My pension fund charges are higher than the investment return
Q&A: Dominic Coyle answers your personal finance questions
I am 78 and my wife is 75. We are in receipt of the OAP and have modest savings. In addition we have an AMRF worth approximately €35,000. It is with a broker and we receive 5 per cent annually. It is deposited at a fixed rate of 0.05 per cent and is losing value after management charges.
Our joint income is considerably below the income tax threshold.
I have spoken with both the Pensions Ombudsman and the Pensions Authority and neither can offer advice. As I am over 75, am I entitled to withdraw the full amount and deposit it, say, in State Savings, where it would earn more than 0.05 per cent and avoid management charges?
We own our house outright.
Mr B.M., email
Approved Retirement Funds (ARFs) and Approved Minimum Retirement Funds (AMRFs) can offer some useful flexibility when planning financial needs in retirement, but they are not necessarily always the right answer.
And your case would appear to prove that point.
For those unaware of ARFs, they are a product that allow most people to keep their pension fund invested upon retirement rather than using them to purchase an annuity that delivers a guaranteed income for life.
Given the miserable rates available, which mean you will get precious little by way of annual income for every €1,000 in your pension pot, ARFs have become popular. The fact that the money in an ARF also passes to your estate when you die rather than simply benefiting an insurance company, as with an annuity, also helps.
With an ARF, the pensioner needs to show they have a minimum annual income of €12,700. Otherwise, up to €63,500 of their pension savings is ringfenced within an AMRF.
You don’t have to withdraw money from an AMRF up to the age of 75, although you can take up to 4 per cent annually if you choose. After the age of 75, your AMRF is deemed to become an ARF and the Government assumes you are drawing down 5 per cent a year and taxes it accordingly.
So that’s the background. But, as you are discovering, you have an investment growing at a rate of 0.05 per cent a year but the pot is still reducing every year because the charges imposed on the fund are in excess of that 0.05 per cent.
At the same time, you are aware that you could be earning more through An Post savings.
The simple answer is that there is no reason why you cannot cash in your ARF and invest the money instead in An Post or elsewhere should you choose.
I have no idea why neither the Pensions Ombudsman nor the Pensions Authority could have confirmed the simple technical possibility to this course of action. Clearly, neither would consider itself to be in a position to advise on whether such a move is a good idea, but certainly the Pensions Authority must be able to clarify the actual rules governing AMRFs and ARFs.
Any cashing in of your ARF is considered to be additional income in the year it is drawn down
Okay, so there is no technical impediment to such a transfer. But there could be a tax implication.
As it stands, with your State pension and the 5 per cent payout from the ARF – because that is what your pension is now that you are both 75 – your income as a couple is below the tax exemption limit of €36,000. The “modest savings” to which you refer will not impact the tax position, although any income they deliver by way of interest does need to be taken into account.
Any cashing in of your ARF is considered to be additional income in the year it is drawn down. If you drew down the full outstanding €35,000 this year, your 2019 income (including the state pension) would exceed the €36,000 limit and you would be liable to income tax and universal social charge (USC), though not PRSI because you are over the age of 66.
On that basis, to ensure you pay no unnecessary tax, you may need to move the funds from your AMRF to An Post – assuming that is what you decide to do – over a two-year period.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice.