Q: I will be turning 65 in six months' time and I plan to retire. By then I will have a pension pot of about €450,000. After I take the tax-free cash, the pension trustees in my work have asked me to consider whether I would like to go down the ARF (approved retirement fund) or annuity routes. I don't know the difference between them and I feel a bit foolish admitting this to my work colleagues. Can you explain?
A: There is no need to feel foolish. Most people do not know the difference between the two.
The chief executive of the Irish Association of the Pension Funds Jerry Moriarty advises that you speak to either the pension trustees or a financial adviser to get a more in-depth understanding of your options. But here are some basic explanations.
With an annuity, when you reach retirement you will receive a guaranteed income for the rest of your life in exchange for the fund. You will have choices around whether the income increases in retirement or an income can be paid to a dependant when you die.
These will reduce the amount payable to you, but can be valuable in dealing with inflation. As annuities are linked to interest rates, many view them as poor value at present.
However, they do give you certainty of income for the rest of your life, Mr Moriarty says.
With an Approved Retirement Fund (ARF), you transfer your fund to a policy and it remains invested.
You draw down money from it, and hope that the growth in the fund offsets much of what you are drawing down as an income.
However, in this case, nothing is guaranteed. But whatever is left in your ARF will become part of your estate when you die.
You also have the risk that your ARF runs out before you die.
One thing to consider is that if you go with an ARF, you can switch to an annuity, but you can't change your mind if you go for the annuity now.
This is a big decision so it is imperative that you get independent advice, Mr Moriarty added.
Read the original article here.