Retirement funds could 'bomb out' once Budget rules kick in
Some specialist pension schemes will soon struggle to maintain their value
Published 16/12/2010 | 05:00
APPROVED retirement funds (ARFs) -- a way of keeping a pension fund invested once you retire -- will be less attractive once new rules kick in demanding 5pc of the value's fund be withdrawn each year.
To work out, ARFs will now have to generate a return of more than 5pc a year, pensions experts said.
ARFs are funds managed by qualifying fund managers in which you can invest the proceeds of your pension fund when it matures.
One of the big advantages is that they can be passed on to a next of kin when the ARF holder dies.
But with effect from the 2010 year of assessment the "deemed distribution" from an ARF will rise from 3pc to 5pc, whether or not a person takes money out of the fund.
This means that if someone does not take a withdrawal, a tax charge will be made to the policy based on a notional withdrawal or deemed distribution amount.
And actual withdrawals made will be deducted from the distribution to arrive at a "net" deemed distribution on which tax will apply at the marginal or higher tax rate.
However, pensions expert Tony Gilhawley warned that many ARF funds will now run down in value and end up "bombing out" unless the fund grows by at least 5pc a year net of charges.
Fund management charges are usually around 1.5pc of the value of the fund, which means an ARF would have to grow by 6.5pc a year to preserve the capital in it.
"It's a big ask in investment terms, and will require ARF holders to take more risks to try to prevent their ARF bombing out while they are alive," Mr Gilhawley said.
He added that a 5pc drawdown rate represents a major conflict with the requirement of some of those with ARFs to preserve the capital in the fund for themselves and the next generation.
ARFs will have to hold higher levels of liquidity to fund a 5pc withdrawal
The Budget changes on ARFs, which come in on January 1, will mean that personal retirement savings accounts (PRSAs) are set to become a more attractive investment vehicle for those who are retiring.
This is because balances left in PRSAs are currently not subject to the ARF distribution charge.
"There is no indication in the Budget that a 5pc per annum imputed distribution charge is to apply to PRSA balances. However, Finance Bill 2011 could contain fresh provisions not announced in the Budget."
Mr Gilhawley advised ARF holders to consider drawdowns before the end of this year. He also said those with this product should review the investments in their ARF.
However, investment company Standard Life insisted ARFs were not an obsolete product.
They still have the option of an approved minimum retirement fund (AMRF) if they can set aside €120,000 or 10 times the State pension (instead of the current €63,500 lump sum).
Jim Connolly, head of pensions at Standard Life said: "This is very good and important news for savers who thought they were stuck with an annuity at all time lows and had no other options.
"This is good news for middle income/additional voluntary contribution savers."