ARF v Annuity......Fair Deal implications

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elacsaplau

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Is there any research available in relation to the Fair Deal implications of the ARF v. Pension decision?
 
Could you clarify your question a bit? An ARF will be assessed at 7.5% and 80% of any drawings too. Pension Annuity will also be assessed at 7.5% plus payout/dividend assessed at 80%. Does that address your query?
 
Hiya Slim,

Thanks for your reply.

I understand what you're saying re ARF but don't agree with your comment re annuity. The in-force annuity is just an income stream - there should not also be an asset-based contribution charge on the annuity value (i.e. the 7.5%) for the Fair Deal. Agreed?

The question is if you take a couple, at age 65, with say a million to invest in either an annuity or an ARF, there will be many factors which influence their decision as to which route to follow. My question is if the couple felt that it there was a chance that one of them would end up in a nursing home and were cognisant of the Fair Deal scheme, how would that consideration influence the ARF/annuity decision? Then, I'd be interested in the same question for available funds of €500k and €2m...….it may not be the same answer. By "answer" I mean the approach that appears best for most people. The "answer" may also be different if the sum to invest "belongs" to just one of the couple compared with each partner having an individual pot, etc.

Overall, I suspect that there's a lot of moving parts here and wonder has anyone tried to join the dots! I don't recall ever seeing any analysis/commentary on this? My sense is that it might be quite (or very) complex!
 
Right, l think the answer is the same. If a couple has €1m in a private pension to invest and they have 2 options, an ARF, which is an extension of the private pension, or purchase an annuity, how can the scheme work if they can avoid the FD financial assessment by choosing the latter? I think not but will look into it further. It doesn't matter which of them has the most money, it's all added up for the purpose of FD.
 
Slim said:
….how can the scheme work if they can avoid the FD financial assessment by choosing the latter?
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Hey Slim,

They are not avoiding the FD financial assessment. The annuity income is taken into account. It may be helpful for you to consider the income from an annuity in the same way that the pension income of a public sector employee would be treated.
 
elacsaplau said:
The in-force annuity is just an income stream - there should not also be an asset-based contribution charge on the annuity value (i.e. the 7.5%) for the Fair Deal. Agreed?
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Are you saying that the value of an A(M)RF is assessed as an asset and any drawing from same are assessed as income (whereas the actuarial value of a DB pension or annuity is simply ignored)?

If true, that looks like double counting to me. An ARF is just an account at the end of the day.
 
Hi Sarenco,

Yes that's my understanding and yes it's at least to some extent double counting!

That's my baseline understanding. My question is about the implications of this in the ARF v. Annuity "decision"!! I've been think about it and my head hurts!
 
elacsaplau said:
Yes that's my understanding and yes it's at least to some extent double counting!
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That's bizarre if true.

Are deposit accounts treated as assets, with withdrawals treated as income? If not, what's the justification for treating an ARF any differently?
 
Hey! I'm not defending the system! And I get your scepticism! The lady from the HSE who explained this to me got a similar reaction from me! Also, requests to show where this is prescribed were not fruitful!!

My guess: Deposits are treated as assets and that withdrawals would not be treated as income because they are not potentially subject to income tax. One of very many complicating factors is deemed distributions on the ARF!
 
Sarenco said:
That's bizarre if true.

Are deposit accounts treated as assets, with withdrawals treated as income? If not, what's the justification for treating an ARF any differently?
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ARF were allowed by FG for paye private sector workers, some party who claim to to be on the side of the people who get up to the morning and go to work,
 
Sarenco said:
That's bizarre if true.

Are deposit accounts treated as assets, with withdrawals treated as income? If not, what's the justification for treating an ARF any differently?
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Yes, a deposit account counts towards total assets. For an individual, any assets over €36k are assessed at 7.5% p.a. subject to the PPR limitation of years. Interest earned on the deposit is regarded as income and assessed at 80%.
 
Slim said:
Yes, a deposit account counts towards total assets. Interest earned on the deposit is regarded as income and assessed at 80%.
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That seems perfectly logical but wouldn't you expect an ARF to be treated in a similar manner?
 
Sarenco said:
That seems perfectly logical but wouldn't you expect an ARF to be treated in a similar manner?
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An ARF could well be a couples pension for life ,if one gets sick and enter a nursing home it could well wipe out the others income,same money given to a Insurance Company to buy an annuity ,why should the annuity be treated better than an ARF
 
Two different things. A couple (married) assessment is split. Only 50% is assessed for each person.
Also if its their home, the other person can continue to stay in it. The FD isn't due until that person leaves.
If you sell the house it becomes cash and is assessed differently. I assume Pensions are income unless they are cashed. At which point they become cash.
So the advice is be careful what you liquidate. Also you might want to use any tax free gift allowance you can before entering the FD. Also any inheritance tax allowance.

The actual rules seem to be poorly documented, and the advice from the HSE while well intention-ed can be vague. A tax consultant might be a wise planning move.

As for pension not being the same as cash. Not sure why that is unfair.
 
Sarenco said:
That seems perfectly logical but wouldn't you expect an ARF to be treated in a similar manner?
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It is! The ARF is assessed as an asset at 7.5%, subject to the exemption limits(€36k pp), and any drawings are assessed as income, at 80%.
 
Slim,

Do you know how all this works tax-wise? Would you be able to do an example? Maybe we could start with a single person with say, €500k in the ARF. Lets assume also that AMRFs don't exist for now!

How does someone pay the 7.5%? Does one, for example, simply sell 7.5% of the fund? Does "selling" 7.5% end up with a lower net amount after tax? Is this ok or is there a special "transfer" to the Fair Deal allowed whereby the 7.5% is transferred gross?

On the income side, what happens with imputed distributions, etc.? Is the required contribution adjusted annually. Is it calculated on a specific date?

Sorry for all the questions!

Thanks....
 
What happens to the arf if a person dies.

The fair deal is paid from the estate. The asset rate is simply how the bill is calculated. You could pay it from cash if the estate had it. Fair deal just raises an invoice that the estate has to settle.

That's my understanding.
 
Slim said:
It is! The ARF is assessed as an asset at 7.5%, subject to the exemption limits(€36k pp), and any drawings are assessed as income, at 80%.
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But drawings aren't income! If you withdraw money from your bank account you don't consider that to be income, do you?

That's my point - it's double counting.

I've absolutely no problem with any drawings being treated as cash, with the asset assessment taking place on the residue (if any) of the ARF on the demise of the person. TBH that's how I thought it worked.
 
But that's how the private pension works. It earns interest/dividends and these are drawn as income, hopefully while preserving the capital. A pension schemes produces 'income'. Income is assessed at 80%. Question arises as to why anyone would draw down any income while in à nursing home!
 
Which is why renting out their empty houses, makes no sense. It wouldn't cover the cost, and certainly not the risks.
 
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