The ARF charge most families miss

Máire is 68 and widowed. Her estate is the family home in Dublin, worth €650,000, and €150,000 in savings — and a third asset. Máire spent forty years in a pension, and at retirement she moved it into an Approved Retirement Fund. Her ARF is worth €300,000.

The house and the savings follow the inheritance tax rules most people half-know. Capital acquisitions tax is charged at 33% on whatever a beneficiary receives above their lifetime threshold, and a child's Group A threshold for everything taken from their parents is currently €400,000. One point before any example: the thresholds are lifetime figures, aggregating all taxable gifts and inheritances in the same group since 5 December 1991 — so everything that follows assumes Máire's children have their full thresholds available. On that basis, if Máire's €800,000 of house and savings splits between two children, each takes €400,000, exactly within threshold, and no tax arises. If it all passes to one child — call her Deirdre — then €400,000 is taxable at 33%, and the bill is €132,000.

The ARF follows none of these rules. It follows its own — and they are the part of Irish inheritance planning that families most consistently get wrong, in both directions.

An ARF dies differently

An ARF is a post-retirement fund, not a life policy. It belongs to the holder personally, so on death it forms part of the estate and is normally distributed in accordance with the will — though the ARF contract and the provider's own processes govern the mechanics, which is one reason the paperwork deserves the attention it gets at the end of this piece. What the family actually receives is a distribution from the fund, with tax deducted by the Qualifying Fund Manager before anyone sees the money. What tax, and how much, depends on who receives it:

• A surviving spouse or civil partner can take the fund into an ARF in their own name with no tax arising at the point of transfer. They pay income tax on their own withdrawals thereafter, and the whole question simply recurs on the second death. This, in fact, is how Máire came to hold €300,000 — her late husband's ARF rolled to her untouched.
• A child under 21 pays no income tax on the distribution; it is treated as an ordinary inheritance and CAT applies against the child's threshold.
• A child aged 21 or over pays income tax at a flat 30%, deducted at source by the fund manager — and no CAT at all. The charge is ring-fenced as a final liability: no reliefs, credits or deductions can be set against it, and it does not touch the child's €400,000 threshold. It sits entirely outside the CAT computation.
• Anyone else — a niece, a sibling, a friend — generally gets the worst of both worlds: the distribution is treated as income of the deceased in the year of death, taxable at the rates applying to the deceased's final-year position, and CAT can then arise on what is left.

The line that matters for most families is the third one. Adult children pay 30%, off the top, threshold or no threshold.

Máire's numbers

Run both versions of Máire's family, with the ARF now included.

Two children. On the house and savings, this family pays nothing: €400,000 each, exactly within two Group A thresholds. The ARF changes that. Each child receives €150,000 of ARF proceeds, and the fund manager deducts 30% — €45,000 each — before a cent is paid out. The "tax-free" estate pays €90,000. The CAT position is genuinely unchanged: the house and savings still pass within the thresholds, and the ARF money never counts against them. But zero was never the real number. The family that believes it owes nothing because "we're under the threshold" is exactly the family this charge catches.

One child. Deirdre's CAT bill on the house and savings is €132,000, as computed above. The ARF is not added to that computation — for an adult child, it is not an inheritance for CAT purposes at all. Instead she pays the flat charge: 30% of €300,000, €90,000, deducted at source. Her true total is €222,000 across €1.1 million of assets.

Now watch the two ways families get this wrong, because both are expensive.

Error one: counting the ARF into the CAT sum. A family that lumps everything together computes CAT on €1.1 million: €1,100,000 less the €400,000 threshold is €700,000, at 33% — €231,000 — and buys a Section 72 policy for that amount. But the real CAT liability is €132,000. A Section 72 policy — the whole-of-life instrument whose proceeds are exempt from CAT when used to pay inheritance tax — is exempt only to the extent the proceeds are applied to that tax. Surplus cover falls outside the exemption and is treated as an inheritance in the beneficiary's hands, taxed according to their threshold position — and Deirdre's threshold is already gone. Over-insuring by €99,000 doesn't buy a margin of safety. It risks buying a new tax bill.

Error two: assuming the threshold covers the ARF. A family that knows the thresholds — and is proud of knowing them — reasons that Deirdre's €400,000 allowance has the ARF well covered, and budgets accordingly. The threshold never applied. The 30% is not inheritance tax, and no relief, exemption or threshold in the CAT code touches it.

The correct answer is neither €231,000 nor €132,000. It is €132,000 of CAT plus €90,000 of income tax, computed separately, because they are different taxes on different assets under different Acts.

And if the ARF goes elsewhere

Run the same €300,000 through the other doors, briefly.

To a 19-year-old grandchild, who ordinarily falls into Group B with its €40,000 threshold (certain family circumstances, such as where the grandchild's parent has died, can change the group — the guide covers the exceptions): no income tax, and CAT of €85,800. Almost identical to the adult child's €90,000, by coincidence rather than design.

To a nephew: the distribution is taxed as the deceased's final-year income — up to €120,000 if the top rate applied to the full amount — and then CAT arises on the net €180,000 against a €40,000 threshold, a further €46,200. On those assumptions the combined burden reaches €166,200, an effective rate above 55%. Routing an ARF to anyone outside the spouse-and-children circle rarely makes tax sense, and it should never happen by accident.

The charge cuts both ways

It is worth being fair to the 30%, because it is not purely a trap.

It is flat, and it is final. For an ARF passing to children whose thresholds are already exhausted — Deirdre's position — 30% is marginally kinder than the 33% the money would have suffered as ordinary inheritance. And because ARF proceeds consume no threshold, the sequencing of an estate matters: an ARF routed to adult children leaves the full €400,000 allowances intact for the house. In larger estates than Máire's, that ordering is worth real money.

One way to understand the charge is as deferred income tax finally collected. Pension money went in tax-relieved and was meant to come out as taxed income across a retirement; the 30% approximates, on death, what living long enough would have collected anyway. Our working paper on longevity insurance prices what "living long enough" now means — on the mortality basis behind that paper, a healthy 65-year-old can expect a further 24 years — and the deemed distribution regime under section 790D is already forcing the drawdown, at 4% a year of the fund from the year the holder turns 61, 5% from 71, and 6% where combined ARF and vested PRSA values exceed €2 million. The balance this piece is about is whatever that long, taxed drawdown leaves behind.

What Máire can actually do

Four things, in rising order of effort.

Size the cover correctly. If Máire takes out Section 72 cover, the CAT computation excludes the ARF and the policy is sized against the true €132,000 — and revisited as the house, the savings and the thresholds move.

Count the ARF at its net value. Here the ARF charge differs from CAT in a way that works in the family's favour: it is deducted at source by the fund manager, who is liable to remit it. Nobody has to find €90,000 by a deadline — the fund pays its own tax and the family receives the balance. But that balance is the number that matters. A will that "equalises" by leaving the €300,000 ARF to one adult child and €300,000 of other assets to another has not equalised anything: one child receives €210,000 net and the other something quite different, depending on their threshold position. Estates should be divided on after-tax values, and almost none are.

Spend it, or move it, while living. Every euro Máire draws down during her lifetime is taxed at her own marginal rate — for a retiree on a modest income, plausibly below 30% — and every euro she then gifts within the small gift exemption, €3,000 a year from any one giver to any one recipient, leaves the estate entirely without touching any threshold. The deemed distribution rules are already forcing the drawdown; the only question is whether the money is deployed deliberately or accumulates in a deposit account waiting to be taxed twice as hard.

Get the paperwork right. The destination of an ARF on death is set by the will read together with the ARF contract and the provider's requirements — not by assumption, and not by a form filled in years ago and forgotten. A will that leaves "everything equally" to a mix of children and others can send the ARF through the worst tax door available. Naming the adult children to the ARF specifically, balancing other assets elsewhere on net-of-tax values, and checking the provider documentation against the will is the cheapest planning in this entire article — and it is planning that needs a solicitor and adviser working from the same page.

Where to start

Our specialist guide, *Inheritance Planning with Life Insurance in Ireland*, gives the ARF charge a full chapter — the computation, the interaction with Section 72 cover, the sequencing of ARF against threshold assets, and worked examples across single-child, multi-child and blended families. It reflects Finance Act 2025 and is free to download.

If you already know your numbers and want to know what the cover costs, we quote the Irish market whole-of-market and every case is reviewed by a QFA. No obligation, no charge for the review.