I have an Approved Retirement Fund (ARF) – Am I withdrawing too much or too little income?
The first step is to remember exactly what your Approved Retirement Fund is, and why you have it.
When you originally accessed your pension, you received a tax free lump sum from the pension and then the remainder of the pension was used to set up an Approved Retirement Fund (ARF). This ARF is in effect the retirement fund from which you draw your income.
Your ARF will in most cases be invested in some collection of financial assets and funds, the intention being that the ARF will get some measure of investment growth at the same time you are withdrawing income from it. For advice on AMRF withdrawal, our experts at Guardian Wealth are always more than happy to help.
Knowing the different aspects of your ARF is key to your pension and retirement planning. There are many factors that affect the longevity and sustainability of your ARF:
Net Investment Growth on the ARF – the higher the investment return (over the long term), the more money you will have available to draw down.
The Level of Income you take from the ARF – if you take too much income each year from your ARF it will not last as long as you need it to.
Life Expectancy – you need your ARF to ‘live’ as long as you do. The longer you live, the longer you need income from your ARF.
Income Tax – income taken from an ARF is assessable for income tax. We will deal with this in next week’s article.
Take the following 2 examples to illustrate some of the above considerations:
Example 1
John, aged 65, has an ARF pension valued at €250,000. He is taking an income from the fund of €25,000 per annum and will take 2% more income each year to keep pace with inflation.
Assume for a moment that the ARF funds John is invested in do not grow at all over the next 10 years, then Johns ARF will be worth €0 in 9 years’ time, as Johns income needs will have emptied the ARF.
However, if Johns ARF could achieve net investment growth of 3% per annum, it would extend the life of the ARF to almost 11 years. The 3% investment growth is equal to 2 years of additional income for John.
Example 2
Mary, aged 60, has an ARF valued also at €300,000. She is taking an income from the fund of €25,000 per annum and will take 2% more income each year to keep pace with inflation. Mary is invested in a range of conservative funds and is not prepared to take any more risk with her ARF so we will assume net investment growth of 3% per annum. As a result of this Marys ARF pension will last just over 13 years.
However, Mary wants her ARF to last longer than 13 years, so she decides to make some cost of living savings which leads her to only need €20,000 per annum each year in income for the ARF. As a result of this Marys ARF will last almost 17 years, an extra 3 years.
Whilst the above examples of AMRF withdrawal have been simplified for the purposes of illustration, we can see that there are many factors that influence the ability of your Approved Retirement Fund to provide you with a sustainable income.
We regularly deal with clients who are afraid to take income from their ARF as they fear they are taking too much now leaving them without income in later years, and we also deal with clients who are taking far too much income from their ARF now without due regard to their income needs in later life.
It is important to understand the role your Approved Retirement Fund plays in your post retirement income needs.
For pension advice and more information on Approved Retirement Funds, please contact Guardian Wealth on:
Wexford: 053 9110380
Dublin: 01 5267770
Email: mcoburn@guardianwealth.ie