Patrick O'Donovan (Limerick, Fine Gael)
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Question 78: To ask the Minister for Finance the options that are available to a retired person with an approved minimum retirement fund who wished to transfer it to an approved retirement fund; and if he will make a statement on the matter. [16024/12]

Michael Noonan (Limerick City, Fine Gael)
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Approved Minimum Retirement Funds (AMRFs) are part of the Approved Retirement Fund (ARF) regime introduced in 1999. The ARF regime gives 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), or to invest in an ARF or an 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) in the 2011 budget and in the Finance Act 2011. The changes made in 2011 have particular relevance for ordinary members of occupational defined contribution pension schemes in respect of the main benefits from such schemes, as up to the passing of Finance Act 2011, 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 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. The 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 purpose of the specified income limit is to ensure, before an individual has unfettered access to their remaining retirement funds via an ARF for example, 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, which was 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. Prior to the introduction of the Finance Act 2011, the "set aside" amount was fixed at the first €63,500 of the pension fund or the remainder of the fund after the tax-free lump sum, if less than that amount. 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 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.

Prior to the introduction of the 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), although 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. The Finance Act 2011 changed this rule so that where the minimum specified income test is met at any time after retirement and before the age of 75, the AMRF automatically becomes an ARF with full access to the funds.

As a transitional measure, the Finance Act 2011 allows the previous lower guaranteed income requirement of €12,700 per annum to continue to apply for a period of three 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, as well as for individuals who availed of the deferred annuity purchase option, had exercised the ARF (or cash) option within a month of the date of passing of the 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).

Where individuals do not meet the new specified income test and choose not to take the AMRF option, they can of course purchase an annuity. Depending on the particular scheme rules, the annuity can be designed to include features that best suit the individual's particular needs, in terms of how long the annuity payments may be guaranteed after death, whether they revert to a dependant after death and whether they remain at the same level or increase during payment. The changes that were made in the 2011 budget and the Finance Act 2011 seek to ensure 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, there was 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 two 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 asset values. The deferral option was operated administratively by the Revenue Commissioners. The period of deferral was subsequently extended to 6 March 2011 - one month beyond the passing into law of the Finance Act 2011.