Couple reviewing their pension and smiling - Arf or Annuity

Should I choose an Arf or Annuity?

ARF or Annuity? This may be one of the most important financial decisions you will ever be asked to make. And only you can make this decision as your own particular set of personal and financial circumstances will determine the right answer. Of course an experiences trusted financial advisor will help you arrive at the right decision for you but their role is limited to education.

Your financial advisor should educate you about the pros and cons of choosing between an ARF or Annuity by taking the time to fully explore all areas of your personal financial lifestyle, health, income requirements and additional resources as well as carefully explaining some of the key differences between an ARF and Annuity.

The months leading up to your retirement are a busy time as you make plans to secure your financial future. One of the most important decisions you will make during this time is what to do with your retirement fund once you retire. You have a number of options.


You will usually be able to take part of your retirement fund as a lump sum; some, or all of this lump sum, may be taken tax-free. Then, provided you meet certain criteria, you can use the remainder of your retirement fund in the following ways:

Buy an annuity – a regular guaranteed income for the rest of your life

Re-invest it in an Approved Retirement Fund (ARF) 

• Take as a taxable cash lump sum subject to PAYE

Any decision you make at this time can have far-reaching implications on the quality of your retirement. It is advisable to seek out impartial advice from an expert, a Financial Broker, who can guide you on the best choice for you based on your personal circumstances, financial goals and your attitude to and capacity for investment risk.

Comparing The Different Options - A Brief Explanation

An Annuity is a contract with a life insurance company whereby they guarantee to pay you a regular pension income for the remainder of your lifetime in return for a fixed sum at outset. The rate is fixed at the beginning with no option to alter once purchased. On death, there will be no income paid to your estate or spouse unless a guaranteed period still applies or a dependant's pension has been purchased.

An ARF is a personal retirement fund where you can keep your money invested after retirement. You can withdraw money from the ARF regularly to give yourself an income (subject to minimum requirements) and, unlike an Annuity, any money remaining in the fund after death can be left to your estate or spouse. Without appropriate planning and management, the fund in your ARF may run out depending on how much you withdraw each year and how your investment funds perform.

The minimum amount you are required to withdraw from an ARF is:

- 4% from the year you turn 61;

- 6% if your combined ARF & Vested PRSAs are valued at more than €2,000,000

- 5% from the year you turn 71;

The key differences between an annuity and an ARF are flexibility and risk.

The key difference between an ARF and Annuity is who carries the Risk

arf or annuity

When you buy an Annuity you buy certainty and the risk is carried by the annuity provider. This is the risk that you will outlive the initial fund and the provider must honour its' guarantees long after it is financially viable for them to do so.

When you invest in an ARF you assume the risk that you will exhaust the fund (know as bottoming out) before you die. If for example, you choose to take a regular income of 6% and the underlying funds only return 1% then it is likely that the fund will be depleted much earlier than anticipated.

Great care must be taken when deciding which option is for you and working with an experienced qualified financial advisor is imperative to avoid making costly mistakes.

Before deciding whether to choose an ARF or Annuity you should consider the following.


Annuity - This offers you a guaranteed income for the whole of your life.

ARF - No guaranteed income for life but you have the flexibility to choose the level of withdrawals you want to make (subject to revenue rules*).


Annuity - You cannot make any changes to your annual income once your annuity is purchased.

ARF - Flexibility to withdraw how much you wish to annually (subject to revenue rules*).

Growth potential

Annuity - None, your annuity income (rate) is fixed on the date of purchase with no potential for further growth. If you choose a fixed rate of escalation then your income payments will increase by that amount each year.

ARF - You might benefit from future growth if your fund is invested in suitable assets, though there is the risk that the value of your fund could also fall.

Risk of fund exhaustion

Annuity - None. You are locked into a fixed annuity rate which is guaranteed to pay out for the remainder of your life.

ARF - Without careful planning and management, the fund in an ARF could be depleted depending on the amount you withdraw each year and how your investments perform.

When death occurs

Annuity - Your income payments stop when you die and there will be no income paid to your estate or spouse unless a guaranteed period still applies or a dependant's pension has purchased at outset.

ARF - Any money left in an ARF after you die may be left to your estate or spouse.

*Minimum of 4%/5% depending on age and 6% when ARF fund greater than €2,000,000.

Life expectancy 

At retirement, you are faced with a choice of how to provide an income for yourself and your life expectancy should be a key consideration for you.

If you choose an annuity and die at a young age, your income stops and your beneficiaries will receive nothing (unless you've added some additional benefits to your annuity).

However, if you live much longer than expected, the income from the annuity continues and you'll see the benefit.

If you choose an ARF and die at a young age, the balance of your fund can pass to your beneficiaries.

If you live much longer than expected, you run the risk of exhausting your fund before you die.

ARF or Annuity summary

Choosing between an ARF or Annuity is never straightforward and it is essential that professional advice is sought beforehand. Remember once you buy an Annuity you cannot change your mind. On the other hand, an unwise income and investment strategy may leave you without an income if you invest in an ARF. The great American firefighter and douser of oil wells Red Adair once summed up the need for professional input nicely.

If you think using a professional is expensive, then try an amateur sometime
- Red Adair (American Fire Fighter)

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