23/08/2018 0 Comments
Annuity v ARF
What are the main differences between an Annuity and an ARF?
- The key differences between an Annuity and an ARF are flexibility and risk.
- An annuity converts the money in your retirement fund into guaranteed income payable for your lifetime, fixed on the date you buy the annuity. However, on death, there will be little or no return for your dependants, unless you purchased a spouse/dependant's pension and/or had a guaranteed period.
- An ARF allows you to preserve, manage and control your retirement fund. You can invest your money into suitable assets and decide how much taxable income you want to withdraw each year, subject to the minimum withdrawal once you are aged 61 or over. Unlike an annuity, it does not provide any guaranteed income but any balance in your ARF on death is payable to your dependants.
| Features of an Annuity | Features of an ARF | |
|---|---|---|
| Income for life | This offers an income for life which is guaranteed. | No guaranteed income for life, subject to withdrawals (minimum 4%/5%*) annually. |
| Flexibility | No flexibility, you cannot make changes to your annual income, once annuity purchased. | Flexibility to withdraw how much you wish to annually, subject to the minimum of 4%/5%*. |
| Potential for future growth? | None, you are locked into a set annuity rate fixed on date of investment with no potential for growth. If you have selected a fixed rate of escalation on your annuity then it will increase by that amount each year. | You might benefit from future growth if your fund is invested in suitable assets, though value of your fund could drop. |
| Features of an Annuity | Features of an ARF | |
| Potential for fund to be drained? | None, you are locked into a set annuity rate fixed on date of investment with no potential for growth. | Without careful planning and management, the fund in an ARF could be depleted depending on your withdrawals and investment strategy. |
| When death occurs? | Income stops when you die (assuming single life annuity) There’s likely to be little or no payment to your dependants. | Any funds left in an ARF may be left to your dependants (subject to tax). |
*6% of ARF fund greater than €2,000,000.
As highlighted, under current legislation, you have the option to take 25% of your accumulated pension funds at age 50 tax-free and invest the balance into Approved Retirement Funds (AMRF/ARF). We understand from our discussions that this is the option that you have chosen.
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