An “ARF” or Approved Retirement Fund is a post-retirement tax exempt investment account into which you can transfer the balance of your pension fund after receiving your tax efficient lump sum. Prior to the introduction of the ARF, the only option was to purchase an irreversible annual income or an annuity from a life assurance company. With an ARF, you as ARF holder will instead retain the full ownership of your retirement fund, where you remain the beneficial owner of all assets in the ARF from which you can draw down a regular income.
The control over your accrued pension funds, income flexibility and estate planning options are attractive features of the ARF. However, it is not without risks, particularly investment risk, the risk that the ARF depletes quicker than expected and that it cannot support your income requirements. These issues are complex and will vary depending on your ever-changing circumstances both at the point of and during retirement. This article looks at the key components of successful ARF planning under the acronym of TRUST.
T Traditional versus Self-Administered ARF
One of the most important decisions you will make is how the ARF will be invested, either into the traditional or self-administered category. The former is usually taken out with a life assurance company which acts as the Qualifying Fund Manager (QFM). The role of the QFM is to ensure the ARF is managed in line with prevailing revenue guidelines and legislation. Often insurance companies will offer the suite of fund options available through their platform. If you would rather not be limited to these products, a self-administered ARF may be a better solution, where you can access a wide range of investments including share portfolios, property, structured products, managed funds, loan notes or a combination of these.
The selected ARF type will depend on how comfortable you are in making investment decisions or exercising control over the type and range of investments available in the ARF. Deciding how and where to invest is complicated. The vast choice of financial instruments by an equally vast list of financial institutions has left many retirees confused. As part of any investment strategy, a financial advisor should work with you to determine investment goals, identify attitude to risk and define an appropriate investment term.
R Risk Return Trade-off
The opportunity to grow ARF funds substantially, safe in the knowledge that there is no chance of loss, simply does not exist. In a sense, every financial decision we make involves risk. Understanding the different risks and deciding how much risk you are comfortable with is an important step to planning for a healthy financial future. The ideal scenario is to find a solution that balances risk and reward, giving the ARF the potential to grow while not overly exposing it to market volatility.
U Understanding Income Sustainability
An imputed distribution or minimum drawdown is calculated as a percentage (currently 4% – 6%) depending on your age and the market value of assets in the ARF. The minimum drawdown requirement is an integral part of the “at retirement” conversation which can be a complex one, in order to fully understand your income requirements and needs. Necessary information will include the ARF size, other sources of income (state contributory pension, investment or rental income) and details of your debts or liabilities. Income requirements can of course change “in retirement” and this is where the flexibility of an ARF comes in. You can withdraw funds in excess of the imputed drawdown to suit your changing needs. The objective of income sustainability means it is crucial to monitor investment performance and withdrawals to ensure that funds are not depleted prematurely.
S Succession Planning
Historically, the role of a pension was simple; to provide an income for the retiree and his or her spouse. The role of the ARF is now two-fold. It exists to provide income in retirement, but it can also serve to provide an asset for the next generation.
On death, the remaining ARF value can be transferred to your spouse or civil partner tax free, who can continue to manage the ARF investments and take withdrawals. Equally, the ARF can be left to children or other persons subject to income tax and/or capital acquisitions tax, summarised below.
|ARF/AMRF Inherited By||Income Tax Due||Capital Acquisitions Tax (CAT) Due|
|Surviving spouse or registered civil partner.||None where transferred into an ARF of the surviving spouse/registered civil partner. Subsequent withdrawals by the spouse/ registered civil partner are subject to income tax and any other taxes due at the time.||None.|
|Child aged 21+ at date of your death.||Yes. Income tax at a rate of 30%.||None.|
|Child aged less than 21 at date of your death.||None.||Yes. Normal Cat thresholds apply.|
|Stranger in blood (anyone else not being your surviving spouse/registered civil partner or children).||Yes. This will be treated as a taxable distribution by the deceased in his/her year of death.||Yes. Normal Cat thresholds apply.|
T Transparent Charging Structure
There are usually various parties to be paid under an ARF contract which may include a financial broker, the QFM and/or the investment manager. The income you will be able to drawdown in retirement depends on the return generated and the charges imposed on it. While it can be difficult to guarantee the return, you can exert control over the charges.
The need for professional retirement advice has never been more important. It should not simply start and end when you take your retirement benefits. The ARF option will require continued retirement and investment advice.
Cantor Fitzgerald is approved by the Revenue Commissioners to act as a Qualifying Fund Manager (QFM) for the management of Approved Retirement Funds (ARFs). To speak with a portfolio manager or account executive today, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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