Approved Retirement Fund (ARF)

[Bernie Cunna]

I have €23,000 invested in ARF with Hibernian since 2003, with no withdrawals. Now I'm told that 3% of the value of the fund will be liable to tax each year from Dec 31 07, phased in at 1% on 31 Dec 07, 2 % on 31Dec 08 and full 3% on 31Dec 09 and each year thereafter.
What should I do? Should I withdraw it all, in part or leave it? Bernie

 

[oldtimer]

Hibernian should have written to you about this. I have one with Eagle Star and they certainly pointed out the implications. As far as I know you will have to withdraw 1% or it will be deducted anyway. You should ring Hibernian and they should guide you on what to do.

 

[ClubMan]

Or better still get advice from somebody independent from Hibernian.

 

[LDFerguson]

In most circumstances, you should withdraw 1% of your fund this year, 2% next year and 3% per year from 2009 onwards. Otherwise you may be double-taxed on these amounts.

Who sold you the ARF in the first place? They should be able to advise you on this.

 

[Perplexed]

AFAIK you will not be double taxed. The amount of tax already deducted on the "deemed encashment" will be taken into account when you do encash some of the funds.

 

[LDFerguson]

AFAIK you will not be double taxed. The amount of tax already deducted on the "deemed encashment" will be taken into account when you do encash some of the funds.

No, you do not receive any credit for the income tax and PRSI deducted on the imputed distribution.

 

[MMilken]

No, you do not receive any credit for the income tax and PRSI deducted on the imputed distribution.

As long as the person encashes the appropriate percentage (1%, 2%, 3% etc...) they would not be taxed other than the normal tax that would apply to an encashment anyway.

 

[LDFerguson]

As long as the person encashes the appropriate percentage (1%, 2%, 3% etc...) they would not be taxed other than the normal tax that would apply to an encashment anyway.

That's correct. My point is that if someone doesn't take the 1%, 2% or 3% withdrawal, their ARF will get taxed on such amounts as if they had. Then if they subsequently do withdraw the same money, it will be taxed again, with no credit gioven for the tax/PRSI already deducted.

 

[MMilken]

If the 1%, 2%, 3% does not take them over their tax-free threshold they would still not pay tax (even if they did not make any encashment).

 

[LDFerguson]

If the 1%, 2%, 3% does not take them over their tax-free threshold they would still not pay tax (even if they did not make any encashment).

That's also correct. Tax on both the imputed and actual withdrawals will be at the individual's normal rates. So if the individual is exempt from Income Tax altogether, there will be no liability. Which is why I said in my earlier post "Otherwise you may be double-taxed on these amounts."

 

[MMilken]

You also said "In most circumstances"!

I would not think that most pensioners have income in excess of €35K a year (their tax-free threshold)..."In some circumstances" would be more appropriate.

 

[LDFerguson]

I would not think that most pensioners have income in excess of €35K a year

That's not my experience of customers who are eligible to, and choose to invest in ARFs. Have you any statistical evidence to back this up?

 

[MMilken]

Yes I do have evidence to back it up.

The average industrial wage is about €30K.

Most pension schemes target a max of 2/3rds of salary.

That would be €20K.

€20K < €35K.

ARFs are available to all self-employed and people with PRSAs, Personal Pensions and AVCs, so should provide a good representation of typical Irish workers.

 

[LDFerguson]

The average industrial wage tells us absolutely nothing about how many people who purchased ARFs have a household income (including spouses if relevant) of greater than €38,000. The Income Tax exemption threshold for a married couple where one partner is over 65 is €38,000; the threshold for a single person over 65 is €19,000.

 

[MMilken]

Of course it tells a lot about it - the number of ARF holders is such that the average wage would be as good a proxy as one could find for their average income pre retirement.

Which in turn could be used to give as good an estimate (with sufficiently large sample data) as possible of the average pension.

It does not matter anyway - the basic point is that telling someone to encash because they will be hit by tax without assessing their personal situation would be very very poor advice.

 

[Conan]

MMilken,
Your understanding of how ARFs operate is a bit wide of the mark (IMHO):

• It clearly makes sense to extract the full 1%, 2% 3% , pay the tax and retain the balance personally. If one simply pays the tax on the deemed distrubution -but leaves the balance of the 1%, 2% or 3% in the ARF- then this will be taxed again on eventaul withdrawal. A no-brainer.
• Access to ARFs (in the main) is open only to Self-employed and Company Directors (who own more than 5% of the share capital). The average industrial wage (I would suggest) is certainly not a reasonable proxy for the earnings of this group. In my experience, those who do effect ARFs do so because they have other income, do not require the certainty of buying an annuity and require the flexibility of income drawdown that ARFs offer. Because they have other income they can "afford" to take the inverstment risk inherint in the ARF structure.
• In terms of advice, if a retiree does not have significant other income (say over €38k p.a.) then it may be more prudent to buy an annuity (an income certain) rather than invest in an ARF (where the same level of certainty of income does not exist).
• The only other category that can invest in an ARF are those who have funds coming from AVC investments. By the very nature of AVCs, it means that they must also be members of an occupational pension plan which will in itself pay a pension. In my experience, those who invest in AVCs tend to be more highly paid than the average industrial wage and therfore their basic occupational pension is likely to be higher than the average.

 

[Protocol]

Most of the people buying ARFs are not industrial workers, and so earn more than the GAIE.

Average income per head is about 36k. Note that is per person.

Average income per worker would be higher.

 

[MMilken]

• It clearly makes sense to extract the full 1%, 2% 3% , pay the tax and retain the balance personally. If one simply pays the tax on the deemed distrubution -but leaves the balance of the 1%, 2% or 3% in the ARF- then this will be taxed again on eventaul withdrawal. A no-brainer.

This is not true.
Tax will not apply if the person would not be taxed on that income.

• Access to ARFs (in the main) is open only to Self-employed and Company Directors (who own more than 5% of the share capital). The average industrial wage (I would suggest) is certainly not a reasonable proxy for the earnings of this group. In my experience, those who do effect ARFs do so because they have other income, do not require the certainty of buying an annuity and require the flexibility of income drawdown that ARFs offer. Because they have other income they can "afford" to take the inverstment risk inherint in the ARF structure.

Most people do not get a pension of 2/3rds of salary - so my argument that a lot of pensions would be less than €30K is most definitely true.

• The only other category that can invest in an ARF are those who have funds coming from AVC investments. By the very nature of AVCs, it means that they must also be members of an occupational pension plan which will in itself pay a pension. In my experience, those who invest in AVCs tend to be more highly paid than the average industrial wage and therfore their basic occupational pension is likely to be higher than the average.

Yes but not likely to be 2/3rds

 

[MMilken]

Most of the people buying ARFs are not industrial workers, and so earn more than the GAIE.

Average income per head is about 36k. Note that is per person.

Average income per worker would be higher.

Most pensions are not 2/3rds of salary - my point was that vague advice is worse than no advice.

 

[LDFerguson]

...the basic point is that telling someone to encash because they will be hit by tax without assessing their personal situation would be very very poor advice...

Of course it would. You seem to be confusing Askaboutmoney with real life. Askaboutmoney is a chat board. In real life, I wouldn't give advice without obtaining a fact-find first. I'm hardly going to do that on Askaboutmoney.

I repeat my original point - my experience of ARFs is that a majority of them are purchased by people who will be within the tax net in retirement, mostly for reasons outlined by Conan above, so my original statement stands - In most circumstances, you should withdraw 1% of your fund this year, 2% next year and 3% per year from 2009 onwards. Otherwise you may be double-taxed on these amounts.