How Should I Take My Retirement Lump Sum?

 

two deck chairs on a beach

If you are currently thinking about retirement planning then one of the questions you are probably asking yourself is: How Should I Take My Retirement Lump Sum?

By now you should know your ARF from your AMRF and your trivial pensions to your annuities.

Those choices tend to be the ones that need careful consideration as those decisions are the ones that will affect your entire retirement for years to come.

But what about the cash bit? How much cash can a pension scheme member take from their pension as a lump sum? It’s at this point that most retiree’s eyes light up. This is the part where we explain that all those years of work mean that your now have a windfall of cash on the way.

But you might have guessed it, there are rules.

In general, you can always take 25% of your pension fund tax free. That’s the starting point.

If you are a member of occupational pension scheme in addition to the 25% rule you will be presented with the option to take up to 1.5 times your final salary as a lump sum. Assuming you have more than 20 years qualifying service that is. If you have less than 20 years, there is a sliding scale which reduces the limit from 1.5 times downward. Often this method allows for a client to take more out tax free than the 25% method, but yes of course there is a catch.

I will assume for second you have read my blog on Annuities. If you did you’ll notice that I am not a massive fan of them in normal circumstances. Well, if you take the 1.5 times final salary method then you must use the balance of your fund to buy an annuity. No, you can’t have an AMRF or ARF or anything else, just the annuity.

Now you can shop around for an annuity with good rates and one that you like but the reality is that you are looking at a fast food menu when you really want a steak and you can’t get in to a steakhouse.

It’s a decision between more money now and the balance of your savings on the drip or less more now and full control of your drawdown.

I don’t have a favourite. The individual circumstances of the client dictate which is best for that client, so our first port of call is to understand the clients goals in retirement, their outstanding debt at retirement, their long held desires to buy something or go somewhere special. All of these are important, so think carefully when deciding and please understand your options fully before deciding.

Finally, it important to say that tax free lump sums are only tax free to a point. The first €200k is tax free, and that is a lifetime limit too. If you are lucky enough to have a fund of €800k or more then it’s likely you will have a tax bill on your lump sum too. But don’t panic it won’t be big! Your lump sum between €200k – €500k will be taxed at 20% and the balance above €500k then higher. Speak to us if this is the case as there are various other considerations at this level.

In summary, most of us like cash. Why wouldn’t you, but consider all of these options and draw a map of how you see your retirement going. When will you need most of your money? Is your mortgage fully paid? Do you want to go on the holiday of a lifetime now, later or not at all? Are you going to gift house deposits to your kids?

Your idea of retirement should be the driving force behind how your pension benefits should be drawn down. Map your drawdown to your expected costs in retirement is the key message.

Be warned though, all of the above is just an outline of the various elements of the rules and there are many more which I haven’t covered so please don’t consider this as a comprehensive lump sum guide as it is not.

If you need us we would of course be happy to help, just get in touch with me directly on nick.lawlor@newbeginning.ie or call Kathy on 01 531 0571 and she will arrange a chat for us.

Do You Know What an Annuity is?

The word Annuity comes hand in hand with Retirement.

 

older couple planning retirement annuity

Annuities are often undesirable beings that live in the corner of the retirement room.

 

They were once the alpha male, strutting around, dominating the retirement landscape and providing strong and consistent returns for its investors for life. They often provided a return of 8% – 10% per annum so were attractive options for clients.

This was before the landscape changed back in 1999 and you were no longer obliged to buy an annuity with your retirement savings. Combine that with a reduction in annuity rates since then, has meant that an annuity is no longer a popular choice for clients.

An annuity is a regular income paid for life. You buy it with your retirement savings and it will pay you (and your spouse in some cases) an income for the rest of your days. A rate of say 4% would return a client €4k for every €100k spent. The real problem with annuities is that the €100k is gone. No money back if a client dies after 5 years when only say €20k has been returned. A very poor return I think most will agree! The flip side of this is that should a client live until they are 120 years old the annuity will still be paying them an income and in this instance, it becomes a smart choice.

Some retirement contracts have guaranteed annuity rates built into them and if this is the case then you should sit up and take notice. These rates are typically far better than are available today.

Furthermore, annuities do sometimes serve a good purpose. There is a rule in Ireland that says that once you have taken your lump sum you must have a guaranteed income for life of at least €12,700 or you must invest €63,500 into an Approved Minimum Retirement Fund (AMRF). I’ll go into more details on AMRF another day.

Considering the state old age pension is now €12,391 per annum, you can purchase an annuity for €309 per annum costing about €7725 of your retirement savings. This will mean that you have satisfied the above requirement and can have access to the balance of your retirement savings if you wish.

Also in bankruptcy, there is an allowable regular income for life. If a client invests into an annuity with their retirement fund it can often mean a client gets some value for their retirement savings. Whereas if it was left in another form, the same savings could be lost to creditors.

Annuities come in various shapes and sizes too. For example, there are some single life annuities which will only pay while one policy owner lives, compared to a joint life annuity which will continue to pay some or all the benefit to the first policy owners spouse.

Annuities can increase their payment to the policyholder over time too or they can stay level throughout the term. Annuities can have guaranteed period which mean that even if the client dies in that period the annuity will continue to pay out until the end of the guaranteed period.

There is even now something called and enhanced annuity. This is an annuity which will give you a better rate if you have listed medical condition or if you’re a smoker. I guess they feel the chances of you being around for a long time are less so they will pay you out more every year!

Of course, different providers have different rates so always worth shopping around too.

All shapes and sizes as I said. And yes, lots of jargon too but it wouldn’t be the pensions industry if there wasn’t a bit of jargon.

As always if you have niggling doubts in your head or need more information on any of this please just get in touch with me directly on nick.lawlor@newbeginning.ie or call me on 01 531 0571.

Chat soon,
Nick

Why You Need to Ask Your Employer About Your Work Pension

two retirees sitting on a bench looking out to seaIn Australia, and now in the UK too, when you start a job you are automatically enrolled in a pension. Auto Enrolment it’s called.

Each new employee has the option to sign out of the pension but very few actually do it. Most think the idea of a pension is a good thing, I do too. Most people feel “well, I am not used to having the cash anyway, so I’ll quickly get used to not having it and if that means I then have money when I retire then ok!” They are good with that, makes perfect sense.

In Ireland, the landscape is entirely different. Employers are not obliged to enroll their employees in pensions. Pity.

As a result, very few wake up on a Monday thinking, “must sort out that retirement today!” So, the inevitable happens. Time is lost, life happens and affordability is always a concern because the challenge is now to spend money you have instead of spending money you never had. So, the pension coverage is Ireland is really poor in comparison. A real pity.

There are other factors of course. Jargon being one of them. As human beings who are consistently being sold to, it’s very difficult to buy into something without understanding it. But how can you understand something in an hour that took me 10 years to fully get my head around? So now you have to trust someone who knows what they are talking about. How do you find one of those? Word of mouth… aaaahhh! By the time you actually get this sorted years have typically slipped passed. A real bloody pity.

That is why pensions in Ireland at a basic level have poor levels of uptake and as a result too many people retire here without enough money.

Ultimately the people who are missing out are the people without the pensions in place often normal people like you and me.

One step the Government has taken to attempt to increase the pensions coverage in Ireland is to make employers provide access to a pension scheme to their staff. It’s an offence for an employer to not provide access to a pension plan to their staff and to facilitate the payment of this plan through their payslip.

So ask!

Lots of employers will have schemes in place, some will have PRSA’s in place and lots of others will have none.

If you would like to start to put a few bob away for retirement, your payslip is the easiest place to do it. So ask.

The key point is that you should not be one of the ones that falls into the trap of missing out on the tax breaks that are available to you. So just ask!

Take care,
Nick

Post Retirement Options and Debt

post-retirement couple assessing their finances

When you approaches retirement there are serious decisions to make. The choices you make at retirement can have lasting effects on your pension savings and how you can access them into retirement.

The drawdown options available to you at retirement can be complicated even more by having a mortgage debt issue which needs to be resolved. So allow me explain where this can get complicated.

TAX FREE CASH VERSUS ANNUITY

If you are entering an insolvency or bankruptcy process you must fill out a Standard Financial Statement that lists your assets and your incomes.

Assets are typically at serious risk of being used to pay creditors before any deal is done or be lost to the Official Assignee if entering a bankruptcy process. Income however is allowable to a certain level.

So when you are deciding between having accessible cash or an income for life the decision of which to choose is likely to be very different should you be considering a debt process. You will need to seek advice if you are approaching this juncture.

AMRF VS ARF

An AMRF is a retirement pot which is locked away until a client reaches 75, unless they show they have a guaranteed income for life in excess of €12,700 (currently). The first €63,500 of a client retirement assets after the lump sum is taken must be invested in an AMRF if they do not have this guaranteed level of income. An ARF on the other hand is fully accessible to the clients and can be drawn down at short notice.

The rules surrounding AMRF’s have changed recently. Previously you could access any amount over the €63500 so any growth or interest earned could be taken subject to tax. Now a client can only take 4% per annum regardless of the AMRF’s value.

So how does this affect clients entering a debt process? Often clients would like access to their AMRF to help them pay down their debts but believe they can’t have access to it. This is true but an AMRF can be turned into an ARF if a client can satisfy one rule and that is if they can show a guaranteed income for life in excess of €12,700. Often a client will be in receipt of the Old Age pension from the state of circa €12000. So all a client needs to do to convert their AMRF into an accessible ARF is to buy a small annuity which will deliver income of €700 per annum. Crucially this will unlock the remaining AMRF allowing them access to their funds which can then be used to address short term needs.

CONCLUSION

These are just 2 of the many pension related situations we come across everyday so please just get in touch with me directly if you have any pension related questions that are concerning you.

Now for the disclaimer. Pensions are very complicated and each individual case should be assessed on its own merits. The rules are there to be applied and used for each of us so please take advice on your situation before making any lasting decisions. Finally if you are considering entering a debt negotiation or process please consider your pensions assets and what form they are in. Your pension assets could be at risk of being lost against your wishes or indeed could be used to help you address your debt but pension planning in advance is vital.

If you would like to discuss your own situation, please feel free to get in touch with me directly on email on nick.lawlor@newbeginning.ie or contact the office on 01-5240000 and I would be happy to look at your situation to find out.