How do I work out Revenue taxation of my retirement ARF when its value changes all the time?

I retired last year at the age of 60 and started drawing an income this year from my ARF. I believe that at the age of 61 Revenue requires that I withdraw a minimum of 4 per cent. I have seen in some places that 30th November is the date to calculate the minimum imputed distribution. (It’s not clear if this is the value on 30th Nov in the current year or the preceding year.)

I would like to understand this calculation as I am taking a fixed value in income each month, but the total value of the fund fluctuates daily. So I would like to understand how I can ensure that for the total tax year I meet the 4 per cent minimum requirement.

PK

ARFs (Approved Retirement Funds) are an increasingly popular option for people looking at options for the pension fund they have built up over a working life. They allow people to keep their fund invested even after retirement.

In bygone days when most pensions were defined benefit schemes, this wasn’t important. Your employer guaranteed to pay you a set sum in retirement based on your years of service and your final salary.

Big shortfalls in occupational pension funds against expected liabilities meant employers moved rapidly away from such guarantees which became promises to pay “where possible”. Inevitably, over a fairly short time, employers sought to shift pension risk further from themselves to their employees and we moved to defined contribution model where a worker’s retirement income is determined by the amount invested by the employee and the employer and the investment performance of those sums.

Defined benefit schemes do remain in public service and in a fairly rapidly diminishing scattering of private sector companies. But, these days, for most people all the risk on retirement income rests with the worker, none with the employer.

When they retire, those workers are entitled to draw down a tax free lump sum and then to invest some or all of the pension fund balance either in an ARF or in an annuity – an insurance product which guarantees to pay a certain sum each year for the rets of your life.

You can inflation proof annuities and provide for a pension for a spouse who might survive you but these products have, for many years, been poor value, That’s why ARFs have become increasingly popular.

As you say, there are rules around how you will be taxed on your ARF, imposed by Revenue as, yet again, a small number of people tried to game the system in a manner that Revenue considered to be calculated tax avoidance.

Imputed distribution

If your pension fund is worth more than €2 million, Revenue will tax you on the basis that you have withdrawn 6 per cent of your fund each year. That’s not an issue for most people as very few funds will be anywhere close to €2 million.

For the rest of us, you will be taxed on the presumption that you have drawn down 4 per cent of your fund each year while in your sixties, rising to 5 per cent once you turn 70.

This is called “imputed distribution”. In your case, Revenue is essentially saying that even if other sources of income mean you only need to draw down, say, 2 per cent of your fund, it will apply tax on the basis of a 4 per cent drawdown.

In that scenario, clearly, it makes sense to draw down and get the use of that 4 per cent. Who wants to pay income tax and USC on money they have not even enjoyed the use of?

And that brings us to this November date. To assess what this 4 per cent (or 5 per cent depending on age) looks like, Revenue requires a fund valuation on November 30th each year. That sets the mark against which tax will be assessed.

On instinct, it makes sense that you would be looking at November 30th the previous year, not least because November of the current year is late in the tax year to have to adjust your spending.

However, Stephen Rice, propositions lead at Aviva Life & Pensions Ireland, assures me this is not the case.

“The relevant valuation date is November 30th in the current tax year,” he tells me.

“Assuming the ARF holder was aged 60 or over for the whole of 2026, was not aged 70 or over for the whole year, and their combined ARF and other relevant retirement funds did not exceed €2 million, the applicable amount [of imputed drawdown] would be 4 per cent of the fund value at November 30th, 2026.”

Given we are now in November, this means the valuation date is looming.

Rice gives the example of a pension fund valued at the end of this month as being worth €100,000. Revenue will assume that at least €4,000 has been drawn down this year by the ARF holder.

If you had left the ARF untouched all year, that means you would need to draw down €4,000 in December to match the “imputed distribution” figure. But, like most people, you have been drawing down a fixed sum each month this year from this fund so you will likely be close to this figure anyhow.

Fund values can change daily, as you point out. To take just one very basic measure, as of the end of last week, the broad-based S&P500 index in the US was up 7.5 per cent so far this year. A couple of days earlier, the year-to-date gain was 12 per cent.

The November 30th valuation date allows you adjust your drawdown in December to ensure that you meet the imputed distribution figure.

If, by year end, you have drawn down more than 4 per cent of the fund, you will be taxed on what you have drawn down rather than the 4 per cent figure.

For most retirees, the trickiest feature of the ARF is that it makes them responsible alongside their fund manager and any adviser for ensuring that the fund delivers sufficient income to provide reasonable income in retirement.

As the €176 billion in Irish deposits indicates, the vast majority of Irish people choose to have nothing to do with personal investment, so suddenly making such decisions in retirement – or even having the basic financial literacy to consider them – is a challenge in a world where all the risk rests with the individual.

On a straight line basis and assuming no change in fund value, an ARF should last 21 years before being exhausted for someone who retires at 66 and draws down the minimum required.

However, investment is never that simple. Returns fluctuate up and down, leaving you with the risk that you could find your fund has been exhausted before you die.

And, regardless of investment performance, there is always the impact of fund charges to consider. You would be surprised at how these can impact your fund over time.

The whole point of an ARF is that your funds can continue to grow in retirement through investment gains – rather than being set against a moment in time with an annuity – but that does require the ARF holder to keep an eye on the performance of their fund and, if necessary, consult their fund manager or adviser about making changes if required.

Having said that, volumes of investment history confirm that regular chopping and changing of investment strategy is rarely to your advantage. Always remember that investment is a longer-term game, even in an ARF where the risk level for the vast majority of us will be relatively low.

In funding retirement, hopefully your fund is more substantial than the €100,000 in Aviva’s example but it let you extrapolate what imputed distribution means for you this year and going forward.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice.