Questions on Buy out bond: lump sum withdrawal, AMRF/ARF, imputed distribution

[David_Dublin]

Hi All,

I have some questions on Buy Out Bond and things linked to it.

When does one have to do the AMRF/ARF think in relation to a Buy Out Bond? What determines the Age that this has to be done by?
Assuming one has enough income, is it best to put this off doing this until as late as possible to avoid the imputed distribution side of things from age 61?

I was kindly advised on here to avoid withdrawing the Tax Free Lump Sum at age 50, if at all possible to postpone this to allow the fund grow (25% tax free up to 200k, beyond that at 20%, the remainder converting to an AMRF/ARF).
Assuming one has enough income, presume it is best to put off withdrawing Tax Free Lump Sum as late as possible?

Is there anything I need to look out for when setting up a Buy Out Bond that may come back to penalise me in the future? I am late 40s now, would like to retire in 10 years or so, but the best laid plans and all that....I'd like to make sure I do things now that don't prevent/penalise me should I need to retire early, or wish to continue working later. My pension should be €1.1m by early fifties, in case that helps.

 

[LDFerguson]

When does one have to do the AMRF/ARF think in relation to a Buy Out Bond? What determines the Age that this has to be done by?
Assuming one has enough income, is it best to put this off doing this until as late as possible to avoid the imputed distribution side of things from age 61?

The BOB will have the same Normal Retirement Age as the pension scheme where the fund came from. But you can decide to retire it at any age from age 50 - 70.

As a general rule, yes it's best to defer drawing down taxable income that you don't need, until you need it.

Assuming one has enough income, presume it is best to put off withdrawing Tax Free Lump Sum as late as possible?

Yes, as the funds within the BOB grow in a tax-free environment, then it's best to leave drawing them down for as long as you can.

BUT

If your fund is of a size that you may be at or near the €200,000 upper limit for the tax-free lump, there is an argument in favour of drawing it as soon as you can - politics! There are certain political parties who favour and have proposed a reduction in the maximum tax-free lump sum from €200,000. So the argument would be to take the tax-free lump sum while you can get it tax-free. That's a speculative position, which you might or might not agree with.

Is there anything I need to look out for when setting up a Buy Out Bond that may come back to penalise me in the future? I am late 40s now, would like to retire in 10 years or so, but the best laid plans and all that....I'd like to make sure I do things now that don't prevent/penalise me should I need to retire early, or wish to continue working later. My pension should be €1.1m by early fifties, in case that helps.

As with any financial product, especially one which may involve a sizeable sum of money, shop around. Things to look out for: -

• Some BOB products have early exit charges after 3 or 5 years. Others don't.
• Compare other charges also, e.g. allocation rate in the first year and annual charge on fund.
• Some funds have the possibility of a delay on exits, e.g. property funds. Most don't.
• As with any investment, make sure that the chosen fund(s) for the BOB fit properly into your overall portfolio of investments (within and without your pension funds) and are suitable for your risk profile and needs. Self-administered BOBs are available if that was of interest - allowing you to choose your own shares, ETFs and/or property as investments within the BOB.

Regards,

Liam
www.ferga.com

 

[Sarenco]

There are certain political parties who favour and have proposed a reduction in the maximum tax-free lump sum from €200,000.

Interesting.

I know that the Greens and Sinn Fein called for a further reduction to the SFT in their most recent manifestos (and I think there is a real chance of that happening at some point - our SFT is much higher than the corresponding limit in the UK) but I don't remember any political party calling for a reduction to the TFLS.

As an aside, I've always thought that the principle of a TFLS is fundamentally inequitable but I can imagine the howls if any Government sought to abolish the TFLS completely.

 

[David_Dublin]

The BOB will have the same Normal Retirement Age as the pension scheme where the fund came from. But you can decide to retire it at any age from age 50 - 70.

As a general rule, yes it's best to defer drawing down taxable income that you don't need, until you need it.



Yes, as the funds within the BOB grow in a tax-free environment, then it's best to leave drawing them down for as long as you can.

BUT

If your fund is of a size that you may be at or near the €200,000 upper limit for the tax-free lump, there is an argument in favour of drawing it as soon as you can - politics! There are certain political parties who favour and have proposed a reduction in the maximum tax-free lump sum from €200,000. So the argument would be to take the tax-free lump sum while you can get it tax-free. That's a speculative position, which you might or might not agree with.



As with any financial product, especially one which may involve a sizeable sum of money, shop around. Things to look out for: -

• Some BOB products have early exit charges after 3 or 5 years. Others don't.
• Compare other charges also, e.g. allocation rate in the first year and annual charge on fund.
• Some funds have the possibility of a delay on exits, e.g. property funds. Most don't.
• As with any investment, make sure that the chosen fund(s) for the BOB fit properly into your overall portfolio of investments (within and without your pension funds) and are suitable for your risk profile and needs. Self-administered BOBs are available if that was of interest - allowing you to choose your own shares, ETFs and/or property as investments within the BOB.

Regards,

Liam
www.ferga.com

Thanks for all the helpful info, much appreciated @LDFerguson

If I withdrew lump sum at 55, is that considered retiring the BOB? And therefore would require me to set up AMRF/ARF at 55, and therefore would ensure imputed distribution kicks in at 61?

But I chose to retire the BOB at age 64, it would mean only having to set up AMRF/ARF at age 64, and therefore imputed distribution would only kick in at age 64?

Sorry if I am being thick here!

 

[LDFerguson]

Thanks for all the helpful info, much appreciated @LDFerguson

If I withdrew lump sum at 55, is that considered retiring the BOB? And therefore would require me to set up AMRF/ARF at 55, and therefore would ensure imputed distribution kicks in at 61?

But I chose to retire the BOB at age 64, it would mean only having to set up AMRF/ARF at age 64, and therefore imputed distribution would only kick in at age 64?

Sorry if I am being thick here!

Not thick at all. Everything you say is correct. Withdrawing the lump sum is indeed considered to be retiring the BOB and therefore you must simultaneously move the rest into an AMRF/ARF (or buy an annuity). So if you defer taking the lump sum, you are automatically deferring starting the AMRF/ARF and therefore deferring the imputed distribution requirements.

 

[David_Dublin]

Brilliant, thanks for the clarification, much appreciated.

 

[LDFerguson]

As an aside, I've always thought that the principle of a TFLS is fundamentally inequitable but I can imagine the howls if any Government sought to abolish the TFLS completely.

Without wishing to derail the original post, I'd be curious to hear why you think that the tax-free lump sum is inequitable as a principle. I can understand arguments that the current system of tax relief on contributions favours higher-rate taxpayers over lower-rate. I can understand arguments that the current limits are too generous / about right / not generous enough. I haven't yet heard an argument that singles out the tax-free lump sum as inequitable.

 

[Sarenco]

Without wishing to derail the original post, I'd be curious to hear why you think that the tax-free lump sum is inequitable as a principle.

Well, in general our pension system operates on the basis of deferred taxation - contributions are relieved, returns within the pension roll up tax-free and drawdowns are subsequently taxable.

The TFLS is an exception to this and it seems odd to me that a comparatively well off person can accrue such a significant sum completely tax-free.
All other drawdowns from a pension are subject to our highly progressive tax system - so the provision for a TFLS seems an anomaly to me.

Regardless, I don't see the TFLS being abolished or materially reduced any time soon.

 

[Gordon Gekko]

Just to highlight that it can make financial sense to “retire” a Buy Out Bond at age 50.

It can often make sense to earmark the lump sum for offset against one’s mortgage for example.

Given that the ARF/AMRF don’t have to be touched for another 11 years post 50.

 

[Sarenco]

It can often make sense to earmark the lump sum for offset against one’s mortgage for example.

Wouldn’t you expect an equity fund held within a pension wrapper to provide a higher return than paying down a mortgage over an 11 year period?

 

[Gordon Gekko]

Wouldn’t you expect an equity fund held within a pension wrapper to provide a higher return than paying down a mortgage over an 11 year period?

There are other factors to consider.

e.g. will the person’s fund be >€800k (for the €200k tax-free) or >€2m

 

[Sarenco]

Are you arguing that it makes sense to retire a BOB at 50 to pay down a mortgage if total pension fund savings at that stage exceed €800k (or will exceed €800k after taking the lump sum)?

 

[Gordon Gekko]

Are you arguing that it makes sense to retire a BOB at 50 to pay down a mortgage if total pension fund savings at that stage exceed €800k (or will exceed €800k after taking the lump sum)?

I’m not arguing anything. I’m merely highlighting that in certain circumstances it can make sense access a BOB at 50 to pay down a mortgage.

The average mortgage rate is circa 3% in Ireland. A higher rate tax payer needs to earn 6.25% to fund that from after-tax income. BOB providers don’t do these things for free, and charge around 1% on average.

€800k gets you €200k tax-free, yes, but it also leaves €24k of income coming out of the legacy ARF/AMRF at the 4% rate which, when combined with the State Pension, sends takes the individual over the 20% rate band.

And as we often highlight to people, markets don’t just go up, even over 10/11 year periods. Clearing one’s mortgage delivers a guaranteed return.

 

[Sarenco]

I’m merely highlighting that in certain circumstances it can make sense access a BOB at 50 to pay down a mortgage

Fair enough Gordon - I'm just trying to tease out what those circumstances might look like.

Let's say I've just turned 50, I'm in full time employment with a BOB of €400k and a €100k mortgage outstanding @3%. I think you are saying that it would make sense for me to retire the BOB and pay off the mortgage with the €100k TFLS - right?

I personally don't think that would make sense. My expectation is that the return on the €100k, net of costs and net of any tax on drawdown, will comfortably exceed the mortgage rate over the next 11 years.

No guarantees, obviously, but that's my expectation.

 

[Gordon Gekko]

I can expect something to do 7% a year but still take your hand off for a guaranteed 5% (just by way of example).

I intend to retire a fund at age 50 as the final piece of my plan to be debt-free.

 

[Sarenco]

Would it not logically follow that you wouldn't contribute to a pension (at least above €800k) while carrying mortgage debt?

Another problem with your approach is that it reduces flexibility. If you retire a pension at 50 then imputed distributions kick in 11 years later when you might still be working (by choice or necessity).

I agree with Liam that, in general, it's best to defer drawing down taxable income that you don't need, until you need it.

I don't think it makes sense to retire a pension early to pay off a mortgage that you can comfortably meet from earned income.

 

[David_Dublin]

Interesting tangent the thread has taken. I'll have a mortgage of about 120k, a tracker, when I turn 50. Assuming current situation prevails, I'll be able to make repayments comfortably, so don't plan to take the lump sum at 50.

 

[Gordon Gekko]

It’s a tracker, so there’s no debate.

 

[Mechman]

Regarding shopping around for buy out bonds, is there any provider which stands out as a go-to, assuming I already know what my attitude to risk is?

 

[David_Dublin]

Interesting tangent the thread has taken. I'll have a mortgage of about 120k, a tracker, when I turn 50. Assuming current situation prevails, I'll be able to make repayments comfortably, so don't plan to take the lump sum at 50.

My situation looks to be changing a little.

Planned job on house, looks like we may need to borrow 150k, to add to savings of 250k. Big-ish job!

I'll be 50 in a year and a half. I have some concerns about ability to pay back the additonal mortgage & sustain currently quality of life. The additional borrowing would mean additional circa 900 per month (18 year term). It's an expensive time of life, unpredictable outgoings sometimes, 2 kids in private school, then college. Want to keep on living a decent life too.

So, for peace of mind, I could have the 200k TFLS option available as a rainy day option - if we struggle to make repayments or impact of higher repayments is too impactful on quality of life. But ideally fund borrowing from salary and leave pension alone until as late as possible.

Anyone see any obvious issues with my plan? Apart from the idea of spening that much money (at this time) on a refurb!

Two questions

• Can you take numerous tax free lump sums up to the max? i.e. could I take out 80k in 2 years to pay off some of the mortgage? And then leave the rest in the BOB until age 61? At which point my understanding is imputed distribution kicks in.
• Looks like the TFLS from 200k to 500k is taxed at only 20%. Do "most people" take that withdrawal, or is it complex to work out when this would be advantageous? Presume it is to do with minimising tax while ensuring you have income to support lifestyle.