The differences between an ARF and an Annuity
Eoin Cullen BBS Msc QFA Grad. Dip CFP ®
After you have taken your retirement tax-free lump sum, you may be able to choose between an Annuity and/or an ARF.
Annuity
An annuity converts the money in your retirement fund into a guaranteed income payable until you die. The amount of income paid is fixed on the date you buy the annuity. However, on death, there will be little or no return for your dependants unless you purchased a spouses/dependents pension and/or had a guaranteed period.
Approved Retirement Fund
An ARF (Approved Retirement Fund) or Approved Minimum Retirement Fund (AMRF) allows you to preserve, manage and control your retirement fund. You can invest your money into suitable assets and decide how much taxable income you want to withdraw each year, subject to the minimum withdrawal once you are aged 61 or over. Unlike an annuity, it does not provide any guaranteed income but any balance in your ARF on death is payable to your dependants.
Features of an Annuity | Features of an ARF | |
Income for life | This offers an income for life which is guaranteed | No guaranteed income for life, subject to withdrawals (minimum 4%/5%* ) annually |
Flexibility | No flexibility, you cannot make changes to your annual income, once annuity purchased | Flexibility to withdraw how much you wish to annually, subject to the minimum of 4%/5%*. |
Potential for future growth? | None, you are locked into a set annuity rate fixed on date of investment with no potential for growth. If you have selected a fixed rate of escalation on your annuity then it will increase by that amount each year. | You might benefit from future growth if your fund is invested in suitable assets, though the value of your fund could also drop. |
Potential for fund to be drained? | None. An annuity provides you with a guaranteed income for life | Without careful planning and management, the fund in an ARF could be depleted depending on your withdrawals and investment strategy |
When death occurs? | Income stops when you die (assuming a single-life annuity). There’s likely to be little or no payment to your dependants. | Any funds left in an ARF may be left to your dependants/estate (subject to applicable tax rates on death). |
* Note In the year an ARF policyholder turns 61, it is compulsory to withdraw a minimum of 4% of the fund. In the year they turn 71 this increases to 5% per annum. If the ARF is greater than €2,000,000 then the minimum withdrawal is 6%. For AMRF policyholders there is a voluntary option of withdrawing up to a maximum of 4% of the fund per annum.
Reade Pensions & Financial Services Ltd trading as ARF Experts have been advising clients on designing and implementing pension schemes for their employees for more than 25 years. We would welcome the opportunity to meet with you to identify areas of financial planning that you and your employees may benefit from.
Please contact your Reade Pensions representative to set up an appointment in due course.
About Eoin
BBS Msc QFA Grad. Dip CFP ®
Eoin has been providing advice to private clients and companies for the past 15 years. Eoin has held senior advisory roles in Aviva & Willis Towers Watson.