Navigating the Pensions Maze

The pensions Industry is very fond of Acronyms, from PRSA’s to PRB’s and AVC’s to ETV’s, it’s no wonder most people would rather bury their head in the sand than discuss their Retirement Planning. The Pensions Authority who are the state appointed regulator in this area are currently involved in a reform process which is intended to simplify pensions, good luck with that!!!

Underneath it all, Pensions are quite a simple concept to understand but it is the “Industry” which has created a lot of the confusion. Familiarising yourself with some of the most common keywords should make it that little bit easier when it comes to understanding your pension entitlements and Retirement planning in general. With that in mind, below I have compiled a list of the most commonly used Acronyms in the Pension

Personal retirement savings account (PRSA): This is a long-term personal retirement account introduced by the Pensions Act 2002. It is designed to enable people, especially those with no pension provision, to save for retirement in a flexible manner. A PRSA is a contract between an individual and a PRSA provider in the form of an investment account. Subject to age, employment status and income based limits, tax relief will be given for contributions to a PRSA.

DC Pension (Defined contribution pension plan): With a defined contribution pension plan, the pension income payable on retirement depends on the value of the pension fund at that particular time. The value of this type of pension will fluctuate with movements in Financial Markets.

DB Pension (Defined benefit pension plan): This is a type of pension plan whereby the pension income paid at retirement is guaranteed by your employer, your pension Income is generally related to your final salary and your number of years of service spent with the employer. This type of Pension is very expensive for an employer to maintain, most private sector DB schemes have closed in recent years, it’s now only found in the Public Sector.

PRB (Personal Retirement Bond, also known as a Buy-out bond): If you leave or move employment, you can transfer the value of your old employer pension to an individual fund in your own name‚ where your money continues grows tax free‚ until retirement. This fund can usually invest in a mix of assets. It may also be possible to transfer this benefit into another pension structure.

AVC (Additional Voluntary Contribution): An individual who is a member of a company pension scheme can also make personal contributions to a separate pension plan called an AVC plan. AVCs can help to increase the value of a pension fund or can be used to contribute to a tax-free lump sum at retirement. If you are earning an income, you can claim tax relief on AVC’s up to certain limits.

ARF (Approved Retirement Fund): This is a post-retirement investment fund. It is an alternative to buying an annuity. It is a personal tax-free retirement fund in which the holder can keep their pension invested as a lump sum after retirement. The holder can withdraw income (which is subject to income tax) from this as and when they wish. A minimum of 4% of the value of the ARF has to be drawn down every year by the holder, this is known as a deemed distribution.

AMRF (Approved Minimum Retirement Fund): This is similar in nature to an ARF (above), a sum of €63,500 must be set aside and invested in AMRF if you do not have a regular Pension Income from any source of at least €12,700 pa, the AMRF cannot be accessed until age 75 (it can be accessed/party accessed prior to age 75 in certain circumstances) at which point the AMRF becomes an ARF. Until then, the holder can only access the growth in the value of the fund over this €63,500 figure

Annuity: An annuity is a contract with a life assurance company through which the life company will pay the holder a guaranteed, regular income (a pension in most cases) for the rest of their life in return for the holder paying them a lump sum at the outset. The amount of pension income or annuity that the holder receives will depend on the size of the lump sum, the annuity rates available at the time, age, gender and the state of health of the individual at the time of purchasing the annuity. With interest rates currently at their lowest levels in decades this makes Annuities a very unattractive option at the moment.

Enhanced Annuity: These are relatively new to the Irish Market. An enhanced annuity is similar to a standard annuity, except that it takes into account your health status and lifestyle health risks (e.g. smoking) in determining the level of regular income payable to you. With an enhanced annuity you may be entitled to a higher regular income than you would under a standard annuity.

Still confused? Hopefully this article will help you understand your next Pension statement when it arrives in the post. If you need further clarification on any of these definitions please don’t hesitate to contact us.

Barry Kerr BBS QFA CFP® is the owner of Wealthwise Financial Planning, Bridge St, Carrick on Shannon, www.wealthwise.ie. Barry Kerr T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.