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Ready for Retirement?
It takes many years of planning, saving and sacrifice to build up a significant pension fund, so after all those years, you want to be sure you are making the most of it.
This guide is designed to provide you with the basic information you need to start thinking about your retirement opportunities. It cannot make any recommendations or decisions for you but, armed with the information it provides, you can start to ask the right questions and, with our help, make sure your retirement is as well funded as possible.
ARF or Annuity?
One of the big questions you need to ask yourself if you are nearing retirement is –
“How do I take my Retirement Benefits”?
You have two main options with a pension –
- buy an income for life i.e., an Annuity, or
- drawing income from your fund i.e., an ARF (Approved Retirement Fund) or PRSA
Of course, you make the choice. But the best answer is different for different people, and at different times the best solution may differ. This is not a technical guide, but we explain both options and consider the different aspects of each avenue.
If you want a personal recommendation based on your specific situation, then talk to one of our advisors. It costs nothing to get in touch for a chat and an initial consultation with us is complementary.
What is an Annuity?
An annuity pays you a guaranteed income for life. On retirement you can purchase an annuity with your pension savings. No one knows how long they are going to live, however, knowing that an income will be paid as long as you live is very reassuring. This is where annuities can help.
Annuity Advantages
- An annuity is the only solution that will guarantee you an income for life.
- You can provide for your partner or spouse when you die and also opt for an income that increases each year.
- You can select an annuity that will boost your income if you suffer from a medical condition or lead a lifestyle that could shorten your life expectancy.
Annuity Disadvantages
- Buying an annuity is an irreversible decision that cannot be changed.
- Generally, no payment is made after your death, though there are options that can provide for some payment in limited circumstances.
- Whilst payments from an annuity are guaranteed, you will not benefit from any market growth.
- When annuity rates are low, they do not represent good value.
- If you want an income that increases with inflation this can be expensive to buy i.e., you get less to start with.
Buying an Annuity
The first and most important question you must ask is whether you want to buy an annuity at all. You have alternatives which will be discussed later.
Always remember that, once you have purchased a specific annuity, you cannot go back on your choice, so it is important to get that decision right. Annuity rates will change with the interest rate climate so, for example, if you are buying at a time when interest rates are particularly low, you may decide not to invest your whole retirement fund immediately and retain some of it instead.
In addition, when considering whether to buy that annuity, remember doing so will consolidate the value of your investment, unless you buy an investment-linked annuity, there is no possibility of benefiting from future growth. In addition, unless you write in certain guarantees, you will not be able to pass on any of that value to your heirs. If you die earlier than expected, the full purchase of an annuity would mean that much of the fund would be lost.
KEY TIP – Shop Around and Get The Best Income
It can be tempting simply to look for the highest rate you can find and take it. However, the long-term security of the annuity provider should be of greater consideration, as should the safeguards you include to protect yourself against inflation. Increasing life expectancy means retirement could now last 20 years or more.
Comparison information on annuities is widely available, so make sure you shop around. We can help you look at the entire market of annuities and select the one that is right for you.
We have helped customers increase their annuity income by over 40%, as some providers do not offer Enhanced Annuities for those with a poor medical history.
Have you considered the 'open market solution'?
Over the years, you will have amassed a retirement fund through a company scheme and/or a private plan. once it’s time to begin drawing your retirement benefits, you should inform your pension provider, who will give you a valuation of your pension pot and is also likely to provide you with a quote for an annuity. However, you are under no obligation to purchase an annuity from your pension provider. Your pension provider is legally required to spell out your choices and to ensure you are made aware the “Open Market Option”, which gives you the right to shop around for the best deal for you.
Pension Drawdown - What is an ARF?
An Approved Retirement Fund, or ARF is a post-retirement product that facilitates a drawdown on your accumulated pension fund. It was introduced in 2000 by then-minister, Charlie McCreevy, and effectively gave ownership of one’s pension fund to the member with a view to protecting wealth accumulated within a pension and to provide an alternative to the annuity, whereby you give your wealth away to an insurance company.
ARF Advantages
- You will have control over your savings and how they are invested.
- You can manage your money with the aim of generating further growth or to beat the effects of inflation.
- You can make changes to the income you receive.
- You will be able to pass any remaining funds in your pension pot on to your next of kin. (Subject to a tax charge)
ARF Disadvantages
- There is a risk you may run out of money during your retirement. Called Bombing Out.
- If your investments perform poorly you may need to reduce the income you take.
- You will need to regularly review your investments to ensure you are still on track.
- If you plan to buy an annuity later in life, annuity rates may be lower than they are currently. Of course, they could get better.
Imputed Distribution
This is a minimum distribution / income that you are required to take from your ARF on an annual basis. If you do not take the income, then your funds are taxed as if you did.
| Age in Current yr. | ARF & Vested PRSA to €2 M | ARF & Vested PRSA >€2 M | ARF – Voluntary Withdrawal |
|---|---|---|---|
| To 61 | 0 | 0 | Up to 4% |
| 61-70 | 4% | 6% | Up to 4% |
| 71+ | 5% | 6% | Up to 4% |
Getting Advice and Guidance
For a long time, annuity rates have been very low and an ARF was the only sensible option however, annuity rates are on the rise and are becoming attractive again. Even though an Annuity is a payment for life it is not suitable for all situations and for these reasons using an Impartial Financial Broker like New Alliance to guide you through your options makes sense.
If you would like to be emailed a more comprehensive guide around your retirement options, you can request this at info@newalliance.ie.
Or if you would like to speak to someone you can email us as above or call us on 01 5543 678.
