When Can I Retire?
The answer to this question depends on the type of pension you have.
- If you took out a pension when you were self employed or were working for a company which did not contribute to your pension you have a personal pension
- If you were working for a company and joined a pension to which your employer was contributing you have a company pension
- If you decided to top up your company pension with extra voluntary premiums you have an additional voluntary contribution (AVC) pension
- Alternatively you may have a Personal Retirement Savings Account (PRSA). This is a new type of pension plan available to employees, self-employed, homemakers, unemployed or any other category of person
- If you left an employer and transferred your pension fund to a standalone pension you have a buy out bond
You can retire from a personal pension at any time between age 60 and 75.
You may be able to retire early for reasons of serious ill health. The Revenue Commissioners may allow retirement before age 60 if you are permanently unable to work.
People in some occupations are allowed to retire early without having to be in ill health. These are mostly sporting occupations such as jockeys, cyclists and footballers.
Your normal retirement age is generally set by your company and can be between 60 and 70.
From age 50 you can take early retirement if your employer and the Trustees of your pension agree.
You can also retire early if you are seriously ill.
The Revenue Commissioners and Trustees can allow retirement at any age if you are permanently unable to work.
Additional Voluntary Contribution pension
Since your additional voluntary contributions are linked to your company pension you must retire from both at the same time.
You can draw on your PRSA at anytime between age 60 and 75.
In some circumstances it may be possible to take benefits from age 50 onwards.
Bun Out Bonds
Your normal retirement age is set in your company pension and does not change when you transfer to a buy out bond. It can be between 60 and 70.
You can choose to retire early from age 50.
You could also retire early if you are seriously ill and the Revenue Commissioners give their permission.
What are my options?
You will have a number of options at retirement and, within certain Revenue rules, you can combine options in whatever way suits you.
The number of options available to you at retirement depends on the type of pension you have and whether you are a director with more than a 5% shareholding in the company from which you are retiring.
The four main options at retirement vary, but are broadly:
- Take a tax free cash lump sum
- Buy an annuity
- Invest in an Approved Retirement Fund or Approved Minimum Retirement Fund
- Take a taxed cash lump sum
- Tax free cash
Am I eligible to take tax free cash?
Yes. Everyone has the option of taking tax free cash at retirement. Although you do not have to take tax free cash, most people take the maximum amount allowed as this is more tax effective than the other options.
How much can I have tax free?
This depends on who you are and what kind of pension you have. There are two different maximum levels which apply. Some people can choose between them but others are limited to one or the other.
25% of the fund
If you have a personal pension, a PRSA or you have a company pension or AVC and are a director of the company with more than a 5% shareholding you can take 25% of you retirement fund tax free.
1.5 times salary
If you are in a company pension or AVC you can take tax free cash equal to a maximum of one and a half times your final salary. The actual amount of tax free cash you can take at retirement varies depending on how long you have worked for the company and your salary at retirement. The maximum tax free cash of one and a half times your final salary is available if you have worked in the company for at least 20 years at normal retirement age.
|Tax free cash options|
|25% of fund||1.5 x salary|
|Company pension - employee||N||Y|
|Company pension - 5% director||Y||Y|
|AVC - employee||N||Y|
|AVC - 5% director||Y||Y|
|Buy out bond - employee||N||Y|
|Buy out bond - 5% director||Y||Y|
Your options at retirement on a buy out bond depend on whether you qualified as a director with more than a 5% shareholding in the company before you left the company and transferred your pension fund.
If you are a director with more than a 5% share in the company and you choose to take one and a half times salary as tax free cash, your options on how you use the balance of the fund are limited to buying an annuity.
Advantages of taking maximum tax free cash
- Any other option would require the money to be taxed at some stage
- Very tax efficient
- Gives you the opportunity to buy something you've always wanted, or to clear a debt like you mortgage
Disadvantages of tax free cash
- The fund that's left will provide less of a retirement income for you
After you take your tax free cash you can use the balance of your fund to buy an annuity. An annuity provides you with a guaranteed income for the rest of your life.
When you buy an annuity you will have several options including:
- A guarantee of payment for up to 10 years.
- This means that if you die before the 10 years has passed, the pension will continue to be paid to your next of kin for the outstanding period
- Increasing your pension each year to take account of inflation
- Adding a dependant's pension so that if you die before your dependants, then they will receive a pension for life
The options you choose to include will affect the amount of pension your fund can provide. You may use your fund to buy an annuity from any insurance company you choose.
If you have a company pension and you are not a director with more than a 5% shareholding in the company, buying an annuity is the only option you have after you take your tax free cash.
If you have a personal pension, a PRSA, an additional voluntary contribution pension, or you have a company pension and you are a director with more than a 5% shareholding in the company, you have additional options. You can choose to buy an annuity with all or some of your fund, but you also have the option of investing in an Approved Retirement Fund or of taking taxed cash.
What happens to my annuity when I die?
When you die your income stops unless you have bought an annuity with a guaranteed payment period or a dependant's pension.
If I choose an annuity now can I switch to an ARF later?
No, once you buy an annuity you no longer have access to your fund. It has been paid to an insurance company in return for a guaranteed income for the rest of your life.
How is an annuity taxed?
The income that you get from your annuity will be taxed as income for the rest of your life.
Advantages of an annuity
- Your income is guaranteed for the rest of your life.
- Your income will not vary with changes in stock markets. Your level of income is certain.
- You can build in a pension for your spouse or your dependants so that they have a guaranteed income if you die.
Disadvantages of an annuity
- When you die your income stops. Unless you have bought a guaranteed payment period or dependant's pension, there is nothing to pass on to dependants.
- Once you buy an annuity you cannot change your mind. With most annuities, the options you have chosen and your level of income are fixed and cannot be changed.
If your retirement fund will provide your only or main source of income after you retire, you should consider investing some or all of it in an annuity to secure an income for the rest of your life.
Approved Retirement Funds
Investing in an Approved Retirement Fund
Approved Retirement Funds (ARFs) and Approved Minimum Retirement Funds (AMRFs) are funds managed by qualifying fund managers in which you can invest the proceeds of your pension fund when it matures.
After you have taken any tax free lump sum, €63,500,or the remainder of the pension fund if less, must be transferred to an AMRF or used to buy an annuity.
Any balance over €63,500 can be invested in an ARF or withdrawn as cash. Any cash withdrawn at this stage will be taxed as income.
You do not have to invest in an AMRF if:
- You have a guaranteed pension or annuity of at least €12,700 a year for life (all of your pensions and annuities including the Social Welfare Pension can be taken into account for this purpose)
- You are over age 75
The sum invested in an AMRF cannot be withdrawn until you reach age 75. However, income or growth from your AMRF may be withdrawn.
How is my ARF/AMRF invested?
Your ARF is invested in funds of your choice.These funds grow tax free.
Can I take a regular income from my ARF?
Yes, you can take a regular income and this is taxed at your marginal (higher) tax rate. This income is generally not guaranteed and depends heavily on how your investment performs.
Taking a regular income may reduce the total value of your ARF, especially if investment returns are poor and/or you choose a high rate of income.
The higher the level of regular income you choose, the higher the chances that your ARF will be fully used up in your lifetime. If your ARF is used up no further income will be paid.
Can I take lump sums out of my ARF?
Yes, you can take money out whenever you want to. All withdrawals will be taxed as income at your marginal (higher) tax rate.
What happens to my ARF when I die?
The value of your ARF and AMRF is passed to your estate when you die. Depending on who inherits the money, different levels of tax will apply.
If your ARF or AMRF is inherited by your husband or wife, there is no immediate tax. They simply take over ownership of the ARF or AMRF and they will be taxed on withdrawals in the normal way.
Children over the age of 21 who inherit money from an ARF or AMRF will be liable to pay tax at the standard tax rate (20% from 6th April 2001) irrespective of whether they inherit the money directly, or through the spouse of the original ARF or AMRF owner.
How your ARF is taxed for inheritance
|ARF Inherited by||Income tax due||Inheritance tax due|
|Surviving spouse||None (ARF transferred)||No|
|Children ‹ 21||None||Yes|
|Children 21+||Yes@20%||* No|
|On death of surviving spouse||Income tax due||Inheritance tax due|
|Children ‹ 21||None||Yes|
|Children 21+||Yes@20%||* No|
* Standard rate of income tax
Advantages of the AMR/AMRF
- You have control and flexibility over how your retirement fund is invested.
- Your fund can be invested in a wide range of funds, giving it the potential to continue to grow.
- When you die, the value of your ARF/AMRF is passed on to your estate.
- You have access to your money whenever you need it.
- You can vary your level of regular income to suit your needs.
Disadvantages of the AMR/AMRF
- Your fund is not guaranteed to last for your lifetime.
- If you withdraw more income then your fund grows by each year, your fund could run out before you die.
- The value of your fund could fall or rise, depending on where it is invested. You may not want this kind of risk.
After you take your tax free cash, you can take all or part of the balance of your fund as cash and pay tax on it.
Before you withdraw this cash, you must either have bought an AMRF, or be able to prove that you have guaranteed income of at least €12,700 a year for the rest of your life.
Any money that you withdraw in this way will be taxed as income at your marginal (higher) income tax rate.
Advantages of taxed cash
- Gives you quick access to a cash lump sum.
Disadvantages of taxed cash
- Unless you have sufficient income from another source, you could run out of money.
Summary of retirement options
|Tax free cash||Other options|
|25% of fund||1.5 times salary||Annuity||ARF & AMRF||Taxed Cash|
|Buy out bond|
If you are a director with more than a 5% shareholding in the company and you choose to take one and a half times salary as tax free cash, the balance of your company pension fund must be used to buy an annuity. You can still choose any of the options for your AVC fund.The tax free cash available from a company pension and AVC is limited to an overall maximum of 1.5 times salary.
Who should I talk to about my retirement plans?
A Financial Adviser will be able to assess your personal situation and guide you through the complexities of retirement and tax planning.
Planning your retirement is a very important part of providing for your future and should be looked at in the context of your overall financial plans and goals.
These definitions are supplied courtesy of Hibernian Life & pensions.
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