What is an Approved Retirement Fund (ARF)?

To make the most of your retirement, it’s important to think about how you’ll manage your income. An Approved Retirement Fund (ARF) offers the opportunity to keep your funds invested even after you stop working.

In this guide, we’ll cover everything you need to know about ARFs: how they work, tax on ARF withdrawals, and their advantages and disadvantages. We’ll also see how ARFs compare with annuities, to help you make an informed decision.

An Approved Retirement Fund (ARF) is a way to manage your pension funds after you retire. After you take out a tax-free lump sum from your pension, you can invest the remaining money in an ARF. This allows your funds to potentially keep growing even after you’ve retired.

The reason why many people in Ireland opt for an ARF over other retirement options is its flexibility. You are free to withdraw money whenever you need it, which can help to cover any expenses or provide a steady income throughout your retirement. Just remember that these withdrawals will be subject to income tax, PRSI (if applicable), and USC.

The performance of your ARF pension depends on how you choose to invest the money. From stocks and bonds to property and cash, you can pick the investments that suit your tolerance for risk. You can potentially grow your fund over time, helping you maintain a comfortable standard of living throughout your retirement. 

In Ireland, you can get an ARF from various financial institutions like banks, building societies, credit unions, life assurance companies, and stockbrokers. The provider of your ARF is responsible for managing your investments and handling all the tax responsibilities.

Previously, you had to invest a certain amount of your pension savings in an Approved Minimum Retirement Fund (AMRF) before transferring the rest to an Approved Retirement Fund. However, this requirement was removed by the Finance Act 2021. As of January 2022, you no longer need to invest in an AMRF to qualify for an ARF. If you were previously using an AMRF pension, your pension provider has likely already converted it to an ARF.

While they may seem an attractive option, there are some important ARF pension rules to bear in mind. Recent changes have been introduced to pension regulations in Ireland, and these may also impact your decision on how best to manage your post-retirement income.

The idea with an ARF is to convert an existing pension product once retired. Eligibility terms will of course vary based on the ARF provider and your existing pension plan. In general, however, you can invest in an ARF in Ireland if:

1. You have certain retirement savings plans, such as:

• Retirement Annuity Trust Schemes.
• Personal Retirement Savings Accounts (PRSAs).
• Other types of private pension plans.

2. You are a member of an occupational pension scheme, such as:

• Defined Contribution (DC) pension schemes.
• Defined Benefit (DB) pension schemes, if you are a proprietary director or have additional voluntary contributions (AVCs).

You don’t need to be an Irish resident to invest in an ARF, but if you live abroad, there are important tax implications to consider. Specifically, under ARF withdrawal rules, you may have to pay Irish tax. To avoid being taxed twice - once in Ireland and again in your country of residence - it’s worth reading up on the tax relief and double taxation agreements.

You might have also heard about a minimum income requirement of €12,700 per year, which was typically covered by the state pension. This requirement was removed under the Finance Act 2021, so it no longer applies.

Under the ARF drawdown rules in Ireland, you can withdraw funds whenever you need them. Some providers will specify the frequency of withdrawals allowed, such as monthly, quarterly, or yearly.

However, it’s important to be careful about how much you withdraw. Taking out too much too soon could leave you short of funds later in retirement. That’s why getting advice from a pension adviser can help you manage your withdrawals and keep your retirement plans on track.

When it comes to the specific amount you can withdraw, there are mandatory minimum withdrawals you must make each year, based on your age and the value of your ARF. If your ARF pension is worth €2 million or less, you need to withdraw:

• 4% annually if you’re under 70

• 5% annually once you turn 70

For ARFs valued over €2 million, you must withdraw 6% annually, regardless of your age.

For detailed information on ARF drawdown rules in Ireland, you can refer to the Revenue’s Pensions Manual (pdf).

Approved Retirement Funds have some tax advantages while your money is invested. You don’t pay income tax, DIRT, or capital gains tax on the growth of your investments within the ARF. This gives your investment the best chance to grow without taxes eating into your returns.

However, as soon as you start withdrawing money from your ARF, these withdrawals, called distributions, are subject to income tax. You’ll also need to pay the Universal Social Charge (USC) and Pay-Related Social Insurance (PRSI) (if applicable) on the amounts you take out. It’s worth pointing out that USC rates decrease after age 70 if your non-pension income is under €60,000 per year.

It’s also important to be aware of recent changes to Irish pension regulations. A new option has been introduced to allow people to defer payment of the state pension until they reach age 70. If you take advantage of this option, and you turn 66 on or after 1st January 2024, you’ll need to pay 4% PRSI on any withdrawals from your ARF. The age exemption has increased to either 70 or until you draw down the state pension.

When the owner of an Approved Retirement Fund passes away, the ARF pension can be transferred to their spouse, civil partner, or dependants. The way the ARF is taxed depends on who inherits it.

If the ARF goes to the deceased’s spouse or civil partner, they don’t have to pay income tax or Capital Acquisitions Tax (CAT) immediately. However, any withdrawals they make from the ARF are subject to income tax.

For other beneficiaries, such as children or other relatives, the inherited ARF is subject to both income tax and CAT. Children over 21 will pay income tax at a flat rate of 30%. Under ARF rules, children under 21 are exempt from income tax but might still owe CAT, depending on the amount they inherit.

A pension annuity provides a guaranteed, regular income for life once you retire. This means you receive steady payments throughout your retirement, regardless of how long you live. However, once you pass away, the payments stop, and there is no residual value left for your beneficiaries. The only exception is if you opted for a joint life annuity, in which case payments will continue to your spouse or partner.

And that’s one key difference compared to ARFs. With an ARF pension, when you pass away, any remaining funds can be passed on to a spouse or partner tax-free. This means your loved ones can continue to benefit from the investment.

Your choice will ultimately depend on what matters most to you. If you prefer a stable, predictable income for the rest of your life, an annuity may be the better option. If you appreciate the potential for investment growth and want to leave a financial legacy, an ARF might offer more flexibility and the possibility of passing on your funds. However, ARF rules when it comes to withdrawals can be off-putting.

It can always help to get in touch with a pensions adviser, or contact your existing pension provider to get personal advice and discuss your options.

Looking to give your retirement savings a boost? Raisin Bank offers a variety of high-interest savings accounts with competitive rates and flexible terms. Right now, you can benefit from competitive rates on fixed term deposits. Register for a free Raisin Account, compare options, apply to open your chosen savings account, and start growing your funds today!