Five key points to note about ARFs

Sandra O’Connell speaks to Colm Power of Davy Private Clients and Suzanne Cashin of Brewin Dolphin who answer the five key questions regarding approved retirement fund (ARFs).

Will they suit you?

ARFs are best suited to people with experience of investing; people with other guaranteed incomes such as the State pension, or another annuity, or a defined-benefit income, says Colm Power of Davy Private Clients. They also suit people who would like to provide for the next generation.

“Any remaining assets can be passed to children or other third parties, unlike an annuity which generally dies with the current generation. You can select your own investment strategy to suit your needs. There is no reduction in passing assets to a spouse on death, the full value can transfer tax-free to a spouse’s ARF. With an annuity or defined-benefit pension, there may be no pension for a spouse or often a reduction to half or two-thirds of the original pension,” he says.

Are you up for it?

“An ARF takes a bit of time to manage. An annuity or DB [defined benefit] is relatively simple in that you continue to get a paycheck in on a regular basis,” says Power.

You will most likely need to be comfortable taking on risk. “With cash deposit rates turning negative and bonds giving little to no return, in order to make the ARF last, you are most likely going to have to take on some risk. Which means that when markets take a wobble like they did in March this year, you need to hold your nerve,” he says.

Are they flexible enough for you?

You have to draw down a minimum of 4 per cent from the year you turn 61, and 5 per cent from the year you turn 71, or 6 per cent if the ARF is valued above €2 million in any of these years, but they also offer the flexibility of drawing more in any year if necessary.

There is a risk of running out of money or having to adjust your lifestyle. “We’ve no idea how long we are going to live – for a 60-year-old the ARF might have to provide for five years or 45 years. So longevity can be a risk if you have no other income or assets to fall back on,” says Power. If longevity runs in your family, it’s one to bear in mind.

Can you make it personal?

Davy builds a goals-based financial plan that’s specific to each individual. “You aren’t lumped together with a bunch of other similar people. We tailor the strategy to your retirement, your cash flows and your life. The plan is a living document, it can be adapted depending on your financial circumstances and will evolve over your lifetime,” he explains.

Are you prepared to make informed decisions?

Because of Covid-19, more people have had more time to carry out personal pension health checks this year, says Suzanne Cashin of Brewin Dolphin, a wealth manager. That’s good, because too often people don’t seek out enough information about their retirement investments, either when contributing to their pension plan or considering their ARFs in retirement. Contrast it with the other significant investments people make, in property, and the perception gap becomes clear.

“If someone had an apartment worth €250,000 and I asked them who their mortgage is with, what they are paying on it and how it is performing for them, they’d know,” says Cashin. “But if I asked the same question about their pension, they probably wouldn’t know how it’s invested or what they are paying in fees.”