In previous blogs on this topic, I briefly covered off public sector pensions and DB (Defined Benefit) Schemes and then ARF’s and Annuities in more detail. To finish up on this subject, I will now compare the pros and cons of ARF’s and Annuities. Finally, I will make a stab at suggesting which may be the most suitable option for you.
Advantages of Annuities:
• They provide certainty – You are guaranteed a specific income for the rest of your life.
• You have flexibility – You can choose to build in a spouses pension, a guaranteed period of payment, index-link your income.
• Impaired Life Annuity – If you smoke, are in poor health, you can receive a higher guaranteed income
Disadvantages of Annuities:
• Annuity rates are at historically low levels – You have a guaranteed smaller income than previous retirees.
• You cannot reverse your decision – Annuities are for life and cannot be changed.
• Additional cost for additional benefits – spouses pension, guaranteed period, index-linking all come at a price
• Your pension dies with you – Probably the biggest disadvantage of all. If you die early, you will have sold off your pension fund for very little in return.
Advantages of ARF’s:
• Investment Control – You decide where to invest your fund in line with your risk profile
• Income Flexibility – You can vary how much income you wish to take each year, subject to a minimum drawdown.
• Tax-free growth – All investment growth within your ARF is tax-free
• Choice to change – If your circumstances or your mood changes, you can switch and use your remaining ARF fund to purchase an annuity
• Inheritance Planning – On death, any remaining ARF funds passes to your estate according to your wishes.
Disadvantages of ARF’s:
• Investment Risk – While you have control over where to invest, getting it wrong could prove costly
• Longevity Risk – If you live too long, there’s a distinct possibility your fund will deplete before you die
• Compulsory Income – You must take a minimum level of income even in years where it might not suit you to do so
• A(M)RF Rule – For those with small funds, you could see most of the capital tied up until you reach age 75
So, while ARF’s appear to be, by far, the most popular route in recent years, the choice depends on each individual’s circumstances. Everyone’s situation is different and your decision will be determined by things such as; What is your marital status? Are you prepared to take a risk? Do you want to pass on any remaining funds? What is your health situation? What flexibility do you want? The following is generic and for general guidance purposes only. Again, please contact me in relation to your specific circumstances.
You would be a strong candidate for an Annuity if the following statements apply to you-
• You want a secure, regular income, guaranteed for the rest of your life
• You don’t wish to make any further investment decisions, and want to pass your money over now to have certainty into the future
• You are in good health and expect to live a long time into the future
• You are single, with no close next-of-kin and don’t see any great need to leave assets to others.
You would be a strong candidate for an ARF if the following statements apply to you-
• You want flexibility over the amount of income you can take in retirement, subject to minimum drawdown rules
• You want the control of choosing where and how to invest your fund, with any growth tax-free within your ARF
• You don’t want to purchase an annuity now as rates as so poor, but may wish to do so in the future with your ARF.
• When you die, you want the remaining value of your ARF passed to your next of kin
Are you nearing or about to retire? Would you like to know all of the options available and which might be the best fit for you?
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As always, contact me if you have any personal Financial Planning queries, or would like to arrange your free Discovery Meeting consultation.
Paul is the Managing Director of Lifestyle Financial Planners Ltd. I’ve been in the Financial Planning business since 1985. Lifestyle Financial Planners offer specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-75951 Mob: 086-8053755, www.lifestylefinancialplanners.ie
The information contained in this article is for general information only. It should not be used as the basis for any form of agreement or advice. We recommend readers seek separate tax and legal advice where necessary. This information is of a generic nature and does not take into account your own particular circumstances. Investment funds can fall as well as rise.
Lifestyle Financial Planners Ltd trading as Lifestyle Financial Planners is regulated by the Central Bank of Ireland.
In previous blogs on this topic, I briefly covered off public sector pensions and DB Schemes and then ARF’s and Annuities in more detail. To finish up on this subject, I will now compare the pros and cons of ARF’s and Annuities. Finally, I will make a stab at suggesting which may be the most suitable option for you.