Assessing your future income options upon your retirement
Q. I AM retiring later this year after running my own business for the past 30 years and have a reasonable level of savings built up in my Pension. I am confused as to how or when I access this money. Can you please outline what my options are likely to be?
A. Congratulations on your upcoming retirement and also for having the foresight to provide for this day. It's not surprising that you are somewhat confused with the options available to you with regards to the most appropriate and tax efficient way in which to access your pension.
You are not just making decisions with regards to your own standard of living in retirement but also need to consider the knock on effect these decisions might have on your spouse / partner, children or business. Whilst any information provided in this article is a simplification of the options available to you, I will try to at least give you a flavour of the issues that are now concerning you.
As a general rule of thumb, most pension structures will allow you to access a portion of your Pension Fund as tax free cash and the balance is used to provide you and / or your spouse with an income in retirement. There are various Revenue formula with regards to how much of your pension fund you may access as tax free cash. But no matter which method you use there is a cap on the amount you can take as tax free cash, currently set at €200,000. What you opt to do with the balance of the Pension fund is dependent on a huge number of factors.
Before you can make a decision of this nature a number of factors must be considered, such as:
Aside from any state pension benefit you might be entitled to, what are your income needs in retirement? ·
Will your spouse also be dependent on this pension in the event of your death? Do you have other sources of income? Have you put an inheritance tax plan in place or even considered such a thing?
Have you given any consideration to your health care needs in old age or the need to have access to emergency cash? What are your expenditure habits likely to be? What debt / liabilities and assets do you have?
Put simply, you can opt to use your remaining pension value to purchase an annuity – essentially a guaranteed payment for life which will pay you or your spouse an income for life. Alternatively, you may opt to place your funds in an ARF (Approved Retirement Fund) or AMRF (Approved Minimum Retirement Fund). This type of arrangement allows you, within certain Revenue limits, to dip in to your funds when and if you need them. You may for example decide that in certain years you need more income than in other years and this option may allow you the flexibility to do this.
Whilst the above information is a simplification of the options available to you, I hope that you can see that deciding on how to access your Pension Fund is a combination of evaluating your personal circumstances, revenue and taxation law, inheritance tax issues, your financial circumstances and also your plans and aspirations as to what you would like to achieve in retirement.