If I was a financial adviser I would… know what an ARF is!
An ARF of all bloody names!
In an industry where jargon is one of the biggest customer complaints reported, one of the main options you have at retirement is to move your life savings to a structure whose name means nothing at all to most normal people outside of the pensions industry, an ARF.
Ok, well allow me attempt to demystify one piece of the pensions world for you as best I can.
An ARF is short for an Approved Retirement Fund. These post retirement account, for want of a better term, were introduced in Ireland in April 2000. Before this date your choices at retirement were limited to taking a tax free lump sum first and foremost and then use the balance to buy an annuity which, as I described in my last blog, were an incredibly limited way to spend your life savings.
An ARF crucially allows you retain control of your retirement savings. Once you have taken your lump sum, and assuming you met certain criteria, you can then transfer the balance of your money to an ARF. You can spend it how you like, invest it how like and place with whichever provider you like.
Pensions rules insist that you draw down (or at least the revenue will tax you as if you did) at least 4% per year between the ages of 61 and 71 and 5% thereafter, and these withdrawals are subject to income tax and levies as any other income would be. If you are lucky enough to have a pot bigger than €2million that withdrawal requirement increases to 6% per year.
Crucially you can invest in thousands of different things, so if you have a decent retirement income it’s possible to maintain the value of your ARF by simply earning a return of 4/5% per annum on your ARF. In this case, instead of your retirement savings being exhausted over time you could preserve it to form part of your estate. This is a crucial difference to how an annuity would work, as an annuity would never pass on to the next generation in any circumstance.
This point can be reserved too of course. If you draw down 20% per year your ARF can run out very quickly indeed and you could be faced with having no back up money left should you need your ARF in the years following your retirement to survive, so buyer beware too. It’s not all rosy, so your situation does need to be examined on an individual basis.
The tax treatment of an ARF as part of inheritance is a whole different kettle of fish and far too complicated to get into here so just pop me a quick mail if you want to know the detail around this. Also the criteria around how to allow you access to an ARF are reasonably straightforward and I will outline these next week in my next blog to give you some clarity around these decisions at retirement too.
In summary, I like ARF’s. I prefer clients of mine, assuming they agree with me on certain key principals, to consider ARF’s strongly. The control point for me is a big one. The ability to retain the asset you have built up over a very long time is a huge consideration and the ability to pass this asset on to your kids is significant. There are naturally numerous factors to consider and far too many to cover here, but often the ARF comes out on top once we look at all the options with our clients.
An ARF, of course, won’t suit everyone either, so please get in touch if you are approaching retirement. The decisions made around retirement are lasting ones so each option needs to be considered carefully and each client’s attitudes need to be examined first and foremost before we make a retirement recommendation.
As always, we are happy to help and even if you have any specifics questions about the above feel free to send me a quick email and I’ll be happy to help if can!