State pension rise unlocks billions of euro in savings

Thousands of people will have up to €2 billion in pension funds unlocked next month when the Budget 2019 increase in the State pension takes effect.

The increase, which kicks in from March 25th alongside other welfare increases set out in the last budget, will bring the full contributory State pension to €12,911.60 per annum.

Crucially it brings the payment above the €12,700 threshold for the first time.

Until now, many people have been forced to lock up to €63,500 of their pension pot with only limited access until they reach the age of 75, unless they have a guaranteed income of €12,700 a year or choose to buy an annuity.

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The locked-in funds, called an Approved Minimum Retirement Fund (AMRF), affects those who choose to transfer their pension pot on retirement to a more flexible Approved Retirement Fund (ARF) – keeping it invested and available for transfer to their family should they die.

These are an alternative to insurance products called annuities that people can purchase with their pension fund on retirement and which pay a set monthly income for life but die with the annuity-holder.

Annuities have become a very expensive option in recent years, meaning that people’s pensions savings often do not provide the income anticipated in retirement. That has led many to opt for the ARF instead.

Threshold

The €12,700 income threshold is designed to ensure people do not fall into poverty in old age. However, many savers have found that their AMRFs are delivering low returns – sometimes even costing them money each year once the effect of fund management charges are taken into account.

Now they will be able to take the money out of the AMRFs and invest it elsewhere with the possibility of greater returns.

Tony Gilhawley, an actuary and pensions specialist, says there are no official figures on how many AMRF s are in existence.

Data provided ahead of a paper he presented to the Society of Actuaries with fellow actuary Roma Burke last year pointed to an estimate of 35,000 holders of AMRFs containing total funds of about €2 billion.

Mr Gilhawley stresses the figures are sketchy but they are the only ones available at present. They also show that just over half of AMRF holders are 66 or older and so likely to be in receipt of the State pension.

However, to avoid tax, they will need to reduce the size of the pension fund over a number of years.

As Mr Gilhawley notes, a person in receipt of the full State pension of just over €12,900 would still be able to draw down €5,000 a year from their AMRF – which confusingly becomes an ARF once the €12,700 annual income limit is passed – without edging over the annual income exemption limit of €18,000.

If they are married and receiving additional benefit for a spouse, the combined State pension of €24,500 leaves them roughly €11,500 below the €36,000 annual exemption limit for couples.