In the past couple of weeks, there is welcome news that Revenue will accept a person in receipt of the full state pension of €243.30 per week (plus €182.75 Christmas bonus) as meeting the €12,700 minimum income requirement to avoid having to set up an AMRF.
Historically, the pension options available to persons who reached retirement were fairly limited.
Prior to the Finance Act of 1999, a prospective retiree could expect to receive 25% of their pension fund at retirement, tax-free, and the balance of their pension fund was applied towards the purchase of an annuity. An
annuity gave the pensioner a set level of income for the remainder of their life.
Tag-on options allowed the pensioner to take a lesser pension, but increasing incrementally in line with the consumer price index and, or, extending pension benefits to a spouse in the event of the pensioner’s death.
These options were not particularly attractive, given the lack of control available to a prospective pensioner.
Nowadays, annuities typically deliver a return of 3%-4%, so a person reaching retirement with a fund of, say €100,000, could receive €25,000 tax-free, with an annual taxable pension thereafter of say €2,250-3,000 per year. For most persons, the prospect of having to live a further 25-33 years to get out the full value of their pension fund is intolerable.
To add insult to injury, following investment into an annuity, where a pensioner died relatively early (and without continuance for a spouse), their pension pot would effectively evaporate.
Announcing those 1999 Finance Act changes, Minister Charlie McCreevy said:
The self-employed person will not be restricted to the one option on retirement of investing his or her accumulated pension fund net of the tax-free lump sum into a traditional type annuity. The self-employed person will have the option of retaining ownership at all times of the capital sum invested on his or her retirement to provide a retirement income.
Thereafter, the Approved Retirment Fund (ARF) and Approved Minimum Retirement Fund (AMRF) options were born.
To protect prospective pensioners from going on a wild spending spree using up all of their pension fund in one go, the AMRF was designed so that a person is obliged to lock away at least €63,500 into a parked fund until that person reached 75, the balance being available to the individual to take as they please.
For example, after 1999, a prospective pensioner with a pension fund of €200,000 could receive a lump sum of €50,000, could invest €63,500 into an AMRF not accessible until the age of 75, and could access the remaining €86,500 as and how they please, as taxable income.
Where a prospective pensioner is lucky enough to have a guaranteed income of €12,700 per annum, they are entitled to bypass the AMRF rules. For example, a prospective pensioner who already has a guaranteed state pension of €20,000, having worked as a civil servant, and with a pension pot of €100,000, can take a tax-free lump sum of €25,000, and can take the remainder as they please, as taxable income without a requirement to invest €63,500 in an AMRF.
The AMRF concept was initially dreamed up to ensure pensioners had enough income in retirement.
Ironically, many pensioners were a bit too good at squirrelling their retirement funds away, and further changes along the way, effective from January 2016, sought to encourage pensioners to at least partially draw down their funds or face a deemed distribution of that amount.
Forcing pensioners to access at least some of their funds was expected to deliver a double boost to the economy, through economic activity and increased tax receipts. Further changes introduced last year meant that pensioners couldn’t avoid the deemed distribution rules by leaving their pension fund inactivated. Yet further changes restrict the amount of pension contributions that will receive tax relief, and the quantum of lump sum which can can be taken tax-free.
Your pension options are complicated, you should get professional advice relevant to your circumstances.