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04 Jul 2022

Making Cents: Your money questions answered

Making Cents: Your money questions answered

There is no such thing as a stupid question when it comes to personal finance

THIS week I’m going to devote my column to sharing with you a sample of questions I received from readers over the past couple of weeks and the answers I gave to each.


Question
Liam, I’ve been offered a transfer value of €111,540 in lieu of a defined benefit pension which would pay me €5,891 at 65. I’m currently 51 and not sure if the offer is any good or not and whether I should take it. What do you think?

Answer
The offer is good.
Typically I look at what the transfer value (TV) would amount to using the safe annual withdrawal rate from a fund i.e. 4%, and if you were to divide the DB payment i.e. €5,891 by 4%, you’d get €147,275.
So, if you took the TV offer i.e. €111,540 and invested it until you reach 65, would it amount to €147,275 and pay you the equivalent DB amount of €5,891?
And it would assuming a return of just under 2% per annum.
So, you could adopt a very risk adverse strategy with the TV and end up with an amount that would be equal to what the DB would pay you.
If the fund was invested and it returned say 3.5% per annum, it would pay you €7,278 which is 23% more than the DB offering. And you wouldn’t have to adopt a very risky strategy to achieve a growth of 3.5% per annum, I’d say a fairly conservative one would deliver it.
Long story short, I think the TV is enough for you to give serious consideration to taking it, I personally would.
And perhaps if you did you won’t let it run until 65 either. One of the advantages of taking the TV and outing it into a Personal Retirement Bond is the ability to take benefits from it from age 50 onwards, so it might serve another purpose i.e. supplement existing income, use the tax-free element to spend or use on a particular area i.e. kids’ education costs etc.

Question
Liam, quick question. I got an underpayment letter from Revenue for my CGT in 2020. I'm convinced I calculated it correctly and sent a supportive sheet to show my calculations but wondering how do I challenge their response and decision.

Answer
You can appeal a decision made by Revenue by making a submission to the Tax Appeals Commission (TAC). It’s responsible for settling disputes between Revenue and taxpayers and is independent of Revenue.
Before you do, it’s encouraged that you contact the person directly in Revenue to try and settle or agree what the difference of yours and their logic in the calculation was before you engage with the TAC and apparently most disputes are settled this way.
However, if you decide or end up going down the TAC route, you need to complete and send a Notice of Appeal form to them. In the correspondence you received back from Revenue i.e. the notice of assessment or decision letter, they should have advised you how much time you have to make an appeal. Typically you’re allowed 30 days from the date on the notice of assessment and/or decision letter.


Question
Hi Liam, I'm turning 32 soon and I still don't have a pension. The company I work for will contribute 8% of my salary (annual €45,000) per month, if I contribute the same amount. I don't know and don't understand how much tax relief/return I'll receive if I decide to invest 8% per month and 16% when you include the company’s contribution. Is it something I should be doing and if I do, how much will my salary reduce by?

Answer
If you contribute 8% of your gross annual salary of €45,000, that means you personally will contribute €3,600 each year which after tax relief (40%) will amount to €2,160 which is €180 per month.
So, that's the amount you'll see your salary reduce by each month.
When you factor in your company’s matching contribution of 8%, it means that in total €600 is going into your fund each month but it's only personally costing you €180 each month.
So, if someone offered you €600 each month in exchange for €180 would you take it?
Of course you would and you should. Along with it providing for your future self, it’s also a great investment, you're effectively getting a 233% return on the full amount contributed before any growth on the fund occurs.

Question
Liam my partner, and I have gone sale agreed on a property and need to arrange life cover. The bank I’ve arranged the mortgage through said they can arrange it for me. They’ve quoted two monthly premiums i.e. €82.11 for just life and €255.06 if I include serious illness. I’m not sure if these are competitive and before I did anything, I wanted to run it by you. We’re both 34. I don’t smoke but my partner does.

Answer
Let me deal with the life cover only quote first.
From my investigation, it appears they’ve quoted you a cost based on a level term type of policy, and that’s where the level of cover remains the same throughout the term of your mortgage. I’m assuming your new mortgage is going to be paid by way of interest and capital repayments and the principal borrowed is therefore reducing.
If it is, then you can arrange the life cover whereby it reduces in line with the amount you, and if you did, the best monthly premium available from all providers is €37.74. Some companies are offering discounts on their current premium that are available up to the end of December and this premium factors that discount in.
So, when you stand it alongside what your bank is quoting you, the difference is €44.36 per month, which is a saving over the term of your mortgage of €13,308.
I’d also recommend to my clients that when taking out a policy that will be assigned to a mortgage, that they do so, with a policy that reduces in line with their mortgage. Keep it simple and keep it as cheap as possible. And if you need additional cover, that’s fine set up a separate policy that you own, not one that incorporates mortgage cover and not one where you transfer the ownership to someone else.
Whether you include serious illness on any policy is a personal choice and not a requirement of your new mortgage. The level of cover you can include in a policy doesn’t have to be for the amount of your new mortgage either, you can choose the amount. And I normally recommend a multiple of your salary i.e. one or two times.
So, if you wanted to take out a new policy for €350,000 based on a reducing cost and you wanted to include serious illness for both of you in the amount of say €80,000, the best monthly premium available is €84.63.
I think that’s a much more appropriate level of cover for you, a policy where the life reduces in line with your mortgage and one that includes a good level of serious illness cover as well.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie

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