Question on ARFs??

QDog10

My father who retired a number of years back went down the ARF route as opposed to the Annuity route. However, over Christmas he raised it with me that he pays PRSI on his withdrawls from his ARF. Why is this the case??
Why should PRSI be payable by someone who chooses the ARF route and not by someone who chooses to buy an Annuity??
From my understanding ARF's are for Pension monies only. Therefore why is there a distinction being made as regards the payments of PRSI, between those in retirement who purchase an annuity to draw down their income and those who do likewise by using an ARF???
Both were his options at retirement...
In addition he is 66 years of age. Social Insurance doesnt apply to individuals older than 66.

ferga_com

I can't offer a good reason why this anomaly exists but both ARFs and annuities do have a certain liability for PRSI. ARF payments are subject to Class S PRSI. The Department of Social Protection website says that Class S is for "Self-employed people such as farmers, certain company directors, people in business on their own account and people with income from investments, rents and maintenance."

So it appears that the Department seems to class ARF income as "income from investments", which seems unfair.

Annuity income should be subjected to Class K PRSI. The Department says that Class K is for "People receiving income which is not subject to social insurance contributions but which is liable for the Health Contribution, such as occupational pensions, income deriving from positions of certain Office Holders (e.g. Judiciary and State Solicitors) and income of people aged 66 to 70 years who were previously liable for Class S."

What I find odd about all this is that Class S PRSI in itself entitles you to certain benefits, including, for example the State Pension, while Class K doesn't entitle you to anything. So, for example, in theory someone retiring at 60 who puts their funds into an ARF is still racking up relevant PRSI towards the State Pension while someone who goes for an annuity is not.

QDog10

Thanks for reply.
This deduction they are charging is a substantial amount of money to be taken from a retired person who is depending on this money for his/her income.
How can the state justify whereby somebody who is retired and receiving an income from a retirement fund (pension) should be asked to pay PRSI Class S, which does not entitle them to benefits which could accrue through the payment of Class S because they are not in a position to avail of them.
Is there anything in the current Pensions Framework that seeks to abolish this PRSI charge??
It is surely in the states interest for people to avail of the ARF route as they are guaranteed that all the money that goes in will ultimately come back in PAYE and tax, as opposed to the annuity from which the state may only get a number of years back on. When the annuity dies the fund will probably cease, and the money belong to the Insurance company.
In my view the state is benefitting from people choosing the ARF route. So why apply further obstacles that don't make any sense or they can't justify??

Maggie Benson

I have an ARF to the value of 30,000 euro approx. Retired recently and will get my first payment in November. I am told I must draw out a minimum of 5% of the fund then, taxable of course. Can't seem to get information on the maximum one can withdraw. Rang the broker and was told I can only withdraw 5% but have been told differently by other sources.

coylemj

If you are aged 60 or more in the whole of the calendar year, there is an imputed 'distribution' (withdrawal) of 3% of the ARF and you will pay tax regardless of whether you actually withdraw the money or not. Effectively this means that you must withdraw the money, you'd be a fool to pay the tax and not withdraw the money.

I'm surprised that you are being forced to withdraw 5%. To my knowledge the insurance companies prefer you to leave the money there forever so they can continue to levy their management fees i.e. the more money you have in the fund, the better it is for them.

Who is saying that you must withdraw 5%? If you will not reach age 60 in 2012 then I see no reason why you wouldn't just leave the money there if you don't need it at the moment. Tax and USC will hopefully come down over the next few years so given the choice I'd not touch money in an ARF if you can avoid it.

On the maximum you can withdraw, you may find that there is effectively a bonus for leaving the money there for about 5 years. In my case, the maximum I can withdraw started off at 95% of the fund and each year they added 1% to the max. so by the time it's there five years I will be able to withdraw all of it with no penalty should I choose to.

Liam D Ferguson

coylemj wrote: »

If you are aged 60 or more in the whole of the calendar year, there is an imputed 'distribution' (withdrawal) of 3% of the ARF...

The figure of 3% was increased to 5% in Budget 2011 on 9th December 2010. So it's 5% now.

Maggie - the terms and conditions of different ARF contracts vary. The law says you can withdraw all of your ARF in one go if you want. But your particular ARF contract may have penalties for withdrawing early. What company is it with?

coylemj

Liam D Ferguson wrote: »

The figure of 3% was increased to 5% in Budget 2011 on 9th December 2010. So it's 5% now.

Thanks, the link I found on the Revenue website was obviously from before that budget.

OP, this applies if you are age 60 or more on Jan 1, 2012. Technically you don't have to withdraw 5% but if you are 60 or more you have to pay the tax whether you do or do not so it's a no-brainer.

The 5% is less any withdrawals you've already made in that tax year so if you've already taken out 5% or more and paid the tax, there is no 'imputed' distribution.

This doesn't apply to the OP but if the ARF is worth more than €2M, the imputed distribution is 6% of the whole fund, not just the excess above €2M.

Maggie Benson

Thanks you for your reply. I am 65 and when I retired in February I took the 20% tax free lump sum which left me with 30,000 approx in the fund. I must have gone with the broker's suggestion to take out 5% per annum and may be tied into that arrangement now. Was just wondering if I should take out a higher sum per annum. I don't really need the money now but thought maybe I would be better investing it elsewhere.

coylemj

Maggie Benson wrote: »

Thanks you for your reply. I am 65 and when I retired in February I took the 20% tax free lump sum which left me with 30,000 approx in the fund. I must have gone with the broker's suggestion to take out 5% per annum and may be tied into that arrangement now. Was just wondering if I should take out a higher sum per annum. I don't really need the money now but thought maybe I would be better investing it elsewhere.

Can I politely ask to you read the answers I've posted above? If the broker told the insurance company that you wanted to withdraw 5% p.a. then he was doing his job properly, that is the absolute minimum you need to withdraw each year if you are over 60.

A few years ago in the budget they introduced the concept of an 'imputed' distribution from an ARF, this means that they assume that you have withdrawn a certain % of the fund money from the ARF and will tax you accordingly whether you withdraw the money or not.

The current level is 5% which means that you would be certifiably insane if you didn't actually ask to withdraw at least that % of the fund annually because you're going to pay the tax either way so you might as well get your hands on the money. If you leave the 5% there, you will effectively have paid tax twice when you do decide to withdraw it.

Capital gains and dividends earned by the fund are tax-free, you only pay tax when you withdraw so if you don't need the money I'd leave it in the fund.

Maggie Benson

Thanks again for your help. Will go with the 5%.

coylemj

You're welcome. Keep an eye on the next budget, keywords are 'imputed distribution'. If they increase the % then you should increase your annual withdrawal accordingly.

Kennie1

Maggie Benson wrote: »

I must have gone with the broker's suggestion to take out 5% per annum and may be tied into that arrangement now. Was just wondering if I should take out a higher sum per annum. I don't really need the money now but thought maybe I would be better investing it elsewhere.

Hi Maggie

Just give the ARF provider a ring and ask "what is the highest % of the fund that I can withdraw without penality every year" Some companies will allow you withdraw up to 15% p.a.

I would think that you are right to take as much as you can now as tax is sure to increase over the coming years.

A New earth

As far as I can figure out there is no big advantage of putting your spare AVC funds (on retirement) into an ARF and it may be simplier/just as efficient to just pay the tax (& USC, PRSI). While the earnings in the ARF are accumulated tax free, all withdrawals are fully taxable. Simple example:

Option 1. ARF €10,000. Deposit interest 3.5% = €350
ARF Charge 1% = - €100
Income €250
Tax etc (eventually) - €125
Net €125

Option 2. Cash in AVC for net €5,000 An Post Saving Cert 3.5% = €175
(DIRT free)

Any views?

Liam D Ferguson

A New earth wrote: »

As far as I can figure out there is no big advantage of putting your spare AVC funds (on retirement) into an ARF and it may be simplier/just as efficient to just pay the tax (& USC, PRSI). While the earnings in the ARF are accumulated tax free, all withdrawals are fully taxable. Simple example:

Option 1. ARF €10,000. Deposit interest 3.5% = €350
ARF Charge 1% = - €100
Income €250
Tax etc (eventually) - €125
Net €125

Option 2. Cash in AVC for net €5,000 An Post Saving Cert 3.5% = €175
(DIRT free)

Any views?

A lot has to do with the person's tax position. They may be close to the tax exemption limit. Example - a couple aged 65 or more can earn up to €36,000 per year and be completely tax exempt. So let's say their other pensions total €32,000 per year and they have an AVC fund of €30,000. If they use an ARF and withdraw 10% of it per year, the additional €3,000 per year income is still tax-free. BUt if they were to withdraw the whole €30,000 as a lump sum, it would push them into the tax net and they'd pay tax on it.

Exact same principle applies if someone is taxable at 20% but close to the threshold for the 41% rate. They can take ARF withdrawals over time at 20% tax but if they took the whole fund at one go they would be taxed at 41%.

Also - your example above shows that if they choose Option 2 they put the money into an interest-bearing Savings Certificate. If they go the ARF route, they can also put the money into an interest-bearing account, so the comparison should also show interest on the ARF side.

A New earth

Liam D Ferguson wrote: »

A lot has to do with the person's tax position. They may be close to the tax exemption limit. Example - a couple aged 65 or more can earn up to €36,000 per year and be completely tax exempt. So let's say their other pensions total €32,000 per year and they have an AVC fund of €30,000. If they use an ARF and withdraw 10% of it per year, the additional €3,000 per year income is still tax-free. BUt if they were to withdraw the whole €30,000 as a lump sum, it would push them into the tax net and they'd pay tax on it.

Exact same principle applies if someone is taxable at 20% but close to the threshold for the 41% rate. They can take ARF withdrawals over time at 20% tax but if they took the whole fund at one go you would be taxed at 41%.

Also - your example above shows that if they choose Option 2 they put the money into an interest-bearing Savings Certificate. If they go the ARF route, they can also put the money into an interest-bearing account, so the comparison should also show interest on the ARF side.

Thanks Liam, hadn't really considered the longer term when a person might have more capacity to not have to pay tax at full rate , by the way I had put interest earned on the ARF side but charge reduces the amount earned and also it is taxed unlike the tax free income on savings certs.