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Your Pension Options Explained

Reading up on the different types of pensions can be difficult to understand. Any income received is liable to taxation and this includes your pension. Even though the Revenue Commissioners provide tax relief for pensions whilst you are saving for retirement, there are some taxes that are required to be paid on your pension income.

In this article we aim to explain the different types of pensions in a simpler form.

Here are some examples of retirement income:

Annuity (Traditionally Known As a Pension)

An annuity is a sum of money, usually fixed, paid out each year. This sum is paid until death. It is important that you choose an annuity payment that is enough to cover your needs in retirement. Payments stop at death, however there are joint life annuities available that guarantee payments for you and your beneficiary for life.

There are also guaranteed periods which will pay for a minimum specified time (usually 5 or 10 years). These guaranteed periods will, however, reduce the amount of fixed payment you receive. At Pension Options we can advise you on this.

Approved Retirement Fund

ARF (Approved Retirement Fund) is a fund where you keep your money invested after Retirement. An income is taken from it on a regular basis.

Before you can invest in an ARF you must fulfil one of the following criteria:

  1. Be receiving at least €12,700pa pension income for life or,
  2. Have invested €63,500 in an AMRF (See no.3) or,
  3. Used €63,500 to purchase an Annuity or a combination of an AMRF and Annuity.

The important thing to note here is that, after your death, any monies left in this fund can be left to your next of kin or estate.

Approved Minimum Retirement Fund

AMRF (Approved Minimum Retirement Fund) is the same as an ARF apart from the following:

  1. Maximum that can be invested is €63,500.
  2. You can only have one AMRF at a time.
  3. One withdrawal of up to a maximum of 4% of the value of the AMRF can be taken each tax year.

After time an AMRF becomes an ARF. This happens on the earlier of:

  1. The AMRF holder reaching age 75,
  2. When the AMRF holder starts receiving a guaranteed pension income for €12,700 p.a.,
  3. The death of the AMRF holder.

Vested Personal Retirement Savings Account

After you take your retirement lump sum out of your PRSA the balance remaining is called a Vested PRSA. At the time of withdrawal, depending on your circumstances, you may be required to keep up to €63,500 untouched in your Vested PRSA. This is referred to as your “restricted fund” and is the same as AMRF.

This requirement will not apply if you:

  1. Have already invested €63,500 in an AMRF.
  2. Have used €63,500 to purchase an annuity.
  3. Are in receipt of a guaranteed pension for life of €12,700.
  4. Are 75 or over.

Trivial Pension

This is a small pension fund, usually under €20,000. This may be able to be taken as a taxable lump sum; however there are certain limits which we have explained below:

  1. When the value of your pension fund, after with paying out your tax free lump sum is less than €20,000 then this balance can be taken as a once off payment. This is subject to income tax and USC.
  2. If your pension payments from other personal pensions and PRSAs do not exceed €330pa then your fund can be taken as a taxable lump sum. Under this option that balance would be subject to income tax of 10%.

Relationships with Your Retirement

The relationships you have with the various parts of your life when coming into Retirement is just as important as your pension planning.

We have compiled them in the 3 parts or, as we have listed them, the 3 “Fs”. These 3 sections are aimed towards your own self-care in retirement. You need to take care of yourself before you can be expected to take care of anyone else!

F is for Friendship.

“The best time to make friends is before you need them” (Ethel Barrymore, US Actress)

This is such an important element to have in your retirement. Having a strong and dependable circle of friends means that you can keep yourself socially busy and also have people to talk in the adjustment period between working and retirement. Having strong and vibrant relationships can greatly reduce feelings of stress and also lower your chances of developing mental health problems such as Anxiety.

F is for Food.

No matter what age you are it is vitally important to think about what you are putting into your body.

As we age though our bodies require additional vitamins and minerals. Especially in Ireland Vitamin D is on the decrease due to the lack of long spells of sunshine. Foods high in Vitamin D are fatty fish like tuna and mackerel, beef liver, eggs and cheese.

Other vitamins that are important are as we age are Folic Acid, Calcium and B12.

Ensuring that you maintain a healthy and balanced diet helps your body bounce back from illnesses quicker and also supports longer energy levels.

F is for Fitness.

Keeping active is essential as you get older. There are many ways that you can keep in shape that will not be too strenuous on your body. Walking is great, and it’s an idea to check your local community centre to see if there are walking clubs in your area.

Swimming and water aerobics are a fantastic to loosen stiff joints. A lot of fitness centres and public swimming pools offer these classes.

These are also great ways to meet new people who may also have started their retirement journey.

Planning to Make Your Pension Last

Nobody knows how long they are going to live. So asking yourself how much money you will need from your pension for the rest of your life is like asking how long is a piece of string! The truth is that the majority of us actually underestimate how long we are going to live.

In the period 2010-2012, life expectancy at birth was 78.4 years for males and 82.8 years for females. In 2011, in Ireland, a 65 year old male could expect to live another 17.7 years, which is an increase 0f 1.1 years since 2006.

A 65 year old female could expect to live another 20.6 years, an increase of 0.8 years over the same period. (CSO statistical release, July 8th 2015).

We have listed some key points to consider about your retirement income. This should be done once you have decided on your retirement date, ideally 6 months before.

Ideas for your tax free lump sum pension:

  1. If you have a mortgage, aim to have this paid off. Set up a meeting with your mortgage broker or provider for advice on how to do this.
  2. Review all hire purchase agreements, credit cards or any other credit that you have. See if you can consolidate these debts and have one payment to focus on each month. Some credit facilities have higher interest rates than others so focus on amalgamating payment under a low interest rate.
  3. Major repairs on your home should be done. Review having extra insulation in your home to cut down on heating costs.
  4. If you have a partner/spouse ensure that you both are on the same page when it come to a budget and stick to it.

Obviously life can throw all sorts at us. Even if you follow all the advice given here, unforeseen circumstances can arise which may lead to there being an unexpected dent in your cash flow. Some we can control some we can’t but here are some examples of what to be aware of:

  1. Inflation leading to higher living costs.
  2. Lack of advance preparation. Fail to prepare; prepare to fail. See our previous article to get some ideas on planning.
  3. Having to support children or grandchildren. This can happen due to children staying at home longer or if they are unable to secure a job. A breakdown in your child’s relationship with their spouse or partner may result in them, along with their child/children coming to stay for a while which will of course result in added expenses.
  4. Medical Costs. These obviously increase as we get older. Going to the Doctor more and also there may be an increase in medication to take.

We here at Pension Options can advise you on any of these matters.

Getting the Most out of Your Retirement

So here it is… Retirement!

Did you know that this new phase of your life rewards you with up to an additional 2000 hours a year? Retirement is not just sitting around. So what are you going to do to fill these hours?

Adopting a “wait and see” attitude may not be the best option for some people so here are some key points that may help you along the way.

Make a Plan

This idea sounds quite broad but it means just that. Obviously at the start of your retirement you will appreciate a few days to sit around and do nothing, because you can!

What I would recommend is start your plan before you finish up work so that you have an idea about how you want to fill your hours. It can be little things to start off with but then you could see yourself putting in larger ideas such as signing up for a course or heading away on a long term holiday.

It’s also important to think about how much money you will need each month, remembering to include one off expenditures such as gifts, car troubles etc. If you have a “Rainy Day” fund it’s good to ensure that you have a reserve of approx 6 months living expenses.

Organise yourself

You are going to spending more time than usual at home.

This can be a good time to clear out unwanted items such a clothing or home-wares. These could be sold online or in a car boot sale to provide some income or you can donate them to your local charity shop.

Do a walk-through of your home and ensuring that there are no repairs needed.

Review your Estate and Will

If you don’t have a Will in place, get one. This will protect your assets while you are alive and you can then choose how your estate will be divided when you pass on.

New Job/Volunteer

Yes you’ve just left your current job but this might be as good a time as any to try something new. Is there any role that jumped out at you in the past? If you had an office job, did you wonder what it would be like to work with your hands?

Volunteering is also another avenue. Most of us get a warm feeling from helping others. There are mentoring positions available in most towns and cities. Why not help out at the local library or join a gardening group.

Activities

A lot of people are not able to take up a sport or activity during their working years or if they are they may not be able to dedicate a lot of their free time to it. There are great benefits from taking up a sport or hobby in your retirement, meeting new people who have the same interests and also the fitness element. Activities such as golfing, tennis or fishing are great for getting outdoors.

Are you mentally ready?

If you work 40 hours a week from the age of 20-65 you will have spent, on average, 90,360 hours in your job. Let me say that again:

90,360 hours!

We build relationships and attachments in this time so it’s no wonder that a large change like retirement can be a difficult emotional adjustment. If you feel that the prospect of Retirement is daunting and causing you to worry, try to talk to a partner, close friend or even your GP.