Approved Retirement Fund (ARF)
An ARF is a post retirement investment fund. It is an alternative to buying an annuity (i.e. a secure annual income) with your pension fund at retirement. Similar to pre-retirement pension structures there are different types of ARFs that can be used. Insured ARFs are held within a life company and are used by the majority of retirees. Self-Administered ARFs are a little more sophisticated from an investment perspective, providing holders with more investment options for their retirement fund.
Tax treatment within ARF and on income drawn down
An ARF is a tax-free investment structure and investments held within the ARF are allowed to grow free of tax. Only when funds are drawn from an ARF will a tax liability arise for the ARF holder. Funds drawn from an ARF will be liable to Income Tax (plus USC and PRSI if applicable) in the same way a salary is liable to Income Tax and levies. The ARF provider is under an obligation to deduct the relevant tax liability under the PAYE rules. In effect the ARF beneficiary is treated as an employee of the ARF provider in respect of the income taken from the ARF.
It is compulsory for the holder (from age 61) to draw down a minimum of 4% per annum from the ARF where the value of the scheme is €2 million or less, and the ARF holder is less than 71 years of age. When the ARF holder is aged 71 or more years of age, a 5% annual drawdown rate applies. Where the total retirement fund assets are worth more than €2 million there is a 6% annual drawdown requirement on the full ARF value. The obligatory drawdown in respect of ARF investments doesn’t apply where an ARF investor is under 61 years of age.
Options at retirement
At retirement the vast majority of individuals will be entitled to take a tax-free lump sum (typically 25% of the value of the pension fund) from their pension arrangement. The individual then has the option of investing the balance of their pension assets into an ARF, purchasing an annuity, drawing down taxable cash or perhaps using a combination of options.
Tax treatment of ARF on death
The tax treatment of an ARF on death will depend on whom the ARF assets are being passed to. A spouse can ‘step into the shoes’ of a deceased ARF holder and take over the ARF in their name without any income tax or capital acquisitions tax liability arising. Any draw down of income or capital from the ARF by the surviving spouse will be potentially liable to income tax and levies in the normal manner. The tax liability of an ARF passing from the original ARF investor to a child or from a surviving spouse’s ARF to a child will depend on the age of the child receiving the ARF assets:
- Where the ARF assets pass to a child under the age of 21 the proceeds will be liable to Capital Acquisitions Tax in the normal manner.
- Where the ARF assets pass to a child aged 21 or over the proceeds will be liable to income tax at a flat rate of 30%.
Where the ARF assets pass to anyone other than to a surviving spouse or child, an income tax liability will arise for the ARF investor in the year of death and the net proceeds passing to the beneficiary will be liable to capital acquisitions tax in the normal manner.