Hopefully this is the episode that will give you some insights on the mystery that is ARFs, or do I mean ARKs!?..........
Apparently Noah's Ark was made of 'cypress wood' and was in the region of 500 feet long. It was said to have been quite a boat, large enough to hold 125,000 sheep if those were his orders! Anyone familiar with the story will know however that he was instructed to bring on only 1 mated pair of every animal that walked along the ground, and his own family. Poor Noah was given only 7 days in which to build this behemoth, and to ultimately save the animal kingdom, before the great flood arrived, no pressure!
If we were to relate this to our own financial lives it's fair to say that, unless you yourself are on the cusp of retiring, you have more than 7 days to build your own ark and save yourself from the flood when you stop working!! Let's discover a little more about Approved Retirement Funds (ARFs), and how they might be your ark when your own great retirement flood comes! There is no doubt it can be a really useful tool in your retirement and pension planning here in Ireland. Indeed anyone I have met with Pensions here in Meath has been a big fan of the ARF!
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What is an ARF (Approved Retirement Fund)?
Other than sounding similar to an ARK, it too can be a real saviour when you do stop working and your income from employer/business stops! Ultimately an Approved Retirement Fund is a vehicle in which you can park some or all of your pension fund into when you decide to retire.
How Do I Get Into An ARF?
We outlined in blog 15 & blog 16 exactly how you can get access to an Approved Retirement Fund when you decide to retire. Broadly speaking if you are in a pension which you have set up and contribute to yourself (Personal Pension or PRSA) or are part of a pension through your employer (Occupational Pension Scheme) then you typically will have access to a glorious and lifesaving ARF. Check out blog 15 & 16 for the low-down!
How Much Do I Need To Get Into An ARF?
Providing you meet the basic income requirement as outlined in Blog 15&16 you can invest funds in an ARF. Imagine you are 35 years of age, with no pension put in place up to this point, you have always felt that pensions were for old people, they are a crock, the charges are outrageous or that you will never retire! Whatever the reason you haven't done one previously. Having listened to the Informed Decisions Financial Planning Podcast you decide that the time is nigh, you don't want to be left out in the flood!
For illustration if you were to manage to invest ?400 per month into a pension plan for yourself. We will assume you increase this by 3% per year in line with headline inflation rate. So in year 1 you pay ?400 per month, in year 2 you will pay ?412 per month and so on and so forth!
If you were to achieve a net return of 7% per year average growth (you will need to find a pension with low charges and go heavy on equities- staying invested when things get rocky- which they will- see here!).
If you were to do that, and to achieve that long term plan, you would have ?796,681.27 of a fund when you get to 68! The bones of ?800k!
Under current rules you could take ?200,000 of that tax free for yourself and go nuts! You would have an option to put essentially the remaining 600k into an ARF and access it as you need it. How bad!?
You could then take funds from this 600k as you wished! Imagine you took the minimum 4% of this per year, equating to ?24,000 per year, which in addition to the State pension would bring your total income to the ?36,000 territory. This would mean you pay essentially minuscule tax on your total income....all totally above board and legitimately done.....so if anyone is telling you that pensions are a crock just tell them this!
Please check out our full blog here if you would like the show notes!
Thanks for listening...You're a Legend!
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