What are my pension drawdown options?
When you pay into a pension it’s only normal you want to know what your benefits and options are as you reach retirement.
It is also of benefit to know at what age you can actually access the funds.
The truth is there are a few different options and variations dependent on the type of pension contract you hold.
We will clarify when you can access your pension, your early retirement options and your options at retirement.
For simplicity I will stick to defined contribution pensions for now – defined benefit pensions are for another day!
At what age can I access my benefits?
Personal Pension
You can access your personal pension benefits at any age between 60 and 75.
There is no requirement to cease working. Once you are over age 60 you can access your benefits.
If you become seriously ill you may be able to access your pension benefits before age 60.
Personal Retirement Savings Account (PRSA)
Similar to a personal pension, you can access your PRSA benefits between age 60 and 75.
Also similar to the personal pension there is no requirement for you to stop working. You can take your benefits and continue working.
There are some circumstances where you may be able to access your PRSA benefits before age 60:
- You become seriously ill
- If you are an employee and over age 50 and you have ceased employment
Personal Retirement Bond (PRB)
A personal retirement bond that relates to a pension from a previous employment can be accessed from age 50 onwards.
You may be able to access your PRB benefits before age 50 if you become seriously ill.
If you have a pension with a previous employer I recommend you read this previous blog.
Defined Contribution Occupational Pension Scheme
If you are a member of your employers occupational pension scheme, the scheme will have a set Normal Retirement Age (NRA).
This is typically 65 but can vary.
If you have left employment you can access your previous employers pension from age 50 onwards and the Trustees agree to this.
Executive Pension Plan
This is very similar to the defined contribution occupational pension scheme.
The executive pension plan will have a Normal Retirement Age (NRA).
If you have left employment you can access these benefits from age 50 onwards once the Trustees agree to this.
Note for company owners with an Executive Pension Plan:
If you own/control more than 20% of the shares in your company and wish to retirement before age 60, you will have to sell those shares.
What options are available when I retire?
At retirement (or when you access your benefits if earlier) you have a few options.
These include a tax efficient lump sum, ongoing investment (ARF) and/or a fixed income payable for life (Annuity).
As with all financial decisions you should take professional advice however the below provides a broad outline.
Personal Pension
You can take a tax efficient lump sum of 25% of the total value.
This will be tax free to a certain limit – refer to the specific tax efficient retirement lump sum section below.
The balance of your fund can then be used to purchase an Annuity or invest in an Approved Minimum Retirement Fund (AMRF) or Approved Retirement Fund (ARF).
Personal Retirement Savings Account (PRSA)
Similar to a personal pension, you can take a lump sum of 25% of the total value.
This will be tax free to a certain limit – refer to the specific tax efficient retirement lump sum section below.
The balance of your fund can then be used to purchase an Annuity or invest in an Approved Minimum Retirement Fund (AMRF) or Approved Retirement Fund (ARF).
An additional option with a PRSA is you can leave the remaining balance within the PRSA – this is called a Vested PRSA.
Personal Retirement Bond (PRB)
With a personal retirement bond you have two tax efficient retirement lump sum options:
- A lump sum based on your final salary and years of service with your employment the bond relates to – this is called the salary and service route or
- 25% of the retirement bond value
With the balance, if you opt for the salary and service lump sum, you must purchase an annuity.
If you opt for the 25% lump sum option, you can purchase an annuity with the balance or invest in an AMRF or ARF.
Defined Contribution Occupational Pension Scheme
As a member of your employers defined contribution occupational scheme you have two tax efficient retirement lump sum options:
- A lump sum based on your final salary and years of service with your employment – ie the salary and service route outlined above or
- 25% of the defined contribution fund value
Similar to the personal retirement bond, with the balance, if you opt for the salary and service lump sum, you must purchase an annuity.
If you opt for the 25% lump sum option, you can purchase an annuity with the balance or invest in an AMRF or ARF.
To re-iterate – if you own/control more than 20% of the shares in your company and wish to retirement before age 60, you will have to sell those shares.
Executive Pension Plan
This is the same as a Defined Contribution Occupational Pension Scheme.
You have two tax efficient retirement lump sum options:
- A lump sum based on your final salary and years of service with your employment – ie the salary and service route outlined above or
- 25% of the defined contribution fund value
Similar to the personal retirement bond, with the balance, if you opt for the salary and service lump sum, you must purchase an annuity.
If you opt for the 25% lump sum option, you can purchase an annuity with the balance or invest in an AMRF or ARF.
To re-iterate – if you own/control more than 20% of the shares in your company and wish to retirement before age 60, you will have to sell those shares.
Taxable Lump Sum
Note in all of the above contracts, in some circumstances it may be possible to draw the balance of your fund (after your tax efficient lump sum) as a lump sum subject to tax.
This typically applies to defined contribution funds with a lower value – but not every case.
Post Drawdown – Annuities and Approved Retirement Funds (ARF’s)
Annuity
An annuity is where you use the balance of your fund to purchase a fixed income for the remainder of your life.
Every month you wake up and have a pension income.
This sounds great – what’s the catch?
The level of income payable is influenced by interest rates and as interest rates are extremely low, so are annuity incomes.
There are different ways your annuity can be set up, level or indexed, spouse’s pension or not and guarantee periods.
It’s important that you take advice.
Approved Minimum Retirement Fund (AMRF) and Approved Retirement Fund (ARF)
An AMRF and ARF are personal retirement funds where you can keep money invested after retirement.
After you draw your tax efficient lump sum, if you wish to opt to invest in an ARF you must meet one of two qualifying conditions:
- Be in receipt of guaranteed income for life of €12,700 per annum* or
- Invest €63,500 in an AMRF
An A(M)RF is a very different option from an annuity and I won’t compare the advantages and disadvantages of each here.
The important thing is that you take advice to help you decide which is the most appropriate option.
Tax Efficient Retirement Lump Sum Limits
When you draw your tax efficient retirement lump sums, either from the salary and service route or 25% route – the first €200,000 is tax free.
Any tax efficient lump sum over €200,000 is taxed at 20%.
Example – pension fund €500,000
Retirement Lump Sum: €125,000 (€500,000 x 25%)
€125,000 is under €200,000 so is received tax free
Example – pension fund €1,000,000
Retirement Lump Sum (Gross) €250,000 (€1,000,000 x 25%)
Of which is tax free: €200,000
Of which is taxed at 20%: €50,000
Tax Payable: €10,000 (€50,000 x 20%)
Net Lump Sum Receivable: €240,000
How We Help
There are many variables at play when it comes to your pension drawdown options.
Before making any decision you should always seek professional advice.
I recommend reviewing your retirement options at least 3 years in advance.
Too often, potential clients have come to me with their options at retirement and they receive a nasty surprise and don’t get what they were expecting.
This can be avoided with a bit of forward planning.
Get in touch
Drop me an email, francis@fortitudefp.ie or request a callback.
You can also give me a call on 086 0080 756 or access our diary here and book a call at your convenience.
Visit our insights.
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You should always engage the services of a fully qualified financial planner before entering any financial contract.
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