Annuities or ARFs: what is the most sensible choice to make?

• Published date: 16 April 2024
• Publication title: Irish Times (Dublin, Ireland)

– Mr JM

There’s nothing wrong with planning early for retirement. Of course, the first bit of retirement planning is to start investing in a pension in the first place, a step all too many people leave far too late, if they do it at all.

Given the tax relief on offer, never mind the contribution that most companies will make to an employee’s pension, it simply makes no sense.

To your credit, you’ve clearly got that bit covered. The next issue, as you are doing is to plan ahead on what you would like to do with your pension fund when you retire. A pension will for most people be their most valuable financial asset – in many cases amounting to more even than the value of your home. Making last-minute decisions on how best to draw it down is a recipe for regret.

You’ll have a couple of things to decide. First up, you will be entitled to take a cash lump sum. Given this is tax-free while everything else you draw down from your pension will be liable to tax, it makes sense to do that. It is a substantial sum – generally 25 per cent of your pension fund up to a maximum of €200,000.

Unless you have outstanding mortgage or other debt that you want to clear before your earning capacity diminishes in retirement, you will need to plan for where to invest this sum. That decision is clearly up to you but there are a few ground rules.

First, do not be talked into investing in anything that you are not comfortable with; second, never be shy about asking what any investment is costing you in fees and charges and avoid anyone who is reluctant to be upfront on that; finally, always bear in mind that the older we are the less time we have to recover from investment setbacks. There’s a reason most pension funds will transfer you into lower-risk investments as you draw close to retirement. The gains might be less spectacular but so too is the volatility.

But back to the rest of your pension fund. Here, you really have two options – an annuity or transfer of your pension fund into an approved retirement fund.

There are fairly fundamental differences between the two, but it has only really re-emerged as a serious discussion in the past year or so.

Until then, for a generation, annuity rates were at such historic lows that they constituted very bad value for money for the vast majority of retirees.

Annuities Annuities are basically a product which you buy from an insurance company. You hand over your pension pot in return for a guaranteed income for life.

How much you will get in...