If you are planning for retirement, one of the important aspects that you need to consider is how you are going to maximize returns on your pension fund to support your lifestyle and longevity projection after you retire.
One popular option is to invest your pension savings into an Approved Retirement Fund (ARF). Here we will discuss everything you need to know about ARFs, their benefits and drawbacks, as well as how to manage them.
Key Takeout: An ARF can avoid the market cycle timing ‘cliffhanger’ at retirement ergo you can keep your funds in the market without having to cash out all at once.
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You can choose to get a review on an existing pension and/or enquire about setting up a new plan.
What is an Approved Retirement Fund (ARF)?
An Approved Retirement Fund (ARF) is a type of personal retirement fund that allows you to invest your pension savings after you have retired. ARFs were introduced in Ireland in 1999 as an alternative to the traditional annuity purchase, which was the only option available to retirees at that time.
Unlike annuities, which provide a guaranteed income for life, ARFs are investment funds that allow you to manage your own retirement savings and potentially generate a higher return. You can invest your ARF in a variety of assets, such as stocks, bonds, property, or cash, and you have full control over how you invest and withdraw your money.
ARFs were initially introduced as a flexible and attractive option for those with substantial pension savings, who wanted to have more control over their retirement income. However, as the rules for accessing pension funds changed over time, ARFs have become an increasingly popular option for many retirees.
What are the Benefits of an Approved Retirement Fund?
There are several benefits to investing in an ARF, including:
- Flexibility: Unlike annuities, which provide a fixed income for life, ARFs give you the flexibility to manage your own retirement savings and to decide how much income you want to draw down each year. You can also choose how you want to invest your money, which gives you more control over your retirement income.
- Potential for Higher Returns: Since you have control over how you invest your ARF, you have the potential to generate a higher return on your investment than with an annuity. However, it’s important to keep in mind that investing always carries a degree of risk, and there is no guarantee that you will make a profit.
- Inheritance: One of the key benefits of ARFs is that they can be passed on to your beneficiaries after your death. This means that any unused funds in your ARF can be passed on to your loved ones tax-free, which can be a significant advantage for those who want to leave a legacy for their heirs.
- No Purchase Requirement: With ARFs, there is no requirement to purchase an annuity. This means that you can keep your pension savings invested and continue to benefit from any potential investment returns.
Are there disadvantages of choosing of an Approved Retirement Fund?
Despite their many benefits (and in many if not most cases they are the most common and recommended option), there are also some potential drawbacks to investing in an ARF, including:
- Market Risk: Since ARFs are investment funds, the value of your fund can go up or down depending on market conditions. This means that there is always a risk that you may lose money, particularly if you have invested in higher-risk assets.
- Management Fees: ARFs are managed by financial institutions, and these institutions typically charge management fees for their services. These fees can eat into your investment returns and reduce the amount of income you receive in retirement.
- No Guaranteed Income: Unlike annuities, which provide a guaranteed income for life, ARFs do not offer any guarantees. This means that you may need to be more cautious in how you manage your retirement savings to ensure that you don’t run out of money.
- Inheritance Tax: While ARFs can be passed on to your beneficiaries tax-free, they may still be subject to inheritance tax. This tax can be significant, and it’s important to consider this.
You can get advice on which option is best for you by using the online form below
You can choose to get a review on an existing pension and/or enquire about setting up a new plan via a PRB.
What are the Rules for Investing in an ARF?
There are certain rules and restrictions that apply to investing in an ARF. These include:
- Minimum Investment: Previous to the Finance Act 2021 to invest in an ARF, you needed t have a minimum pension fund of €63,500. (This is no longer the case*).
- Maximum Withdrawals: The maximum withdrawal amount from your ARF each year is based on your age and the balance of your fund. The table below shows the maximum withdrawal amounts based on different ages and fund balances.
| Age | Maximum Withdrawal |
|---|---|
| 61 or younger | 4% of fund |
| 62 to 64 | 5% of fund |
| 65 to 67 | 6% of fund |
| 68 to 70 | 7% of fund |
| 71 or older | 8% of fund |
- Taxation: Any income or withdrawals from your ARF are subject to income tax. Additionally, any gains or income earned within your ARF are also subject to tax. It’s important to consult with a tax advisor to understand the tax implications of investing in an ARF.
- Investment Restrictions: There are certain restrictions on how you can invest your ARF. For example, you cannot invest more than 30% of your fund in any one company or entity, and you cannot invest in certain high-risk investments, such as cryptocurrency.
*What Happened to AMRFs?
An AMRF (Approved Minimum Retirement Fund) was a type of personal retirement fund that was available to retirees who did not have a guaranteed income of €12,700 per year. AMRFs were introduced in 2011 as a way to ensure that retirees had some level of guaranteed income in retirement.
However, as of 2020, AMRFs are no longer relevant under Irish law.
How to Manage Your Approved Retirement Fund (ARF)
Managing an ARF can be complex, and it’s important to work with a financial advisor to ensure that you are making the most of your retirement savings. Here are some tips for managing your ARF:
- Create a Retirement Plan: Before you retire, it’s important to create a retirement plan that outlines your income needs and goals for retirement. This will help you determine how much income you need to draw down from your ARF each year and how you should invest your money.
- Invest Wisely: Since ARFs are investment funds, it’s important to invest your money wisely to ensure that you generate the best return while minimizing risk. Work with a financial advisor to develop an investment strategy that aligns with your retirement goals.
- Re-balance Your Portfolio: As you get older, your investment needs may change. It’s important to periodically review your portfolio and rebalance your investments to ensure that they align with your changing needs and goals.
- Consider Annuities: While ARFs offer flexibility and potential for higher returns, they do not provide any guarantees. Consider investing a portion of your pension fund in an annuity to provide a guaranteed income for life. This could again become an interesting strategy if the interest rate climate remains elevated and the LifeCo institutions start offering better value for this instrument (which has fallen out of favour over the last couple of decades or so).
- Review Your Withdrawals: The amount you withdraw from your ARF each year will impact the longevity of your fund. Work with a financial advisor to periodically review your withdrawals to ensure that you are not depleting your fund too quickly.
In Conclusion
An Approved Retirement Fund (ARF) can be an attractive option for retirees who want flexibility and control over their retirement income.
If you would like a quick check of your own existing pension retirement options, just submit this 2 minute questionnaire below and we can do a no-obligation quick review of same. Of course if you would like to start a new pension, you have come to a good place too.
