Given the fact that the National Pension Reserve Fund (NPRF) effectively no longer exists (It was at circa €23bn before the bank bailout) , there now exists a serious problem about the affordability of the Old Age Pension. Already the entitlement age is creeping up towards 68 years of age (as opposed to 66 existing) and it is conceivable that the entitlement age will be 70 before very long. Anyone in their 20′s, 30′s or 40′s now should plan their retirement on the assumption that the “free” old age pension will not exist when they reach entitlement age.
Unless you are one of the lucky ones on a defined benefit pension scheme, you will have to build a pension pot that is sufficient to give you a reasonable standard of living when you retire. Your employer may contribute 5% towards your pension (if you’re lucky) but you will have to make Additional Voluntary Contributions (AVC’s) to top up the fund. A big selling point for the pensions community is that you can get tax relief at your top rate of tax on these AVC’s. For the self-employed or proprietary director all pension contributions can be netted off against your corporation tax (great if you are making profits). It’s complicated !
What the pensions community will not tell you is the complex rules and regulations that are in place once you retire. There are basically three types of pension, namely Defined Benefit (DB), Annuity (AN) and Approved Retirement Fund (ARF). With poor pension fund performance in recent years, the DB scheme is considered gold-plated and is unlikely to be ever offered again to new work entrants. This scheme has historically been available to Bank workers and Public Servants.
The Annuity was the traditional route at retirement where after the 25% tax-free disbursement, an annuity had to be purchased, which guaranteed a pension for the pensioner until his/her death with 50% going to the surviving spouse upon the death of the pensioner – the fund expired upon the death of the surviving spouse or upon the death of the pensioner if there was no spouse – seems very unreasonable that after a lifetime of work, that your annuity pension could expire if you died a short time after retirement – the flip side of course is that you could live for 40 years after retirement, your pension lasts for the rest of your retired life – presumably the actuarial calculation took all of the data into consideration and stacked the overall statistical outcomes in favour of the life company.
The Approved Retirement Fund (ARF) is the pension vehicle for Proprietary Directors, the Self-Employed, Sole Traders, Farmers and most other Entrepreneurs. It is an extremely efficient form of pension planning as long as you are making profits and as long as your cash-flow can afford the contributions, but what a lot of people don’t fully appreciate is the restrictive nature of your entitlement draw-down upon retirement. Your broker will only give that information is you ask the right questions, so in a nutshell, here’s what happens:-
1) You are entitled to 25% of the accumulated pension pot as a Tax-Free lump sum payment – Happy Days !
2) You must put EUR 63,500 into an Approved Minimum Retirement Fund (AMRF) which is not accessible until you reach age 75 – Not so good if you are in ill-health at retirement – you can however access any of the gain in excess of the 63,500 figure as a taxable sum at the prevailing tax rate of the day.
3) You can access the balance as a Taxable income but cannot draw-down in excess of 9% of the fund per annum without stringent penalties being applied. If you wish to access all of your remaining fund as a lump sum (very inadvisable), you will be fully taxed on that amount in the year of draw-down.
The great thing about the ARF/ AMRF is that it forms part of your estate upon death and is not lost – the negative thing about it is that the fund can expire before you do, depending on how aggressively you draw it down and how healthy you are in your retirement – plenty to think about at the planning stage.
I hope that this synopsis has been useful in helping you to decide how to plan or manage your pension towards retirement – whereas it appears very attractive from a tax perspective while you are working, you are at the mercy of fund performance and broker commissions. You will inevitably end up paying all of that tax back when you retire and judging by the way taxes are likely to go in Ireland, you will probably end up paying a lot more tax than you saved when you were making all those contributions in the good old working days of your life.