Retiring

The amount of regular pension income you get from an annuity will already have been guaranteed and you will have chosen to suit your needs. Once you take the pension, your income level is fixed and can’t be changed afterwards, so watch out for significant changes in inflation.

Your annuity income is usually just for your own lifetime and generally does not go to your dependants when you die. However, there are some guaranteed annuity products that may pay out some benefit to your dependents.

One alternative to taking out an annuity is to set up an Approved Retirement Fund (ARF). In retirement, you can withdraw from an ARF regularly to give yourself an income, on which you pay income tax and any other levies, such as the income levy. However, the income is not guaranteed in value and an ARF can run out during your lifetime if:

• you make large, regular withdrawals from it
• investment returns are less than expected.

ARFs are also subject to yearly management charges, which are taken from the fund and reduce the value of any growth in the fund. From 1 January 2015, the yearly drawdown requirement for ARF’s has been reduced from 5% to 4% for those under the age of 71, where funds are under €2 million. For those aged over 71 years, a 5% drawdown still applies and a 6% drawdown applies for funds over €2 million. So you will be charged tax whether you have taken an income or not. Any money left in the ARF after your death can be left to your next of kin.

When you retire as an employee from your employer’s pension plan, you can usually take your benefits in two separate parts.

• a tax-free lump sum; and
• a pension for life (subject to income tax).

The amount you can take as a tax-free lump sum depends on the rules of your employer’s plan.

It usually makes sense to take the biggest lump sum you can tax-free. If you took the same amount of money as an annuity or guaranteed pension income, you have to pay income tax on it at your top rate. In addition, you get the lump sum now, to invest or spend as you want.

However, in some cases taking a lump sum can reduce your annual pension so you would have to carefully consider the consequences before you choose.

You can also leave some of the lump sum to your dependants if you die soon after retirement.

If you have paid Additional Voluntary Contributions (AVCs) into your employer’s pension plan, or into a separate Personal Retirement Savings Account (PRSA), you must normally take these benefits at the same time as you retire. You may be able to take part, or all, of your AVCs as a tax-free lump sum. If there is any money left in your AVC fund, you can use it to:

• increase your basic pension
• transfer it to an Approved Retirement Fund (ARF)
• take it as a cash lump sum on which you pay income tax.

If you have a personal pension plan or Personal Retirement Savings Account (PRSA), you can immediately take a tax-free lump sum of up to 25% of your pension fund, up to a maximum of €200,000, when you retire. You can use the rest of your fund to buy an annuity, which gives you an income for the rest of your life, invest in an ARF  which allows you to continue to invest some or all of the benefits from your pension fund in retirement and take out money as you need it, or take the remaining balance as a taxable lump sum.

With most pension plans, you can take your pension benefits at any time if you become seriously ill and have to give up work. Otherwise, the earliest you can take your pension benefits depends on the type of plan you have. Usually your money is tied up until you reach retirement age, so you can’t take money from your pension until you retire.

People in certain occupations, such as professional sportspeople, are allowed to take their benefits from a younger age.

Remember that if you retire early, your pension will normally be much lower than if you continued making contributions up to the expected retirement age for your pension plan.

If you have paid Pay Related Social Insurance (PRSI) during your working life, you may be entitled to a state pension at the age of 65, or 66 if you are self-employed. You should consider this when working out the best way to take your pension benefits. Check with the Department of Social and Family Affairs to see if you are entitled to a state pension.