Are pensions overly complicated?

A report issued last week for the Journal of Aging & Social Policy found that 66% of over 50’s didn’t know either how their pension pot would be paid at retirement or the amount of their benefits. This is a frightening statistic for a demographic that should be thinking about life after work. You have to ask why do so many people not know what they are going to get from a pension? From my work in providing advice to retirees, pensions are just too complicated for people to understand.

Too many types of pensions

There are three main types of pensions; company paid pensions, personal paid pensions and a government invention that is somewhere in between the two. There are numerous different plans under each main type with their own sets of rules for each.

For example, if you are in a company paid scheme and wish to make personal contributions, you can pay into the main fund, an AVC fund or a PRSA AVC. But whatever you do, don’t pay into a PRSA?!

Why not simplify pensions to one company paid and one personal paid pension? Get rid of the government PRSA invention, no one uses them anyway.

Tax-Free Lump Sum

The tax free lump sum you get and the options available to you at retirement differs depending on the pension you have.

If you have personal paid pension, you get 25% of the fund* as a tax-free lump sum and with the remainder you can buy an annuity for the rest of your life or manage it yourself in an ARF.

But if you have a company paid pension and you take 25% of the fund tax-free, you must manage the remainder yourself. If you want an annuity, your tax-free lump sum must be based on your years service. You can’t take 25% tax free and purchase an annuity?!

Will one type of tax-free lump sum not do?

*To add to the confusion, the maximum tax-free lump sum you can get is €200,000. Anything over that is taxed at 20%, to a maximum of €300,000 (maximum allowed fund is €2m).

Approved Minimum Retirement Fund

Introduced by Charlie McCreevy, the Approved Minimum Retirement Fund (AMRF) just does not make any sense. If you elect to manage you money yourself when you retire, if you do not have a guaranteed income of €12,700 a year, you have to put €63,500 away until you are 75. You can take out 4% per year but no more. The guaranteed income must be made of pensions. Given the old age pension is €11,976, most people fall foul of this rule.

When Charlie McCreevy brought it in, he said it was to protect people who were reckless with their retirement fund so they would have money in their old age. What if they had blown their money by age 70, were they to wait another 5 years to access a relatively paltry sum? Up until 2015, rules stated you could only access any amount over the €63,500, so if the fund fell below the original amount, you couldn’t take any of it out even if destitute on the streets.

16 years after the ARF option was introduced, the evidence is there that people are not reckless with their retirement funds. It’s time to remove the AMRF altogether.

Pensions and pensions legislation needs to be simplified but successive governments have gone the opposite way, making them more complex in a bid to increase their tax take from pensions.

If you have any questions, you can contact me directly at