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Are you thinking about retiring in the next few years? If you are, hopefully you have some kind of retirement fund in place to replace at least part of any drop in your income. If this fund is in a pension arrangement, like 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 in the next while is how you should take the money out.

Standard procedure is to take as much of a Tax-Free Lump Sum as you are allowed under Revenue and Pension legislation. This is usually 25% of the total fund, to a maximum of €200,000. Depending on which type of pension arrangement you have there may be an option to have it calculated using your salary and service.

You then have to decide how you want to draw out the balance of the fund, bearing in mind that this portion will be taxable. Traditionally you would have to use the rest of the money to purchase an Annuity. This means that you enter into an arrangement whereby you hand over the balance of your pension pot after having taken your tax-free lump sum 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 to you if you have taken your Tax-Free Lump Sum based on the salary/service calculation.

The actual amount of income you would receive (Annuity Rate) would depend on prevailing interest rates, the lower they are the lower the Annuity Rate will be. Your age is also a factor here, as the younger you are when you retire the lower the Annuity Rate will be.

Currently, a 65 year old male may only get a rate of 4% per annum under a single person annuity with no additional options. The rate is set at the start, so even if interest rates increase your Annuity Rate will not change, and at 4% you would have to survive 25 years to receive the total value of your fund.

Generally when you die the Annuity pension dies with you, however, you can opt for things like an extended guaranteed payout period or a spouse’s pension. Any options you add will also reduce your annuity rate.

In recent years more flexible ways of accessing the rest of your fund have been introduced. You can now opt to take the whole lot out together if you want, however that would not be advisable from a tax point of view. A better option may be to invest the money in 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 an income from it regularly or as required. This would usually be a much more tax-efficient method of accessing your pot.

The main advantages of an ARF are that you maintain control of your pension fund which has the opportunity of 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.

As with all things financial, proper advice is key. Your advisor can help you choose the best option to suit your individual circumstances and if consulted in time could even help you qualify for options you cannot access currently.

Sean Sweeney, 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 sean@jfl.ie.