MAKING CENTS: Your financial questions answered

Question

Liam, I’m due to retire in a year’s time and I’ve been told that after I take out the tax free element out of it, I’ll have about €350,000 left over and I have to decide what to do with the fund. The administers of the pension scheme have offered me an annual annuity type pension of €13,500 and I’m not sure if that is good or not or whether I should take it or do something else. I’m 61 and married and we have two adult children

Answer

Okay, first off an annuity arrangement is where in exchange for a lump sum an insurance company will give you a guaranteed income for the rest of your life. And it looks like based on the amount being offered that this annuity arrangement (and there are different kinds and offerings) is calculated whereby if you were to pass away, the €13,500 would be paid for 5 years and thereafter 50% i.e. €6,750 would be paid to your husband. And when he passes away the pension dies with him.

The alternative to an annuity is to move the €350,000 into an Approved Retirement Fund (ARF).

And ARF’s were first introduced in Ireland back in 1999 with the specific goal to give retirees an alternative to having only one option that being only being able to purchase an annuity.

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And if you chose the ARF option you have to take a minimum of 4% from the value of the fund each year, so you’d have to take €14,000 in the first year and you could keep it at that amount if you wish going forward.

The funds in the ARF are invested and if the fund returns say 1% per annum and that’s an awful return by the way, you’d run out of money at about 90. And if the fund returned 2% every year, it would be exhausted when you are 95.

I have clients by the way where the return on their ARF is higher than the % they are taking each year which means if it continued this way their fund is never ending and they could never outlive it.

The advantage of the ARF as I see it are twofold (a) you can alter the amount you pay yourself each year. The minimum is 4% but you might decide to pay yourself 6% next year and 7% the year after and then return to 4% after that and (b) the big advantage to an ARF is that when you die, the funds in the ARF are passed to your husband and into another ARF in his name and the amount that passes to him is not subject to capital acquisitions tax (CAT) when it transfers.

So, if you were to pass away at say age 75 and the fund is earning 2% and you are taking €14,000 from it there would be c. €238,000 left in the fund that passes to your husband. Whereas with an annuity there is nothing passed on. He just continues to get €13,500 for 5 years and it becomes €6,750 in year 6.

Let’s say you choose the ARF and your husband receives this €238,000 and he continues the €14,000 payment to himself but he was to pass away 5 years later there would be c. €180,000 left in the fund and that would be passed to your two children.

They would have to pay 30% tax on this amount so they would be left with €126,000 between them or €63,000 each. So, the obvious benefit with an ARF is being able to pass your pension on in death to your husband first of all and then eventually to your children on his passing. The downside to an ARF is that it is invested and is subject to market fluctuations but the fluctuations will be determined by how much risk you are willing to take and based on past data/returns, even low risk funds should be returning 2% for you. And there are even funds that you can invest in that carry 100% capital guarantees with potential to earn c. 5% per year as well.

It’s important to choose a destination for your fund that’s’ best suited to you and meets your needs and those of your husband in retirement, so I’d recommend you seek out the advice of a qualified financial adviser independent from the pension schemes administrators before you make a final decision and get them to go through the options and numbers for you just like I did.

Question

Liam, I have inherited money from my late parent’s estate and I’d like to give my wife some money from it, so she can invest it or do whatever she wants with it. Can I do this without her having to pay any tax?

Answer

Yes, you can.

Since the 31st January 1990, gifts between spouses have not been liable to gift tax (Capital Acquisition Tax) so you could give her as much as you like and as often as you like and no tax liability on yours or her part will arise. And many couples take advantage of this when it comes to making pension contributions. One spouse might gift the other spouse a sum of money that can be used towards topping up their pension contributions. They are receiving this money tax free and they are using it to get tax relief (40%) on the contributions being made.

Question

Liam, I’ve two dogs but no pet insurance and wondering is it something I should consider? Any thoughts and what are the likely costs?

Answer

I came across someone recently whose dog was hit by a car and needed a life-saving operation which involved the amputation of a leg. He didn’t have pet insurance and he loved his dog dearly and he had to take out €1,750 of his savings to cover the costs incurred.

He was obviously sorry he didn’t take out a policy which would have cost him somewhere between €210 and €395 per year depending on the insurance provider and the level of cover he’d want.

Pets are expensive anyway but a sick one without doubt can impact your finances and insurance can be a great and relatively inexpensive way of covering vet bills. If you took out a policy that paid out a maximum amount of €4,000 for vet fees and it was costing you €395 each year, then you have about 10 years’ worth of your pet’s costs covered provided they don’t exceed €4,000.

And with any insurance policy the devil is in the detail so I’d say know the detail.

Know what’s included and excluded, what the excess is on the policy is etc. Most companies covering pet insurance insist your pet has an annual vet check-up and is vaccinated every year. And some won’t cover dogs over a certain age and those that do apply a higher premium and some companies they have a maximum pay (c. €1,000) out if the dog is stolen or dies and that’s regardless of how much they are worth.

And like any form of insurance, what you are paying for is peace of mind and pet insurance is no different. It’s to protect your pet so they get the care needed along with you not having to worry about the financial implications so it might be worth looking at what’s on offer and whether the cost fits into your monthly budget.

Question

Liam, I have surplus money left over each month, and not sure what to do with it. Is it better to increase my pension contributions or overpay on my mortgage or top up what I’m contributing to my companies share purchase scheme?

Answer

You’ve suggested three great options and if your surplus was big enough I’d tell you to use it towards all three. But if it wasn’t and I was asked to pick just one it would be towards your pension.

Because contributions towards a pension fund from after tax income, so if you save for example €100, it’s only going to cost you €60 after tax relief (assuming you’re taxed at the marginal rate). And what that means is that your return on investment (ROI) is 67% because that’s what you need to earn if you wanted to turn €60 into €100.

Overpaying on a mortgage comes from after tax income so for every €100 you save, you’ve had to earn about €135 first. And the return on your mortgage is whatever interest rate you’re being charged. So, if it’s 3.5% that’s your ROI in this instance.

And with an ESPP scheme you are buying shares at a discount of 15% from their market value, which is terrific but what they will become when they vest and are available to sell is unknown because you don’t know what their future value will be, what currency exchange rates are etc.

All three options are great but from a financial perspective the one that creates the biggest impact I believe is putting those surplus monies into your pension by way of additional voluntary contributions (AVC’s).