As I’ve said before, pensions are boring, complicated and full of jargon. But as they are central to how comfortable (or not) our retirements will be, it’s really important to know the basics.
If you have a private pension (ie, anything other than the State Pension) you can generally take up to 25% of the value of the fund at retirement in the form of a tax free lump sum. So what happens to the remaining 75%? You will normally then have a choice between an Annuity and/or an Approved Retirement Fund (ARF). An Annuity is a pension product where you buy a (taxable) income for life in return for a once-off upfront payment – I explained more about this in a previous blog, What Is An Annuity?
An ARF is a retirement fund where you can keep (75% of) your pension pot invested after retirement. Instead of a set Annuity payment for life, you decide when to withdraw funds as (taxable) income. Unlike an Annuity, any money left in the ARF fund after your death can be left to your next of kin. I explained more about this in another previous blog, What Is An ARF?
So then, what is an AMRF?
If you are under 75, you cannot transfer to an ARF unless you can demonstrate a guaranteed income of €12,700 per annum, which can include State Pensions. If you are unable to meet this minimum, you must either transfer €63,500 to an Approved Minimum Retirement Fund (AMRF), or purchase an annuity which will bring up your level of guaranteed income to the minimum amount. Strangely, you can only release up to 4% of the value of the AMRF each year. When you reach the age of 75 the AMRF automatically converts into an ARF.
The full State Pension before Budget 2019 was €12,651 per annum, leaving a ridiculous situation where many pensioners had no option but to invest in an AMRF for want of an extra €49 in annual pension income.
But with a €5 increase in the weekly Contributory State Pension in Budget 2019 sense has been restored and so those in receipt of the full State Contributory Pension will now satisfy the income requirement of €12,700 per annum and will no longer be required to set aside €63,500 in an AMRF.
In saying that this still leaves many pensioners just shy of the €12,700 income requirement. Plus new State Pension PRSI requirements coming down the line are expected to push many more out of the full rate Contributory State Pension.
The AMRF is a consequence of our (Nanny?) State attempting to ensure we don’t spend all of our retirement pots rashly by requiring us to have some guaranteed retirement income for life. And yet access is limited to 4% of funds per year. Not to mention the poorly pitched minimum income requirement. It will go down as a very flawed financial invention which one day soon may be put out of its misery.