Some retirees facing mandatory higher pension drawdowns
Tax bills will also rise for some from 2019 as a result of €5 increase in State pension
The head of financial planning with Merce says it is “probably bad” for people who had wanted to protect, or ring-fence, the funds in AMRFs, as they will now be obliged to access these retirement savings. Photograph: iStock
Thousands of retirees will have to draw down more of their private pension pots on an annual basis from next March, due to the €5 increase in the State pension in this month’s budget.
Pension experts say this arises as the €5 increase will necessitate a change in pension structures, which risks retirees being forced to draw down income from their pension pots at too fast a rate. Tax bills will also rise for some, as they take more money out of their pensions.
Currently, pensioners are obliged to ring-fence €63,500 of their pension in an approved managed retirement fund (AMRF) when they do not have guaranteed income of more than €12,700 a year.
As the State pension is currently €12,651, it means that thousands of pensioners have set up such a structure. However, from next March the State pension is set to increase to €12,911. This means that people receiving the full State contributory pension will be pushed out of an AMRF into an approved retirement fund (ARF), as they will then meet the minimum guaranteed income requirements.
These ARF funds face a mandatory drawdown of 4 per cent a year up to the age of 70, and 5 per cent thereafter, or as high as 6 per cent when funds have a value of €2 million or more.
According to Trevor Booth, head of financial planning with Mercer, the move is probably an unintended consequence of the State pension increase rather than a specific strategic policy decision. He says it is “probably bad” for people who had wanted to protect, or ring-fence, the funds in their AMRFs, as they will now be obliged to access these retirement savings.
Drawing down pension income triggers a tax liability, and so may also mean higher tax bills for those whose income will exceed the tax-free limits for pensioners.
Commenting on the impact of the budget changes on AMRFs, a spokesman for the Department of Finance said the whole area of retirement funds is currently under review.