This question relates to the flexible options on retirement first introduced in Finance Act 1999. Prior to that Act, any person taking a pension under a defined contribution (DC) scheme or a Retirement Annuity Contract was required to purchase an annuity with their remaining pension pot after drawing down the appropriate tax-free lump sum. Finance Act 1999 introduced significant changes which gave a considerable degree of control, flexibility and personal choice to certain categories of individuals in relation to the drawing down of benefits from their pension plans. These choices include the options to purchase an annuity, to receive the balance of the pension fund in cash (subject to tax, as appropriate), to invest in an approved retirement fund (ARF) or an Approved Minimum Retirement Fund (AMRF), subject to certain conditions.
Access to these flexible options was extended to all main benefits from retirement benefit schemes (other than Defined Benefit arrangements) by section 19 Finance Act 2011. The changes made in Finance Act 2011 have particular relevance for ordinary members of occupational DC pension schemes in respect of the main benefits from such schemes, as up to the passing of the Act, the only option available to them in respect of those benefits had been the purchase of a retirement annuity after taking the tax-free lump sum. These individuals now have the choices referred to above depending on their particular circumstances. It should be borne in mind, however, that the option to invest in an ARF or AMRF as opposed to purchasing an annuity may not be appropriate for everyone.
Under the regime the options to:
invest in an ARF, or
receive the balance of the pension fund in cash (subject to tax, as appropriate),
are subject to conditions. The conditions include the requirements that the individual be over 75 years of age or, if younger, that the individual has a guaranteed level of pension income (specified income) actually in payment for life at the time the option to effect the ARF or cash option is exercised. Finance Act 2011 increased the guaranteed level of pension income required from the previous fixed amount of €12,700 introduced in 1999, to a variable amount equal to 1.5 times the maximum annual rate of the State Pension (Contributory) bringing the "specified income" limit to €18,000 per annum at present. The amount of a State Pension in payment to an individual in his or her own right (excluding any amount in respect of a dependent) would count towards meeting the specified income test.
The purpose of the specified income limit is to ensure, before an individual has unfettered access to their remaining retirement funds via an ARF or the cash option mentioned above, that they have the security of an adequate guaranteed income throughout their retirement. The change to the specified income limit introduced in Finance Act 2011 was strongly signalled in the National Pensions Framework published in March 2010.
Where the minimum specified income test is not met, and an individual does not wish to purchase an annuity, then an AMRF must be chosen into which a "set aside" amount must be invested from the pension fund equal to 10 times the maximum annual rate of State Pension (Contributory) —€119,800 at present — or the remainder of the pension fund, after taking the tax-free lump sum, if less. The purpose of an AMRF is to ensure a capital or income "safety net" for individuals with pension income below the specified income limit throughout the latter period of their retirement. The funds in an AMRF can be used by the owner at any time to purchase an annuity. On death of the AMRF owner, the AMRF automatically becomes an ARF and any remaining funds may be passed on in a tax efficient way to a surviving spouse and/or children.
As an alternative to going the AMRF route, an annuity can be purchased with the first €119,800 of the pension fund or an annuity can be purchased sufficient as to satisfy the specified income test and the balance placed in an ARF or taken as cash subject to tax. Prior to Finance Act 2011, if the minimum specified income test was not met at the time the option to effect the ARF or cash option was exercised and the individual placed a "set aside" amount in an AMRF, that capital sum was effectively "locked in" and could not be accessed by the individual, other than to purchase an annuity, until he or she reached 75 years of age (at which point the AMRF automatically becomes an ARF) though any income generated by the fund could be drawn down subject to tax. This was the position even if the minimum specified income test was met after retirement. Finance Act 2011 changed this rule so that where the minimum specified income test is met at any time after retirement and before age 75, the AMRF automatically becomes an ARF with full access to the funds.
As a transitional measure, Finance Act 2011 allows the previous lower guaranteed income requirement of €12,700 per annum to continue to apply for a period of 3 years from the date that Act was signed into law (6 February 2011):
for individuals who had retired before that date and who already had an AMRF, and
for individuals who availed of the deferred annuity purchase option, had exercised the ARF (or cash) option within one month of the date of passing of Finance Act 2011 and who in exercising that option had transferred the requisite amount to an AMRF within that one month period.
This means that if such individuals satisfy the guaranteed income requirement of €12,700 within that three-year period their AMRF becomes an ARF. After this three-year period expires, the new higher guaranteed income test will have to be satisfied before the AMRF can become an ARF. The amount of guaranteed income required to meet the test will change in line with any future change in the maximum annual rate of State Pension (Contributory). The Budget and Finance Act 2011 changes sought to ensure that those in pension arrangements to whom the flexible ARF options on retirement have been extended will have choices which best suit their particular circumstances. In making the changes, however, there was also a concern to ensure that the parameters and rules governing the extension are set in a way that avoids an increase in the risk of income poverty in old age.
The deferred annuity purchase option was introduced with effect from 4 December 2008 for members of defined contribution occupational pension schemes and allowed them to defer the purchase of an annuity for an initial period of 2 years, in light of the fact that pension funds had been adversely affected by the falls in equity markets and the more general falls in assets values. The deferral option was operated administratively by the Revenue Commissioners. The period of deferral was subsequently extended to 6 March 2011 i.e. one month beyond the passing into law of the Finance Act 2011.