Retirement Options – How to mature a pension

The world of pensions has become more complex over the years so when it comes to retirement, people don’t know where to start when it comes to maturing their pension plans and starting their retirement. Today, I am going to look at the the retirement options available and how to mature a pension.

There are some differences between company pensions and personal pensions and PRSA’s, so I will go through those options briefly before details on how to mature a pension. For the purposes of this article, I am assuming that the pension is defined contribution.

Retirement Options – Company Pension

You can take two paths when maturing a company pension:

1. Take up to 150% of final salary as a tax-free lump sum and purchase an annuity with the remainder.
2. Take 25% of the fund value as a tax-free lump sum and invest in an ARF or take taxable cash with the remainder.

Retirement Options – Personal Pensions & PRSA’s

With personal pensions and PRSA’s the retirement options are more straightforward, you take 25% of the fund value as a tax-free lump sum and you can purchase an annuity, invest in an ARF or take taxable cash with the remainder.

I have written on all of these options previously, so you can click on the links to get more details on each.

Retirement Option – Annuity

You do not have to purchase an annuity with the insurance company you have your pension with. You can shop around. While every insurer will offer an annuity, not all are competitive in that market, so it is best to shop around. Unfortunately, you cannot get the rates in one place and it can even be difficult to get rates by ringing. A financial advisor will be able to able to run quotes for your specific situation fairly quickly and get you the best annuity rate for you.

When you have chosen what annuity option you want, complete a pension maturity form for your pension provider informing them of:

1. The tax-free lump sum you want to take (150% final salary option for company pensions or 25% fund value for personal pensions and PRSA’s).
2. You want to take the annuity option and with which provider.
3. Return your original pension policy documents. If you cannot find these, you must complete a Lost Policy Declaration stating you have lost this document.
4. Proof of date of birth – passport or driving license will suffice.

To implement the annuity, you have to complete yet another proposal form, telling the provider what kind of annuity you want and when it is to commence. Again, you have to submit proof of age so the provider can confirm the rate applicable to you. Once the annuity has been processed, it will be paid into your bank account for the rest of your life.

Retirement Option – ARF

As you are now going to manage your retirement income yourself, there is a lot more work involved. The danger with an ARF is that you will exhaust the fund too early. This can happen through taking too much risk and there being a stock market crash or taking too little risk and the fund being depleted by the withdrawals because there is no growth.

As with all my pension and investment clients, I follow the same investment process when advising them on their money.

1. Psychometric risk profiling questionnaire
2. Assessing suitability questionnaire including gauging how your lifestyle would be effected in a worse case situation and the potential gains and losses you may suffer.
3. Investment Policy Statement – agreement of an investment strategy that you are comfortable with.

As part of my work as a financial advisor providing retirement advice, I will research the market for you for the most suitable funds and best contract to match your needs.

When the chosen provider is chosen, complete a pension maturity form for your pension provider informing them of:

1. That you want to take a tax-free lump sum of 25% of the fund value.
2. You want to invest in an ARF and with which provider.
3. Return your original pension policy documents. If you cannot find these, you must complete a Lost Policy Declaration stating you have lost this document.
4. Proof of date of birth – passport or driving license will suffice.

To implement the ARF, you have to complete yet another proposal form, telling the provider:

1. The mix of funds you want to invest in.
2. Whether you have a guaranteed income of €12,700. If not and you are under age 75, you must invest €63,500 in an AMRF or purchase an annuity with that amount.
3. What level of income you want to take and at what frequency you want it. This is very important. Under most contract structures, there is a maximum amount you can take out on a regular basis. This varies depending on the provider from 5% to 10%.

The insurance companies then trade some regulatory paperwork between them and the old pension is matured. You get your tax free lump sum and the remainder is sent to the ARF provider.

Unlike the annuity option, you are now in control of your retirement fund and so it must be managed and reviewed at regular intervals ensuring that it does what you want it to do.

Retirement Option – Taxable Cash

The process is the same as the ARF option with the exception that instead of investing in an ARF, you take the fund as cash and pay tax on it immediately. The guaranteed income requirement of €12,700 per annum is still in place, so if you go down the AMRF option, the investment process will have to be followed.

Remember, annuities, ARF’s and the taxable cash options are all taxed under PAYE. If you are no longer working, you have to move your tax credits to the insurance company to reduce your income tax liability. Otherwise, you will have to claim it back from the Revenue.

If you have any questions, please contact me directly at steven@bluewaterfp.ie