main providers to ensure that you get the most competitive rate on the market. We can also advise you on other features such as guaranteed periods after death, whereby the annuity can continue to pay out for 5 years after your death.

Buy Out Bonds
Also referred to as Personal Retirement Bonds, a Buy Out Bond is an extremely flexible way to take the proceeds of your previous company pension. The advantages of investing in a Buy Out Bond are

  • You take ownership of the policy, there are no trustees
  • Full range of investment options as any other pension product
  • Access to funds if necessary from age 50
  • Potential to transfer your Buy Out Bond into a new pension scheme in the future

If you leave employment due to redundancy or a career change, contact Gavin here at Keenan Financial Planning to discuss your options. We can arrange for the scheme administrators to issue you with a Transfer Options Form, and identify what the best course of action is for you to take thereafter.