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Early Retirement in Ireland – When Can I Unlock My Pension Early?

 

, Early Retirement in Ireland – When Can I Unlock My Pension Early?

 

In this article, we talk about early retirement, which occurs when individuals access their pension benefits before they have reached their normal retirement age (generally age 65), along with the different types of pensions, pre and post-retirement, and the merits of each.

 

When can I access my pension?

If you want to access or unlock your pension, you need to be 50 years of age to draw down from an occupational pension scheme, however, this may vary depending on the individual scheme rules and you will need to get your employer’s consent.

The age limit of 50 also applies to Buy Out Bonds.

However, you must be 60 years of age in the case of a PRSA (this can be reduced to 50 when you are an employee and you are leaving service).

Personal Pensions can be accessed at age 60 if you are ceasing employment.

Some professions such as sportspeople can also access their pensions early.

Revenue rules also allow you access to your pension if you are permanently unable to work due to serious illness.

 

Can I work after taking my pension in retirement?

Once you retire and start taking your pension it does not mean you can never go back to work. Many individuals end up going back to work as they find they need a little more cash flow or they are a little bored with all the free hours they have. This is generally allowed and in general, there is no rule which prevents people over the normal retirement to go back to work as an employee or else become self-employed.

 

Do I have to retire at a certain age?

There is no fixed age at which you have to retire. The retirement age is normally set out in your contract of employment with the general retirement age being 65 however there is normally provisions for early retirement from as young as 50.

In some professions there is a statutory retirement age limit, however, this does not mean that you cannot take up a different job when you retire. In most cases, you will no longer be able to pay contributions to an occupational scheme after the normal age of retirement.

There is no retirement age if you are self-employed or for company directors however, the company’s articles of association may set a maximum age.

 

What are your options when you access your pension?

If you are eligible to access your pension in accordance with the rules of the scheme, you can immediately withdraw a maximum of 25% as a tax free lump sum up to €200K with the next €300k at the lower tax rate of 20%, and then the residual funds must be invested into an Approved Minimum Retirement Fund (AMRF) or Approved Retirement Fund (ARF). Alternatively, you can purchase an annuity which is a guaranteed income for the rest of your life, however annuity rates are extremely low at present and many would argue if they offer much value.

 

, Early Retirement in Ireland – When Can I Unlock My Pension Early?

Changes in Irish pension legislation

Changes back in June 2016, meaning that individuals with Buy Out Bonds that originated from a defined benefit scheme or a defined contribution scheme can now access the flexible option of an Approved Retirement Fund (i.e. take 25% in a tax-free lump sum and then invest the residual amount in an ARF).

 

Issues to consider when taking early retirement

  • If you decide to go with the annuity option (annual income), the earlier you take your benefits the lower the annual income is likely to be as it would need to be paid for a longer period.
  • If you take your pension benefits early, you may not be able to work in employment related to that particular pension.

 

What is an Approved Minimum Retirement Fund?

Individuals must invest in an Approved Minimum Retirement Fund (AMRF) if they cannot provide proof of a guaranteed income of €12,700 per annum (including the state pension). In this case, €63,500 needs to invest in an AMRF which must remain in place until age 75, with the residual amount being invested in an ARF.

However, recent budget changes that came into effect in March 2019, means that anybody who has full state pension entitlement should be over the €12,700 limit and should be able to go straight into an ARF.  It should also be noted that those who may have been restricted to an AMRF up to now, may also be able to convert to an ARF, giving them more access to their funds.

 

What is an Approved Retirement Fund?

An Approved Retirement Fund (ARF) is a retirement fund controlled by individuals and remains invested after retirement as a lump sum. Individuals look to grow this fund and then take regular withdrawals from it which are treated as income; thus, you pay income tax, PRSI and Universal Social Charge (USC). A minimum withdrawal limit of 4% of the fund is also enforced from the age of 61. This increases to 5% of the value once you reach the age of 70.

 

What is the difference between an AMRF & an ARF?

The main difference between the two structures is access to your funds. You can only make 4% withdrawals from an AMRF per annum whereas you can access your ARF funds at any time. You cannot access the full amount of your AMRF until you are 75 years old.

 

Advantages of an ARF

  • You keep control of your money with potential to grow these funds in accordance with your attitude to risk.
  • The value of your ARF will pass to your spouse free from inheritance tax, but will be taxed as income in the course of payment, or else distributed to your estate in accordance with your will in the event of your death. If distributed to children, and depending on their ages it can form an integral part of inheritance tax planning, as the rates applicable to ARF holdings are different than other inheritance distributions.
  • Any growth in your ARF is tax free.
  • If you decide you would like a guaranteed income, you can use your ARF to buy an annuity later. Annuity rates are very low at the minute so individuals can wait for these rates to increase.

 

Disadvantages of an ARF

  • You are taking investment risk with these funds and there is no guarantee the pension will hold its value as investments can go down as well as go up.
  • There is a risk of bomb out with ARF. This is where the ARF runs out in your lifetime. This can be caused by either taking too much income, the poor performance of the underlying investments or you live longer than expected.
  • There will be ongoing costs associated with ARF’s which will reduce the overall value of the fund.
  • Annuity rates are not expected to go up anytime soon with the expectation that they will go down if anything in the near future.
  • You are forced to withdraw at least 4% of the ARF value depending on your age. If you do not withdraw these funds, Revenue will still charge you the income tax and USC as if you did.

 

, Early Retirement in Ireland – When Can I Unlock My Pension Early?

Early retirement with a PRSA (Personal Retirement Savings Account)

You can access your PRSA from the age of 60, however, if you are retiring from employment, you can take the benefits of your PRSA from age 50.

We would always recommend trying to avoid early retirement as the longer you leave the funds, the longer the fund has the chance to grow. If you access early, you will need to start drawing down on the fund and you could risk bomb out if you go the ARF route or you will get a lesser annuity as it will need to be paid out for a longer period.

 

Early retirement with a Personal Pension

If you hold a personal pension and you are ceasing employment, you may take benefits whenever you wish from age 60.

We would always recommend trying to avoid early retirement as the longer you leave the funds, the longer the fund has the chance to grow. If you access early you will need to start drawing down on the fund and you could risk bomb out if you go the ARF route or you will get a lesser annuity as it will need to be paid out for a longer period.

 

Early retirement from a defined contribution occupational pension scheme

Individuals should be able to take early retirement from a defined contribution scheme, any time from age 50 once this is permitted in the rules of the scheme. The amount you will receive will depend on the current value of your holding at that time, along with your service and salary at date of leaving.

We would always recommend trying to avoid early retirement as the longer you leave the funds, the longer the fund has the chance to grow. If you access early you will need to start drawing down on the fund and you could risk bomb out if you go the ARF route or you will get a lesser annuity as it will need to be paid out for a longer period.

 

Early retirement from a defined benefit occupational pension scheme

These pension holders can access their benefits from 50 onwards like any other occupational pension once the scheme rules permit it.

Normally DB schemes aim to provide a set pension for the remainder of an individuals life. This can vary between 2/3rds of final salary or 1/2 of final salary depending on what sector you work in. A tax free lump sum of 150% of final salary can also be availed of.

If you would like your Defined Benefit to be treated like a Defined Contribution scheme and go the ARF option, the scheme administrators will give a transfer value  and the scheme can be transferred to a Buy Out Bond / Personal Retirment Bond. Upon retirement, the individual is able to access 25% of the fund as a tax-free lump sum with the rest invested in an annuity (guaranteed income) or an ARF. It is imperative that you seek independent financial advice in this regard for a number of reasons.

 

Should I accept my DB transfer value?

A combination of the longevity of pensioners, low-interest rates and lower investment returns are resulting in schemes having liabilities outweighing their assets causing a funding deficit. This is causing many employers to contact former employees and offering a transfer value to transfer out to an alternative pension arrangement.

The first thing to consider is the funding level of your DB scheme and look under the bonnet to access the financial health of the scheme. Just because a scheme is fully funded now, doesn’t guarantee it will be in the future and vice versa. An individual should look at the underlying assets, previous performance of the funds the make-up of the pensioners are drawing from the fund as well as the ones who are due to draw down the line. Judgment will need to be made on whether the fund will be around and be able to offer the quoted pension when it comes to retiring.

Enhanced transfer values are often offered to employees in order to entice them to leave the scheme.

Another thing to consider is the what investment growth you will need if you took the transfer value to provide you with the same or a higher level of income should you stay in the DB scheme and it provides the quoted income. This investment risk needs to also be looked at in relation to your appetite for risk and if you can stomach the investment journey it will take to reach the required level of growth. The investment risk passes from your employer to you personally.

Above all, personal circumstances will play an important role here, in terms of health, life expectancy, dependants and future retirement expectations.

 

, Early Retirement in Ireland – When Can I Unlock My Pension Early?

What tax will I be subject to in retirement?

Retirement income is treated like normal income which means it is subject to all the same taxes. This includes annuities, withdrawals from ARF’s, taxable cash payments, dividend income, and rental income. This will be subject to income tax at your marginal rate, PRSI, and USC.

There are some tax reliefs for older people. Once you hit 65 you may be exempt from paying income tax altogether if you elect to avail of the exemption limit. This allows a single person to earn up to €18,000 or a married couple to earn up to €36,000 without being subject to income tax. This amount can be increased if you still have dependent children (including those in universities). You will still be subject to USC at the full rate while availing of the exemption limit.

You will not qualify for the exemption limit if your earnings are in excess of the rates stated above however you will be entitled to an age-related credit of €245 per year for a single person (double for a married couple). This credit will be applied when you or your spouse turn 65.

 

There is another saving to be made on PRSI as when you turn 66, you’ll also stop paying PRSI. This saving may be accessed earlier if you draw down from a private occupational pension as some private pensions are not subject to PRSI regardless of age.  There is also a reduction in USC when you turn 70.

 

Tax considerations of early retirement

It may seem attractive to draw benefits from one of your pension pots to supplement your income if you continue to work in another capacity. It is worth ensuring that this extra income doesn’t move you from the lower tax bracket to the marginal tax bracket. It might make more financial sense to delay drawing these benefits. This should form part of your overall financial plan.

 

Social welfare implications of early retirement

Some social welfare payments are means tested such as the non-contributory state pension and jobseekers allowance. If you take early retirement from your pension plans, your pension income could result in you failing the means test and having your state benefits reduced.  It should also be noted that if you retire early, you will not be accumulating ‘contributory pension’ credits, as you will not be paying PRSI from earned income, and could result in a reduced pension in the future.  Consideration needs to be given to ensure that an individual has accrued the required 30 years to benefit from the maximum contributory pension.

 

How can I prepare for retirement?

Many people focus on ‘their number’, i.e. how much they need to have in their pension pot before they can retire. This is obviously important, but another big but less spoken about consideration is if you are emotionally ready for retirement. This is a massive transition period and one which many people don’t deal with very well as they are faced with a major upheaval to their daily routine. Individuals are faced with a lot of spare time which they aren’t used to and can find themselves without purpose as they stare at the walls in their home. There is also a change in an individual’s social networks as they no longer have the relationships they forged in the workplace. Another issue that people are faced with is what role they now play in society. Many people define themselves by their career and can feel a little lost when they no longer have this associated with them leading to issues with their identity and purpose. Failure to recognise and plan for these lifestyle changes can lead to difficulties during this transitional period.

There is a lot of research which suggests that a planned retirement is a more enjoyable and fulfilled one and that those that do put plans in place live longer happier lives. Plans should be made in conjunction with your family, friends and your employer. Individuals should put in place some structures around this new spare time by pursuing interests and hobbies as this will keep you mentally engaged and will also allow you to substitute the human interaction you are accustomed to through the workplace. It can also help reinforce feelings of self-worth.  Looking after health should also be a priority ensuring regular exercise paired with maintaining a healthy and balanced diet.

 

The Retirement Council of Ireland can help people prepare and transition well to the next stage of living. They provide support, information and guidance to those approaching retirement. They offer practical courses and seminars which talk through the financial and lifestyle changes retirement brings to prepare people before the time ahead.  This coupled with a good working relationship with your financial advisor who can map out the different scenarios for you by use of cashflow modeling and reviewing your plan, help you manage and achieve your expectations can make the transition to your ‘second phase in life’ an easy transition.

 

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