Business Personal Finance

Wednesday 26 July 2017

?2,500 going a'begging

Charlie Weston

Charlie Weston

Invest ?7,500 of your SSIA (Special Savings Incentive Account) money in a pension plan, and the State will top it up to ?10,000. Pensioners can also benefit

FOR once those tight-wads in the Department of Finance and the Revenue Commissioners are giving you something back.

This is because you can earn a free ?2,500 dividend if you invest ?7,500 of your SSIA (Special Savings Incentive Account) money in a pension plan.

The giveaway comes in the form of a pensions incentive scheme for maturing SSIA holders.

SSIA proceeds can be reinvested either as an additional voluntary contribution (AVC) to an occuptional pension, a contribution to your PRSA (Personal Retirement Savings Account), or as a premium under a retirement annunity contract.

And the incentive applies whether you are working or retired (up to the age of 75).

The following conditions apply. Firstly, your gross income in the year in which the SSIA matures must not exceed ?50,000.

Secondly, you cannot claim an income tax deduction for the amount of SSIA money re-invested in the pension.

So what do you exactly do you get?

For every ?3 of your maturing SSIA invested in your pension, the Government will contribute ?1 in the form of a tax credit, up to a maxiumum of ?2,500.

So, if you put in ?7,500 that nice taxman will bump it up to ?10,000.

But there is more.

Savers who want to pump up their pension also benefit from an additional tax credit. This depends on the actual proportion of the maturing SSIA diverted to the pension.

Here's how it works. If you convert all of the maturing SSIA funds into a pension the Government will credit you with 100pc of the amount of tax deducted from your SSIA on maturity, according to a Revenue Commissioners spokesman.

If you convert half of the maturing amount into a pension, you get half of the deducted tax back.

Take an example of someone who took out an equity-based SSIA and ended up with ?15,000. Of this ?15,000, the 'gain' from stock market-related growth was ?500. The ?500 would normally be subject to exit tax at 23pc.

But if this person put the full ?15,000 into their pension, no exit tax would apply. The full ?15,000 would be invested in the pension, along with the top-up payment of ?2,500.

Put in ?7,500 into your pension and you will get the top-up of ?2,500, and a tax credit for ?250. The rest of the gain will be taxed at 23pc (ie ?250 X 23pc).

Beware the time limit. Because you must grab this ?2,500 giveaway within three months of your SSIA maturing.

Apart from the one-off boost, the SSIA top-up scheme will give a retirement fund a good start, but most people need to think about making regular monthly payments into their pension.

Smallish one-off lump sums will make little difference. Most industry sources would suggest that someone of 35 should be saving 18pc of their gross monthly salary to end up with a pension worth half their pay.

Consumers should check out the pension calculator on www.pensionsboard.ie. If you input your age, sex and whether you have a pension fund it will estimate how much you need to save each month to end up with a certain pension when you retire.

But if you decide to commit ?7,500 of your SSIA cash to your pension, you should also make additional monthly repayments of at least ?150 a month.

You will get 20pc tax relief on this. And if you are in non-pensionable employment, you can also claim tax relief on your PRSI payments and levies of 6pc.

Low-cost PRSAs are availble out there for those prepared to use an execution-only (no advice) broker.

For an upfront fee of ?250, Ferguson & Associates (www.ferga.com) will set up a PRSA with no bid/offer spread charge (this means if you invest ?100 the full amount is allocated) and just the 1pc annual management charge.

Liam Ferguson's brokerage is offering pensions from Canada Life, Eagle Star, Hibernian, Irish Life and New Ireland.

The bid/offer spread charge (ie a charge on each contribution) can be as much as 5pc on a standard PRSA. This has been described as a 5pc drag on the performance of the pension.

For those who are already retired (and are under 75) they can also benefit from the SSIA pensions top-up scheme by taking their SSIA Maturity Statement to a pension provider (bank or broker) and setting up a PRSA (Personal Retirement Savings Account).

Some ?7,500 is put into this PRSA. The pension provider will then request the pensioner completes and signs a declaration form and makes the contribution to the PRSA.

Once this has been done, the Government contributions under the pensions incentive will be claimed by the pension provider and invested in the pension.

After a year, the pensioner is free to draw down the money from the PRSA.

According to Michael Kiernan of MyAdviser.ie, the first 25pc of the money drawn down is tax-free.

No tax will be due on the remaining amount for a couple who are earning less than ?34,000 a year - if the ?7,500 is taken through an Approved Retirement Fund.

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