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If you are approaching retirement and have a large pension fund built up, one of the many options your financial adviser should be talking to you about is ‘Segmenting a PRSA’. Simply put, this allows you to divide your pension pot into a number of smaller pots and retire each pot as needed. There are a number of benefits to taking this approach and these are as follows:


  1. You only take the amount of Tax Free Cash that you need at retirement, rather than taking the whole entitlement in one go. This means that you don’t have excess cash lying around. Remember, all growth within a pension fund is tax free but, as soon as you take cash out of your pension and reinvest, any growth could be liable to 41% DIRT or Exit Tax.
  2. When you take your tax free cash at retirement the remainder of your fund must be transferred to an ARF* which is subject to a taxable 4% withdrawal every year from the year you turn 61. Even if you don’t take this withdrawal, Revenue will deduct tax from your ARF as if you have taken a 4% withdrawal. However, by leaving the bulk of your fund in a PRSA and only taking the tax free cash that you need, your PRSA fund will not be subject to this automatic withdrawal.
  3. Finally on death, if you are invested in an ARF, the fund can transfer to your spouse tax free but the withdrawals are subject to tax. Alternatively, the ARF can transfer to your children. If they are over 21, it is taxed at a special rate of 30%. However, any funds you have invested in a PRSA transfer directly to your estate. Your spouse can receive this fund 100% tax free and so can your children, subject to not breaching the necessary inheritance tax threshold.


So how does it work?


Let’s look at an example. John is 65 and has just reached his Normal Retirement Age. He is married to Mary who is also 65 and currently receiving a pension of €30,000 per annum. John is a company director and plans to continue working in his business. His pension pot is €800,000. This means he could take up to €200,000 tax free and transfer the rest of the fund to an ARF.


John has told his financial adviser that he doesn’t need to access his entire fund as he and Mary have plenty of income for the next couple of years. He has, however, said he would like to access €25,000 so he and Mary can add an extension to the house but he doesn’t need any other cash at present. His other main priority is to save as much of his retirement fund so it can be passed to his 4 grown-up children when he and Mary have passed away.


John’s financial adviser has told him that he could transfer his pension pot to a PRSA and segment that PRSA into 8 separate funds of €100,000. He can now retire one PRSA and he will be entitled to 25% of €100,000 i.e. the €25,000 he said he needed. The remainder of this fund must now go to an ARF* or purchase an annuity. However, the remaining €700,000 remains in a PRSA where it will grow tax free, is not subject to any automatic taxable withdrawals or payment (which the ARF and Annuity are) and on death the fund can transfer tax free to his estate.


So what type of people would most likely be in need of this type of advice? At Metis Ireland we have found that this approach to taking retirement benefits is most suitable for individuals who:


  • Have a large pension fund at retirement
  • Have post-retirement earnings from other employments, pensions or rental income etc.
  • Have children that they would like to inherit the money
  • Don’t mind taking some investment risk post retirement


Sound complicated? It doesn’t need to be. If you are approaching retirement, make sure you ask your adviser about segmenting a PRSA and if it would be suitable for you. Your adviser should be asking you questions like how much tax free cash do you need now? Do you need a regular monthly income in retirement? What level of risk are you willing to take with your post-retirement fund? Do you have children that you would like to inherit your pension fund? If your adviser isn’t asking you questions like this, you really need to wonder how good their advice can be, particularly if they’re unaware of this information.


If you are approaching retirement and want to discuss your options call Metis Ireland today to arrange an appointment with one of our experienced Directors.


Cian Callaghan
Financial Planner


*Subject to meeting AMRF Requirements


Metis Ireland Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland. All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.