Retirement Benefit Options and Income Drawdown
At retirement
Members of DC arrangements typically choose between an annuity, an Approved Retirement Fund (ARF), an Approved Minimum Retirement Fund (AMRF), or a taxable lump sum with the balance invested. DB members usually take a scheme pension with an optional tax-free lump sum and possibly a spouse's pension.
Annuity versus ARF
An annuity provides a guaranteed income for life, transferring longevity and investment risk to the insurer. An ARF keeps the fund invested, with investment risk and longevity risk retained by the member, and imputed distribution rules applying from the relevant age. An AMRF applies where the fund is below the threshold and imposes a minimum income requirement before access to capital.
Tax treatment
The retirement lump sum is tax-free up to the statutory limit, with excess taxed. Imputed distributions are taxed as income. Approved Retirement Funds must satisfy minimum withdrawal rules and succession rules on death.
Traps
- Assuming the ARF threshold is the same as the AMRF threshold - they are distinct.
- Confusing the imputed distribution with a voluntary withdrawal.
- Forgetting that annuity rates reflect interest rates and mortality.
- Treating the tax-free lump sum as unlimited.
Rule of thumb
If the client prioritises certainty of income, an annuity is the default; if they prioritise flexibility and estate value, an ARF is the default, subject to the AMRF threshold and imputed distribution rules.