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Can I wait until 65 to decide on pension?

Q I’m 57 and in a defined contribution pension scheme through work. Some of my colleagues are already talking about Approved Retirement Funds (ARFs) and annuities. Do I need to plan my retirement decisions now or wait until I’m 65? Imelda, Dun Laoghaire, Co Dublin

I appreciate retirement is a little bit away but ideally I’d advise to decide now whether you will choose an annuity or an ARF when you hit 65, as this decision should influence your investment strategy between now and then. To help with your decision, I have set out the differences between the two and why one might be best suited to you over the other.

An annuity is a contract which will pay you a guaranteed, regular pension income for life, whereas an ARF is a retirement investment fund which allows you to keep your money invested as a lump sum after retirement, which you can then manage and withdraw from as you see fit.

There are both pros and cons to each option and the suitability of each will depend on your personal situation. The plus side with an annuity is that it will provide you with a regular income stream. The down side is that the annuity rate is fixed the day you buy the annuity – so if annuity rates increase after your buy your annuity, you won’t get the benefit of the higher rate. Annuity rates are driven by interest rates and you pay a lot more for annuities when interest rates are low.

The ARF option is more flexible in that your monies will be invested and can be ‘drawn down’ as and when needed. However, because this is no longer treated like a pension, it will be subject to tax, with the Government requiring you to draw down at least 5pc of the fund on an annual basis. You also have to ensure it will last you for your lifetime.

Experience would suggest that people put off making the choice until they have to. However, it is probably better to give this decision some consideration in advance of you hitting retirement age. That way, you can plan for one over the other as you face into the final years of pension contributions – this decision will dictate your investment strategy until it matures.

For example, if you favour the ARF option, you will probably start withdrawing relatively small amounts from the fund in the years following retirement – so you can afford to treat the ARF as a 20-year (or more) investment.

However, if you lean towards the guaranteed annuity, you will effectively withdraw 100pc of your fund at 65, so you’ll need to take a much more conservative approach to investment risk over the final years of pension contribution – which may slow the growth of the fund.

Your first port of call in this instance should be to get in touch with the trustees of your scheme and see what information or support they can give you. You may also want to engage the expertise of an experienced independent financial adviser. Planning for the period in your life in which you will no longer work and so will no longer have a regular wage is crucial if you want to enjoy this next phase of your life.
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