Audio of radio piece on Death of the AMRF?
Recent budget rumours are suggesting that there may be a slight increase of €5 per week in the old age state pension. That’s insignificant, right?
Not so fast. I am not sure even the government themselves have thought this one through. You see there is a slight issue.
If this increase was to go through it would mean that the income from a full rate old age state pension would break through a magic number of €12,700 per annum.
This is a magic number because it is the euro equivalent of IR£10,000 but it is also the minimum income requirement for an AMRF.
An AMRF is an Approved Minimum Retirement Fund. When you draw down your pension you have two routes you can take.
- A pension from a life company for the rest of your life. If you die the income (with some exceptions) will most likely die with you. This wasn’t very appealing to most, so in 1999 the government changed things.
- They introduced the AMRF/ARF route. This allows people to take a lump sum of 25% of their fund (200k tax free with a further 300k at 20% tax) with the next €63,500 going into an AMRF and the balance of the fund going into the ARF.
ARFs and AMRFs are simply accounts you can take money from.
You can take what you want out of an ARF anytime but you must take 4% per annum, unless you are loaded and then you must take 5%. What you do take out is subject to income tax.
The difference with an AMRF is you can only take a max of 4% per annum from an AMRF until you are 75. At which point you can take it all out.
If you die, everything in the ARF and AMRF is paid to your estate.
The government introduced the ARF route to provide flexibility to people and encourage people to take out pensions. They introduced the AMRF to protect people from themselves.
You see they want to give you freedom but they are worried you would spend all your money and be broke early in retirement so they said, “spend what you want but keep €63,500 until you are 75”.
People who have a regular guaranteed income in retirement from some other source can skip the AMRF and put all their money after the tax-free cash into the ARF.
The regular guaranteed income can come from things like pensions or social welfare benefits. But guess what, there is a minimum income requirement.
That minimum is €12,700 per annum.
So, if the old age pension is increased by €5 per week anybody who is entitled to it in the future will be able to skip the AMRF but also anybody who already has an AMRF may now be able to unlock that fund.
We could say the government haven’t thought this through. Or maybe we haven’t given them enough credit.
In the past few years they have been relaxing rules around making sure people protect themselves.
For example, the AMRF requirement was recently reduced from €119,800 back down to €63,500.
On top of that at one point, you could only take any growth out of the fund that went over the €63,500 now you can take 4% per annum if you want.
Maybe the government are saying “you got yourself this far we trust you to look after yourself financially from now on.”
Or maybe they realise every penny taken out of an AMRF is subject to income tax….
Or maybe they haven’t copped it yet…..