Approved Retirement Funds

An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money invested after retirement, as a lump sum. You can withdraw from it regularly to give yourself an income, on which you pay income tax, PRSI and Universal Social Charge (USC). Any money left in the fund after your death can be left to your next of kin.

Investing in an ARF may be an option if you are self-employed, a proprietary director, or if you have a PRSA. If you are a member of a defined contribution employer pension plan, you may also have this option, depending on the rules of your own pension plan.

From 1 January 2015, the yearly drawdown requirement has been reduced from 5% to 4% for those under the age of 71, where funds are under €2 million. For those 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.

An ARF invests in various assets such as sharespropertybonds and cash so the growth of your ARF fund depends on the performance of the assets it is invested in. ARFs are designed to grow in value but your original investment is not guaranteed. An ARF can run out during your lifetime if:

  • You make large, regular withdrawals from it
  • Investment returns are less than expected
  • You live longer than expected.

ARFs are subject to yearly management charges, which are taken from the fund and reduce the value of any growth in the fund. An Approved Minimum Retirement Fund (AMRF) is similar to an ARF and as of 1 January 2015, AMRF holders can drawdown up to a maximum of 4% of the fund value each year. Under the old rules, you could not withdraw any of your original capital until you reached 75, unless you reached the minimum income threshold of €12,700. These new rules replace the previous income and drawdown rules apply regardless of age of the fund value. Once you reach 75, your AMRF will automatically become an ARF.

Advantages of ARFs

  • You keep control of your retirement money. This may be important if you are in poor health or want to leave this money to your dependants after you die
  • You have flexibility in terms of when and at what rate you draw on your ARF in retirement. Remember, if you do not withdraw any money from your fund, Revenue will assume that you have withdrawn 4% each year (for those under 71 years and with funds of under €2 million) and you will be charged income tax and USC on that amount
  • You can choose how to invest your ARF and select the type of investments that suit your needs and attitude to risk
  • Any growth in your ARF is tax-free, but withdrawals from an ARF are taxable
  • You can always use your ARF to buy an annuity later on, if you decide that you need a secure, regular income. By waiting, you may be able to get a higher annuity rate later on for the same lump sum, as you will be older

Disadvantages of ARFs

  • Your retirement money is not guaranteed to keep its value because the assets in which your ARF is invested may not perform as well as expected
  • There is a risk that the ARF could run out in your lifetime. This could happen if you take income from your ARF at too high a rate, its investment performance is less than expected or you live longer than expected
  • You will have to pay for any ongoing investment advice about your ARF
  • Some ARFs have high ongoing charges, which will reduce the value of your fund
  • There is no guarantee that your ARF will be able to buy you a higher pension later on than you could have bought at retirement. Annuity rates could be lower in the future than they are today
  • Revenue will assume that you have withdrawn 4% each year (for those under 71 years and with funds of under €2 million) and you will be charged income tax and USC on that amount

If you can choose between an annuity and an ARF, it is important to weigh up the pros and cons of both, and consider your own personal circumstances, now and in the future, before you make a final decision.

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