Defined contribution pensions to have non-annuity option

RETIREMENT:FLEXIBLE ARRANGEMENTS will be put in place for holders of defined contribution (DC) pension funds on retirement, the Government has said.

The Finance Bill will include provisions allowing holders of DC pension funds to transfer their money into Approved Retirement Funds (ARF) on retirement rather than force them to purchase an annuity.

Since December 2008, holders of DC funds, where the pension fund is determined by the performance of funds contributed by the worker and/or the employer, have been allowed to defer purchase of annuities for up to two years.

The provision came into force as the financial crisis pushed up the cost of annuities, reducing the annual retirement income a person could secure with their DC pension fund.

Under the new rules, all holders of defined contribution pensions will be able to opt to transfer their fund into an ARF on retirement – provided they have a guaranteed lifetime annual income of 1.5 times the State contributory pension (just under €18,000 at current values).

This marks an increase from existing ARF rules which require just €12,700 in annual guaranteed income.

As a transitional measure, people who have already retired can opt for an ARF if they meet the lower €12,700 threshold.

People whose guaranteed lifetime income does not meet the standard must put their money into an Approved Minimum Retirement Fund (AMRF).

In addition, if a DC fund on retirement is lower than 10 times the State contributory pension (about €120,000) after the drawing down of a lump sum on retirement, it must be put into an AMRF. At present, the equivalent threshold is €63,500.

AMRFs are subject to tighter rules. The money cannot be accessed by the pensioner until the age of 75, although interest on the sum can be drawn down.

A separate reform will allow people the flexibility to move from an AMRF to an ARF if they secure additional guaranteed income required. At present, once in an AMRF, the individual is locked into the arrangement.

The Minister said the temporary deferral of annuity purchase – due to expire at the end of this year – will be extended until the new arrangements are signed into law in the Finance Act 2011.