When the ARF was first introduced, you were under no obligation to make any withdrawals from it if you didn’t want to. This was was very useful for those with other sources of income, especially if those other sources were taxed as income. You could just let your ARF accumulate in value in a tax free environment and the Revenue didn’t get any tax income. That all changed in 2007. The rumour is that two property developers accumulated €25m each in their ARFs without any intention in drawing down any of it. This annoyed the Revenue and they decided that the purpose of ARFs is to provide an income in retirement, you have to take out a certain amount each year. And the term imputed distribution was born.
If you have an ARF (or a vested PRSA), you have the following choices:
As the remaining funds under option 2 can be taxed again, retiree’s take the money out and use it to fund their lifestyle.
The amount taken is based on the value of your fund as at 30 November of each year. So if you start an ARF policy in December, it is not liable to imputed distribution in that year. Also, if you have taken out amounts during the year, it will be deducted from the amount due at 30 November.
The payment is liable to tax under the PAYE system, so income tax is paid at the marginal rate, USC is payable and PRSI is charged up to age 66.
For those considering moving abroad, such as Portugal, to avail of lower tax rates, you should be aware that the Revenue doesn’t issue PAYE Exclusion Orders for ARFs and imputed distribution payments from them.
So, how much do you have to take out of your ARF each year?
Unless you were born on 1 January, you don’t have to making imputed distributions until age 61. That’s because the rule is that you have to be age 60 or older for the full year. The minimum amount that you have to take out is 4% each year.
When you reach age 71 (or 70 if born on 1 January!), that 4% increases to 5% each year for the rest of your life…or the fund’s life, whichever comes first.
If you have an ARF valued over €2m, the minimum amount you have to take out each year is 6% per annum once age 61 or older.
A lot of retiree’s have a number of different ARF policies with different providers. You have the choice of appointing one of them as your nominee policy and all imputed distributions will be paid from that account. If your total ARF policies is valued over €2m, you must appoint a nominee to be responsible for all the imputed distribution payments. They will get details from all the other providers you use and decide what percentage needs to be deducted based on the value as at 30 November of that year.
The AMRF is not subject to imputed distribution, so it can accumulate in value without having to make any withdrawals. At age 75 it will automatically become an ARF and subject to imputed distribution at 5%.
With the State pension now at €248.30 a week (€12,912 a year), those in receipt both the maximum and the 40-47 average contributions levels now satisfy the guaranteed income requirement and their AMRF will convert to an ARF and be subject to to imputed distribution.
While I recognise that the Revenue want people to make withdrawals from the ARFs (it was only the very wealthy who didn’t need to), I feel that the minimal levels are too high. ARF holders assume the investment risk of their ARF. No one know how long they will live for, so retiree’s tend to be cautious in their investment approach, planning as if they will live long lives. The investment approach becomes more cautious as they get older, when the Revenue’s approach is that they should take out money money (which flies in the face of the reality that we spend less as we get older). This puts retiree’s at the risk of either taking more investment risk than they are comfortable with or the value of their fund decreasing each year as they make withdrawals. A reduced imputed distribution level would certainly be more sensible.
If you have any questions, send me an email at steven@bluewaterfp.ie