Extension of flexible options on retirement
The National Pensions Framework published in March 2010 contained a commitment that flexible options on retirement in relation to pension funds (e.g. access to Approved Retirement Funds (ARFs) etc.) be extended to all Defined Contribution (DC) pension arrangements. As mentioned in the Minister for Finance’s Budget speech, this commitment is being fulfilled in 2011.
Prior to the Finance Act 1999, any person taking a pension under a DC scheme was required to purchase an annuity with the pension fund moneys remaining after the drawdown of the appropriate tax-free lump sum. The Finance Act 1999 introduced significant changes which gave a considerable degree of control, flexibility and personal choice to certain categories of individual, which included the options to purchase an annuity or to invest in an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF), as appropriate.
The option to have all or part of an individual’s accumulated pension fund placed in an ARF must be exercised not later than the date on which the annuity or pension would otherwise become payable and is conditional on the individual having a guaranteed pension income for life of at least €12,700 in payment at that time. Where this guaranteed income test is not met, a maximum of €63,500 of the net pension fund
(after taking the tax free lump sum), or the whole of the remaining fund, if less, must be either invested in an AMRF or used to purchase an annuity.
Where the AMRF route is taken the capital invested in the AMRF cannot be used by the individual until he or she reaches 75 (or dies) whereupon the AMRF automatically becomes an ARF. Up to now, the fact that the owner of an AMRF was able to meet the guaranteed income requirement after retirement was of no consequence – if the test was not met at the point of retirement the AMRF route had to be taken and the capital was "locked in" until age 75.
In the context of extending the flexible options, the Minister indicated the following changes to the legislation and transitional arrangements:
The AMRF option is being retained but the "set-aside" requirement will now be the lesser of 10 times the maximum rate of State Pension (Contributory) – about €120,000 – or the remainder of the pension fund after taking the tax-free lump sum, as compared with €63,500 at present.
- The specified or guaranteed income limit of €12,700 per annum is being increased to 1.5 times the maximum rate of the State Pension (Contributory) bringing the "specified income" limit to close on €18,000 per annum.
- The guaranteed income requirement, if not satisfied at the time of retirement may be satisfied at any time after retirement, at which point the Approved Minimum Retirement Fund (AMRF) becomes an ARF.
- As a transitional measure, the current guaranteed income requirement of €12,700 per annum will continue to apply for a 3 year period in the case of individuals who have already retired. If they satisfy the existing requirement within 3 years (of the 2011 Finance Bill becoming law) their AMRF becomes an ARF. After this 3 year period, the new higher guaranteed income test referred to above will have to be satisfied.
The deferral of annuity purchase arrangements for members of occupational DC schemes which is operated administratively by the Revenue Commissioners is being extended pending these changes being signed into law.