The Finance Bill 2021 introduced a number of changes to pension rules, including one that abolished the AMRF, or Approved Minimum Retirement Fund. This has somewhat simplified post-retirement pension options, and in general the feeling is that this is a welcome development, but there are both positive and negative potential implications for clients who are retiring or indeed have already done so.
The AMRF was initially introduced in order to protect pensioners from drawing too much income from their pension funds and therefore running out of money in retirement.
In previous years the first €63,500 of a client’s pension fund would be invested in an AMRF, which could not be accessed until the age of 75. The exception to this requirement was if a client had a guaranteed annual income of €12,700 for the rest of their life. Only certain types of income qualified, for example Rental Income was not deemed to be guaranteed for life.
The remainder of the client’s pension fund was invested in an Approved Retirement Fund (ARF), which would typically be invested, and from which annual income would be drawn subject to a minimum percentage, usually 4% or 5%.
Recently clients had been able to elect to also take some income from their AMRF’s once a year. Increases in the State Pension have also meant that more clients have a guaranteed annual income of €12,700 which led to less clients having to invest €63,500 in the AMRF. These developments meant that the AMRF often became a cause for confusion more than anything else when trying to understand the pension rules once you retired.
So, the positive effects of the end of the AMRF are twofold: simplified post retirement options, and more flexibility in accessing your pension fund.
The possible negative effect really is of relevance to clients who do not necessarily need income from their pension fund.
These clients would keep their income withdrawals to the minimum required levels – generally 4% to age 71 and 5% thereafter, although if you have a significant fund in excess of €2m you must take 6% per annum. Keeping the withdrawals to the minimum levels also minimises the level of income tax you must pay, as ARF withdrawals are subject to income tax in retirement.
Clearly for these clients, not having to take income from €63,500 of their fund was of benefit. The abolition of the AMRF now means that they will be required to take the relevant percentage of their entire post-retirement fund, and therefore pay more income tax in retirement.
Despite the simplification of the pension rules resulting from this change, how a client elects to manage the investment of the ARF itself now becomes slightly more complicated! The requirement to draw an annual income from the entire pension pot will have implications on the expected longevity of the fund in retirement, and this should be considered in the context of any investment decisions made.
As always, we are here to help. If you have any questions or concerns about your retirement plan, contact Harvest on 01 237 5500 or email justask@harvestfinancial.ie and we will be happy to assist.
