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:
- Be receiving at least €12,700pa pension income for life or,
- Have invested €63,500 in an AMRF (See no.3) or,
- 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:
- Maximum that can be invested is €63,500.
- You can only have one AMRF at a time.
- 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:
- The AMRF holder reaching age 75,
- When the AMRF holder starts receiving a guaranteed pension income for €12,700 p.a.,
- 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:
- Have already invested €63,500 in an AMRF.
- Have used €63,500 to purchase an annuity.
- Are in receipt of a guaranteed pension for life of €12,700.
- Are 75 or over.
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:
- 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.
- 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%.