Clare Daly
Question:188. Deputy Clare Daly asked the Minister for Finance his plans to reverse the 4% cap on withdrawal from approved medium retirement funds in circumstances such as a case (details supplied). [29841/15]
View answerThursday, 16 July 2015
Questions (188)
Written answers
Finance Act 2014 introduced changes to allow owners of approved minimum retirement funds (AMRFs) to draw down up to 4% of the assets of such funds on one occasion in each year instead of the facility to draw-down the accrued income and gains of such funds, as had applied prior to the changes.
I should explain by way of background, that under the flexible options at retirement arrangements (the so-called Approved Retirement Fund or "ARF option"), where an individual in a Defined Contribution pension savings arrangement is under age 75 at the time of exercising the option and does not meet the guaranteed pension income requirement of €12,700 per annum, that individual must place a maximum "set aside" amount of €63,500 (or the remainder of the pension funds if less than €63,500 after taking the retirement lump sum) in an AMRF or purchase an annuity with those funds.
Any amount of remaining pension funds in excess of €63,500 can be invested in an ARF with access to those funds at the owner's discretion, subject to tax at the marginal rate.
The purpose of the AMRF is to ensure that an individual without the minimum guaranteed pension income for life has a pension "nest-egg" to provide for the latter years of his/her retirement. Up to Finance Act 2014, the capital invested in an AMRF could not be accessed, except to purchase an annuity, until the AMRF owner reached age 75 (or meets the guaranteed pension income requirement before then) at which point the AMRF becomes an ARF with unrestricted access to the funds, subject to taxation. While the capital sum in an AMRF could not be accessed, as set out, any income, profits or gains accrued from the investment of the capital could, up to now, be withdrawn by the AMRF owner, subject to tax at the marginal rate.
I decided to change the arrangements for AMRFs so as to allow AMRF owners voluntary, tax-liable access to a maximum of 4% of their AMRF assets each year up to the point at which the AMRF becomes an ARF. This change provides AMRF owners with access to a definitive and certain level of income from their AMRF rather than the uncertain level of income which access to the accrued income, profits and gains in the AMRF provided.
Under the previous access arrangements for AMRFs, the extent of any income, profit or gains would depend on the performance of the investment options taken and could, therefore, be highly volatile with the possibility of little or no gains accruing in certain years. In addition, the scale of the capital allowed for in an AMRF, at €63,500, would not always permit for investment returns of any significant scale to be made using a prudent investment policy. In this context, it would be unusual for the capital in an AMRF to both make the scale of the annual gains set out in the details supplied with the question while also paying out those gains each year.
The change allowing access to a specified percentage of the capital in an AMRF is primarily aimed at those individuals whose AMRF constitutes a significant part of their retirement funds and who, while not wishing to purchase a pension annuity with those funds, may require access to a portion of these funds to provide a more certain form of supplementary pension income prior to reaching age 75. This facility also ensures that an individual will have some remaining funds in the AMRF at age 75 to provide for their remaining years, assuming the individual has not purchased a pension annuity in the meantime.
Individuals whose AMRF represents a less significant part of their retirement funds and whose circumstances would allow for greater investment risk and, therefore, potentially greater investment returns will be limited to the 4% level of asset draw down. However, this draw down will also be available to them for periods when their AMRF investments make losses or returns of less than 4% of the value of their AMRF assets and where, under the previous arrangement, they would not have been able to make a draw down or a drawdown of a lesser value than will now be permitted.
Based on the details supplied, the AMRF owner would also have the option of using part of the AMRF funds to purchase a small pension annuity equal to the difference between the State pension in payment to her and the guaranteed pension income requirement of €12,700 per annum, thereby allowing the conversion of the remaining AMRF funds into an ARF, giving full access to the funds, subject to taxation.
Finally, I consider that the change to the access arrangements for AMRFs will be to the benefit of AMRF owners, generally, and I have no plans to reverse it at this time. I will, however, bear in mind the circumstances of this case in considering the detail of the ARF option which, in common with other matters, will be reviewed as part of the preparations for the forthcoming Budget and Finance Bill.