When planning for retirement a lot of the conversation is around starting a pension. But what happens after you retire? A pension is a way of saving for retirement but how do you translate that pension into an income in your retirement? What are your retirement options, and do you understand them?
At retirement you will have a major decision to make regarding your pension fund and how it could be best used to meet you, and your family’s needs in the future. You will have several options to manage your retirement income, depending on the type of pension plan you've built up during your working years. These options offer a variety of choices in terms of how you can access your retirement savings, manage taxes,and secure financial stability.
The first thing to know is that you can take a portion of your pension fund as a tax-free lump sum (up to €200,000 subject to Revenue rules).The second is that you have two options to choose from using the remainder – an Approved Retirement Fund (ARF) or an Annuity – to turn it into an income. Which option you choose is down to your own individual circumstances.
Annuity: Guaranteed Income for Life
An Annuity would have been the more traditional option at retirement to provide a stable income for the rest of a person’s life. An annuity provides a guaranteed income by converting your pension pot into a regular income. The income amount depends on factors like your age, gender, the size of your pension pot, and interest rates at the time of purchase.
It is a simple retirement payment option that guarantees to pay a particular amount every month in retirement. An annuity is purchased in exchange for the accumulated pension fund. There are a range of different annuity types and it’s important to ensure that the one you choose suits your needs.
Pros: Offers financial security and predictability, as you will receive regular payments for life. There’s no risk of running out of money.
Cons: Once you purchase an annuity, you generally can’t access the lump sum again or change the terms. Additionally, inflation can erode the value of your fixed payments over time unless you purchase an inflation-linked annuity.
An Annuity is most suitable for retirees who want the certainty of a fixed income and prefer to avoid market risks.
Approved Retirement Fund (ARF): Flexibility and Freedom
25 years old this year, the Approved Retirement Fund (ARF), was introduced as an alternative to an annuity. It is one of the most flexible options for managing your pension pot post-retirement.It allows you to keep your pension savings invested while also drawing an income. With an ARF, you can take out money as and when you need it, giving you control over your retirement funds. Another big benefit of this type of personal retirement investment fund is that any balance remaining in your fund is payable to your estate after your death.
Pros: Flexibility in accessing your money. Any remaining funds can be passed on to your estate after your death.
Cons: Your withdrawals are subject to income tax, and if your investments perform poorly, your fund may not last throughout your retirement. There’s also a mandatory withdrawal rate which increases with age.
ARFs are ideal for those with larger pension funds or who want more control over how they access their retirement savings.
What is the best option for me?
The retirement option that is right for you will depend on many factors, including the size of your retirement fund, the level of income you and your spouse/civil partner/dependants will need during your retirement years, the amount of other assets – apart from your retirement fund – that you have to fall back on and whether investment growth or financial security is more important to you during your retirement.
The answer really is down to your own personal circumstances.
At Searing Point Wealth Management, we’d be delighted to help you to take control of your retirement planning and work with you to build, manage and grow the optimum retirement solution for you. Just contact us to arrange a suitable appointment.
