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What happens at retirement?

What happens at retirement?

The proceeds of a PRSA can be used to provide you with tax-free cash and / or income, in your retirement.

Your Retirement Options

The following decision tree shows the different ways in which you can use your PRSA fund at retirement.

What happens at retirement?

 

Tax-free cash

If you are self-employed, or you are not a member of an Occupational Pension Scheme, you are allowed to take 25% of your PRSA tax-free at retirement. The remainder of your fund can be used to buy an ARF, an income, can be left in a PRSA (to age 75) or used for taxable-cash. There are Revenue limits regarding ARFs and taxable cash.

If you have an Occupational Pension and are using a PRSA to make AVC contributions, you may be entitled to take some cash tax-free. The amount of cash you are entitled to depends on the number of years of service you have worked and your salary at retirement.

Your main scheme may provide you with some tax-free cash, but a Standalone PRSA AVC may be used to substitute this, or even to increase the amount you can receive tax-free. This will be subject to Revenue rules and the rules of your pension scheme itself. Your scheme booklet will give you details of your entitlements at retirement age.

If you make Additional Voluntary Contributions, the amount of tax-free cash available will depend on your service, salary, tax-free cash available from your main pension and your maximum allowance under Revenue rules.

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Option 1: Buy an AnnuityOption 1: Buy an Annuity

If you’d prefer the security of a guaranteed level of income each month during your retirement, you should consider an annuity.

With a basic annuity, your income would stop when you die, but an annuity can be set up with a:

  • minimum payment period (e.g. five or ten years)

  • pre-selected rate at which the payout would increase each year (e.g. 3%), or

  • benefit for your spouse if you should die first.

If you’d prefer the security of a guaranteed level of income each month during your retirement, you should consider an annuity.

With a basic annuity, your income would stop when you die, but an annuity can be set up with a:

  • minimum payment period (e.g. five or ten years)

  • pre-selected rate at which the payout would increase each year (e.g. 3%), or

  • benefit for your spouse if you should die first.

Option 2: Invest in an Approved Retirement Fund (ARF) or remain invested in your PRSA until age 75Option 2: Invest in an Approved Minimum Retirement Fund (AMRF)

ARFs can be taken out by PRSA holders. An ARF is an investment product into which a PRSA fund can be transferred on or after retirement age.

In the past, the value of funds built up for retirement had to be used to buy an annuity, after the tax-free cash amount had been taken. ARFs now offer an alternative solution, with the option to invest in funds similar to those available under PRSAs.

Before you can invest in an ARF you must have:

  • A guaranteed pension income of at least €12,700 each year, or

  • €63,500 invested in an AMRF or this amount is used to buy an annuity

While your fund is invested in an ARF:

  • your investment growth is not taxed,

  • you can make regular withdrawals (which are liable to tax as income) to provide you with a pension income, and

  • you can withdraw your money at any time so you have complete control over how your pension fund is invested.

If you’re over 60 and you don’t draw down at least 3% of the value of your fund each year, the difference between your actual withdrawals and 3% of the value of your fund will be treated as an ‘imputed distribution’ and will be liable to tax as income.

Of course, if your withdrawals are consistently high you could exhaust your ARF pretty quickly. It’s worth bearing this in mind, particularly if the funds you’ve invested in don’t produce the returns you’d hoped for.

When you die, the remaining value of your ARF will be paid to your family, subject to income tax and levies on any subsequent withdrawals. This is an important point to remember if you’d like your family to benefit from the contributions you’ve made to your PRSA over the years.

Remain invested in your PRSA to age 75:

If you are using your PRSA to make AVCs, then this option is not available to you. If you are using your PRSA as your primary retirement vehicle, then you do not need to take any benefits from your PRSA when you retire. There is currently no imputed distribution on PRSAs, as there is for ARFs.

Your PRSA cannot continue beyond age 75. Before reaching age 75, you will have to use your fund to purchase an ARF, annuity or take taxable cash.

An Approved Minimum Retirement Fund (AMRF) is similar to an ARF but you can’t get access to the money invested before age 75, although you can withdraw any investment growth, which is liable to tax as income, prior to age 75.

If you invest €63,500 in an AMRF, then:

You can invest the balance in an Approved Retirement Fund or leave the balance in your PRSA to age 75. If you are using your PRSA to make AVCs, then this option is not available to you. If you are using your PRSA as your primary retirement vehicle, then you do not need to take any benefits from your PRSA when you retire. There is currently no imputed distribution on PRSAs, as there is for ARFs.

Your PRSA cannot continue beyond age 75. Before reaching age 75, you will have to use your fund to purchase an ARF, annuity or take taxable cash.

Option 3: Withdraw your capital as taxable cash 
If you have a guaranteed pension income of at least €12,700 each year, or €63,500 invested in an AMRF or used this amount to buy an annuity, you can withdraw your PRSA fund as cash. This cash will be liable to tax as income.