Pensions

ARF's

What is an Approved Retirement Fund (ARF)?

An ARF is a post retirement investment fund. The following pension policies can avail of this option:

• Personal Pension Plan
• Personal Retirement Savings Account
• Proprietary Directors who own more than 5% of the voting rights in the company.
• Members of an employers pension scheme who contributed to Additional Voluntary Contributions (AVC).

How does it work?

It is a tax exempt investment plan than that will provide for your retirement needs. They can be invested in a range of products from cash in a bank account to an investment portfolio in a stockbroker or even as part of a managed fund with a life company. Only when funds are drawn down does a tax liability arise. Then the ARF provider acts as the employer for the ARF holder and income tax is liable under PAYE rules.

From 2007 onwards there is an obligatory draw down in respect of ARF’s, in 2007 the rate that will apply for draw down is 1%, in 2008 the rate that will apply for draw down is 2% and 3% p.a. from there on.

This obligatory draw down will only affect ARF holders that are aged 60 or older in the tax year.

Are there any conditions imposed when investing in an ARF?

The individual must have a pension or an annuity of €12,700 p.a. Where this is not the case the individual must invest €63,500 in an Approved Minimum Retirement Fund or they can use the €63,500 to buy an annuity from an insurance company.

An Approved Minimum Retirement Fund (AMRF) is similar to the ARF. The main restriction is in relation to the draw down benefits. Only the growth on the original €63,500 can be accessed before the age of 75 at this stage the AMRF becomes an ARF.

There are certain transactions that will cause an income tax liability for the ARF holder.

They are as follows:

• Loans from the ARF to the ARF holder or anyone connected with the ARF holder.
• The disposal of a property by the ARF holder to the ARF.
• The purchase of the property by the ARF holder from the ARF.
• The purchase of a Property (Holiday home or residential) that will be used by the ARF holder or anyone connected with the ARF holder.
• The purchase of shares in a close company where the ARF holder of a connected person is a participator.

What happens in the event of my death?

A spouse can take over the ARF from the deceased ARF holder without being liable for Income tax or Capital acquisition tax. Any draw down from the surviving spouse will be liable for income tax purposes in the normal manner.

The tax liability of an ARF passing to a surviving child will depend on the age of the child receiving the assets.

• If the child is under the age of 21 the funds in the ARF are liable to Capital Acquisitions Tax in the normal manner.
• If the child is over 21 the funds in the ARF will be liable to income tax at a flat rate of 20%.

Where the ARF assets pass to anyone other than the Spouse or a child of the ARF holder, will be liable for income tax in the year of the ARF holder’s death and liable for Capital Acquisitions Tax in the normal manner.