Coming up to retirement, it can feel like you’re on a conveyor belt and you don’t have much choice once you’ve pressed the button. This is certainly not the case. Each person’s circumstances are different and you are free to choose the option, or options, that make most sense for you.
Tax-free lump sum, Approved Retirement Fund or Annuity
What usually happens is that your life company will convert your pre-retirement pension into a post-retirement fund and pay you a tax-free lump sum worth up to 25% of the fund’s value. You can then invest the balance in an Approved Retirement Fund (ARF) or you can buy an annuity. You may use the proceeds of the ARF as you like. You might like the idea of a self-administered ARF which gives you more control over how your fund is invested.
Whether you go for a standard or self-administered ARF, be aware that when it runs out, it runs out. An annuity on the other hand is a fund that guarantees to pay you a certain income for however long you live. There are pros and cons for both options. We are here to talk through them so that you fully understand what you are committing to and make a decision that is right for you.
Tax treatment of post-retirement funds
The advantage of these funds is that growth is tax free. You will, however, pay income tax on whatever you draw down from them. In fact, you’ll pay income tax and USC on at least 4% of the fund annually whether you draw it down or not, so it’s worth asking the question: do I really need to take my pension now? It is much more tax efficient to leave it as long as you can. It’s not going to go anywhere – most pensions don’t have to be drawn down until the age of 70 at least. Don’t forget, you’ll have the state pension from the age of 66 (67 from 2021 and 68 from 2028).
Our experienced advisors are on hand to help you tease out your options to ensure you make the best use of your wealth over your later years.
Your retirement check list
- Understand your options at retirement
- Ask yourself whether you really need to draw down your pension immediately
- Decide between an ARF and an annuity
- Consider a self-administered ARF
Your post-retirement check list
- Review your life cover and consider Section 72 whole-of-life insurance
- Make sure you have an up-to-date will
- Scrutinise your health insurance plan – you may want to increase your cover particularly where there is a family history of certain illnesses
If it sounds like there’s a lot to think about, don’t worry. Our advisors are experienced in helping people navigate this critical time. Give us a call and we’ll put you in touch with the advisor in your area, or have a look at our advisor profiles.