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Are you looking to retire in the near future? If you are, hopefully you have some kind of retirement fund to help replace at least part of any drop in your income. If this fund is a pension arrangement, such as a Personal Pension Plan, a Company Pension, a Personal Retirement Bond (PRB) or a Personal Retirement Savings Account (PRSA), one of the biggest financial decisions you will have to make is how you should access these savings.

Standard practice is to request the maximum Tax-Free Lump Sum allowed under Revenue and Pension legislation. This is usually 25% of the total fund, to a maximum of €200,000, however, depending on your pension contract there may be an option to use a salary and employment service calculation. This can potentially generate a larger tax-free payment so should be investigated but be careful because this may restrict your options for the balance of your savings.

After payment of your tax-free allowance, you then need to decide how you want to draw out the balance of the fund, bearing in mind that this portion will be taxable. Historically, we may have purchased an Annuity. This means that you agree to hand over the balance of your pension pot to an Insurance Company and in return, they will pay you a guaranteed income for the rest of your life. An Annuity may be the only option available if you have taken your Tax-Free Lump Sum based on the salary/service calculation.

The annuity rate will dictate the amount of income you receive and will depend on prevailing interest rates, the lower they are the lower the annuity rate will be. Your age is also a factor, as the younger you are when you retire the lower the annuity rate used.

Currently, a 65-year-old male may achieve an annuity rate of 5.35% per annum under a single life annuity with no additional benefits. The rate is set at the start, so even if interest rates increase your annuity rate will not change, and at this level, you would have to survive 19-years to benefit from the full value of your fund.

Generally, when you die the Annuity pension ceases; however, you have the option to include a guaranteed payment period or a spouse’s pension. Any benefits you add will also reduce your annuity rate and therefore your income.

In recent years investors have enjoyed greater flexibility in choice and you now have the option to take the balance as a taxable payment; however, remember that this could mean you paying a higher level of income tax, PRSI and USC. It may not be the most advisable method of claiming your savings.

A better solution may be to continue investing your savings by way of an Approved Retirement Fund (ARF). An ARF is a personal investment account into which your retirement fund can be transferred. You can then draw down a regular income or request ad hoc withdrawals as required.

The main advantages of an ARF are that you maintain control of your pension fund which has the potential to benefit from tax-free investment growth and on death any remaining fund value can be left to your family. However, the ARF may run out before your death depending on how much income you take and how your investments perform, plus all withdrawals are taxable subject to status.

As with all financial decisions, professional advice is key. Your advisor can help you choose the best option to suit your individual circumstances.

Rob. Downes, QFA RPA is a Qualified Financial Advisor and Retirement Planning Advisor. You can contact him through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on robert@jfl.ie.