Expert Pensions

ARF vs AMRF: What You Need To Know

The terms ARF (Approved Retirement Fund) and AMRF (Approved Minimum Retirement Fund) will become important as you near retirement age and make big decisions about your pension. There is no fixed age at which you have to retire but some pension schemes will allow you access your funds from as early as age 50. Once you are eligible, it is possible to withdraw 25% of your pension as a tax-free lump sum (up to a limit of €200,000). Should you wish to withdraw a larger sum, you will pay 20% tax on the next €300,000. Lump sums are still the most tax efficient way to draw income from a pension fund as you will in the majority of cases pay little or no tax. Any remaining funds must be invested into an ARF/AMRF or used to purchase an annuity (a guaranteed income for life). A financial advisor can offer you expert advice on the right decision for you and your family.

Here we take a closer look at the ARF/AMRF options and the differences between them.

AMRF (Approved Minimum Retirement Fund)

If you cannot provide proof of a guaranteed income of €12,700 in retirement, then you must invest in an AMRF. Most guaranteed incomes will be provided by the state pension if you are entitled to it.  It’s important to understand what constitutes a guaranteed income, i.e. rental income from an investment property is not considered guaranteed. Withdrawals of up to 4% of the value of the fund can be taken from an AMRF every year but you cannot access all your funds until the age of 75 or you can prove you surpass the €12,700 income requirement. Income from an AMRF is subject to tax plus USC (and PRSI if you are under the age of 66). But remember, you only pay tax over the age of 65 if your income is above €36,000 (married couple) or €18,000 (single person). Recent budgetary changes — allowing recipients of the State pension of €12,651 a year to include their Christmas bonus as income — pushed thousands of pensioners above the €12,700 AMRF minimum retirement income rate. This means they will no longer be forced to wait until 75 to access their full pension fund as they can convert from an AMRF to an ARF. When you reach the age of 75, or upon death, the AMRF automatically converts into an ARF.  The purpose of the AMRF is to provide a safety net that whilst you don’t have income per annum greater than €12,700, you have a safety fund to provide you will some sort of supplementary income from age 75 on. It’s to safeguard against people spending all their pension income too quickly in retirement which is a risk with the ARF option. This is called ‘bombing out’.

ARF (Approved Retirement Fund)

After you satisfy the AMRF requirement, you can place pension money into an ARF. This is a fund controlled by an individual using money remaining in their pension pot after withdrawing their tax-free lump sum. A person with Buy Out Bonds originating from a Defined Benefit or Defined Contribution scheme can also create an ARF. An ARF offers more flexibility than an AMRF as you can access your funds at any time and draw some or all of the fund if you wish. You do not need to wait until the age of 75. As we mentioned though, ‘bombing’ through your ARF account may be down to bad money management.

Once you retire, Revenue applies a tax (known as imputed distribution) every year as a percentage of the value of your ARF on the assumption that you are withdrawing cash to fund your retirement. This levy is 4% if you are 61 years or over and 5% if you are 70 years or over. Actual distributions may be deducted from the “imputed distribution” to arrive at a “net” imputed distribution.

Advantages of an ARF include:

— You are in control of investment decisions and any continued growth in the fund is tax free

— You decide what income you want to withdraw from an ARF every year but if that is more than €36,000 (married couple) or €18,000 (single person) — including your State pension — then it is subject to income tax and USC (you will not pay PRSI if aged 66 or over)

— After death, your fund can be transferred tax free to an ARF in the name of your spouse/civil partner

— If you later decide you would like a guaranteed income, you can use your ARF to buy an annuity

Disadvantages include the risk that the value of your fund can go down as well as up, depending on the performance of your investments or the ARF might run out of money altogether if you live a very long time.