THE PENSION STRUCTURES AVAILABLE FOR PRE-RETIREMENT AND POST-RETIREMENT
Pension structures are long-term savings plans that helps you save for your future because unlike a regular savings account, a pension is a very tax efficient way to fund for retirement. When you retire and look for access to your fund, the benefits can be available in a tax efficient way.
What are the main benefits on all pension structures – The 3 T’s!
- Income tax relief on premiums paid
- Tax free growth on pension investment
- Tax free lump sum in retirement
Additional tax advantages for Occupational Pension Schemes:
- Employer gets Corporation Tax Relief
- Employer contributions to an OPS are not regarded as part of an employee’s income – not treated as Benefit-In-Kind
There are 3 Revenue approved pension arrangements:
Personal Pension Structures
A personal pension may suit if you are self-employed or if your employer does not offer an occupational pension.
PRSA Pensions (Personal / Group PRSAs)
A Personal Retirement Savings Account is a flexible & simplified pension plan and can be taken out regardless of your employment status.
Occupational Pension Schemes
Personal Retirement Bond
A Personal Retirement Bond is a pension structure which allows you to take your pension entitlements with you when changing jobs and without transfering to the new employer’s pension scheme.
Executive/Company Pension Plan
An Executive/Company Pension Plan would suit a company director, company owner or employees to fund for their retirement because Both employers and employees can make contributions with tax relief available on contributions.
Additional Voluntary Contributions, like AVC’s, are extra contributions that can be made in addition to an existing company pension. AVC’s allow funding for retirement on your own terms and avail of the reliefs available, within revenue limits.
On retirement, there are several post-retirement/pension structures available. A pension holder may take a tax-free lump sum to a maximum of €200,000 from the pension arrangement. The following €300,000 is taxed at the standard rate of income tax, currently 20%. The balance of a lump sum over €500,000 is taxed at the higher rate of income tax, currently 40%.
After you have taken your retirement lump sum, you can choose between an Annuity, Approved Retirement Fund or Taxable Lump Sum.
An Annuity is designed to provide you with a guaranteed income for the rest of your life. It is essential that the annuity reflects your needs and potentially the needs of your spouse in retirement. Annuities are suitable for people who wish to avoid any potential investment risks and would prefer a guaranteed income for their retirement. This option appeals to people in good health with a long life expectancy as the main pitfall with these post-retirement products is that the annuity payment will stop if you pass away prematurely. Some add-ons can be availed of to help in this situation, e.g. Guaranteed Annuity Period.
Approved Retirement Fund
An Approved Retirement Fund, or ARF, gives you more control over how your retirement fund is managed. An ARF allows you to remain invested in the markets with the ability to control your investment and take a flexible income in retirement. With an ARF you can withdraw from your fund on a regular or ad-hoc basis (subject to income tax and USC. PRSI may also apply). The main advantage to availing of the ARF product is that in the event of death, the ARF proceeds can be left to dependents. The most significant risk attached is that, as you can draw from the ARF whenever you want, it may ‘bomb out’ sooner than expected.
There is a minimum income you must take from your ARF each year, which is dependent on your age. If your total ARFs are under €2 million, you must withdraw:
- 4% of the value of your fund, if you are over 60
- 5% of the value of your fund, if you are over 70
If your total ARFs exceed €2 million, you must take out 6% of the value of your fund each year.
Once you have taken your minimum withdrawal, you can choose any additional income as you need it.
*Certain conditions apply to ARFs. See below
Taxable Lump Sum in Retirement
To set up an ARF or avail of the Taxable Lump Sum option, you must first have a guaranteed pension income of at least €12,700 per annum. If you do not meet the €12,700 per annum limit, then the first €63,500 of your retirement fund must be used to invest in an Approved Minimum Retirement Fund or purchase an annuity – or a combination of both.
Approved Minimum Retirement Fund
An Approved Minimum Retirement Fund (AMRF) is similar to an ARF. AMRF holders can draw down up to a maximum of 4% of the fund value each year. Once you reach 75, your AMRF will automatically become an ARF.”
The retirement option/pension structures that are right for you will depend on many factors, including:
- The size of your retirement fund;
- The level of income you and your spouse/civil partner/dependants will need during your retirement years;
- The number of other assets – apart from your retirement fund – that you have to fall back on;
- Whether investment growth or security is more important to you during your retirement years;
- Whether you wish to pass your retirement fund on to your dependents; and
- Your current state of health.