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Your questions answered: ‘My employer’s benefit scheme is about to expire. What should I do?’

 Your questions answered: 'My employer's benefit scheme is about to expire.  What should I do?'

Martin, Co Limerick

a From a tax relief standpoint, it’s worth joining the new DC scheme as soon as possible and saving as much into it as you can afford. If you are 60 years or older, you can claim tax relief on pension contributions up to 40 percent of your income, as long as you earn less than € 115,000.

While you can also arrange for your own personal pension, it is generally more beneficial to save into an employer’s pension plan as they may also pay contributions on your behalf and costs may be lower than for a personal pension. Your employer can also take out life insurance via his DC pension.

With DC plans, the value of your pension depends on how much you and your employer (if they choose) put into it during your working life and how well that money is invested.

With some DC pension schemes, the more you deposit for your pension, the more your employer will pay. If that’s available, you might want to take full advantage of it. Since you still have five years to go before you retire, you should also think carefully about where your pension fund invests. A financial broker will help you choose the best option for your own circumstances.

“If I invest in an ARF, do I have to pay taxes on annual withdrawals?”

Q My pension fund through my employer’s scheme is expected to be worth $600,000 when I retire next year, when I turn 60. I am considering taking € 150,000 of this tax-free at once and investing the rest in an Recognized Pension Fund (ARF). Do I have to pay taxes on withdrawals from an ARF?

Mairead, Co Wexford

a If you invest any amount in an ARF at retirement and are age 60 or older for a full tax year, you must withdraw at least 4% of it each year. In your case, assuming you invest $450,000 from your pension fund into an ARF, this could work out to about $18,000 per year. Withdrawals from an ARF are treated as income and taxed under the PAYE system. The amount of tax you would have to pay depends on several factors, including what other sources of income you have and whether you and your spouse are taxed for income tax purposes, if you have any.

Under the current rules of the Tax and Customs Administration, you can take up to € 200,000 tax-free pension for life. You must pay tax on any amount withdrawn above that limit, and there is a flat rate of 20%. for any amount between €200,000 and €500,000. Whether you can withdraw all of your $150,000 as a tax-free amount depends on whether you have previously withdrawn other lump sums that would now take you above the $200,000 lifetime limit.

‘I have an option to switch to a Personal Retirement Bond once my defined benefit plan ends. Do I have to buy an annuity with my PRB or can I invest in a Recognized Pension Fund?’

Q My DB pension plan is about to expire and I have been given the option to transfer the money to a Personal Retirement Bond (PRB).

If I do this, will I have to buy an annuity from my PRB in retirement? I heard the ARF option is not available with PRBs?

Mary, Co Kildare

a You can access an ARF or an annuity upon retirement if you transfer the money from your existing pension to the PRB. Prior to June 22, 2016, the ARF option was not available for value transfers from a DB plan – with the exception of Voluntary Contributions – but that is no longer the case.

Weigh the pros and cons of annuities and ARFs before deciding which option to use. A major advantage of ARFs is that the money left in your ARF after your death can be left to your next of kin. With an annuity, the payment will stop when you die, unless a minimum payment term or a spousal provision has been made from the start. Since annuities provide guaranteed income for life, they are considered by some to be the safer option.

Transferring your pension to a PRB is just one option. You can also transfer your benefit to a new company pension scheme – such as a defined contribution scheme set up by your employer – or transfer your pension to a Personal Retirement Savings Account. You should compare the PRB to the other options available to you; pay attention to the costs, the choice of investment and the benefits available.

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