I have a pension, but should I start up an AVC, too?
QI am a civil servant earning a comfortable pensionable salary. I am 61 years old and due to retire in a few years. I pay tax at the higher income tax rate of 41 per cent. I currently contribute 6.5 per cent of my salary to my pension scheme. Should I consider AVCs?
Peter, Fairview, Dublin 3
AAVCs (Additional Voluntary Contributions) are extra savings you can make towards your pension. So yes, it is a good idea to pay money into them.
Doing AVCs will enhance your final tax-free lump sum, provide you with additional retirement income, and allow you to benefit more from the pension tax relief available to you.
Someone of your age can contribute up to 40 per cent of their salary to a pension – and get full tax relief on those contributions. As you are already paying 6.5 per cent of your salary into a pension, you can contribute another 33.5 per cent of it to AVCs. As you are a higher rate taxpayer, you can get 41 per cent tax relief on those contributions.
You can use the AVC to maximise the tax-free lump sum you are entitled to on retirement.
If you have any money left over in your AVCs after doing that, you can transfer it to an ARF (Approved Retirement Fund – a personal retirement fund where you can keep your money invested after you retire). You can then draw down 5 per cent of the money in the ARF annually to supplement your pension.
If you die, the ARF transfers to your spouse or family, and if you invest the ARF in low-risk funds, you may have income for 20 years.
QWith deposit rates so low, my bank is recommending that I invest in a managed fund. I do not need access to the money and am a low-risk investor. Should I consider this option?
Michelle, Douglas, Co Cork
AThe main benefit of your deposit account is short-term access. However the main disadvantage of it is low returns because of low interest rates, a higher DIRT tax rate of 41 per cent and the effects of inflation.
Investing in a managed fund should offer you diversification by enabling you to invest in a broad range of assets (such as equities, property, bonds and cash) or markets with the longer term goal of obtaining higher returns than those available on deposit.
When investing in a managed fund, there are a number of factors that you'd first need to consider.
You need to be comfortable with the level of risk you want to take. Your bank will ask you to complete a risk profile questionnaire. This will help you to understand the level of risk you are prepared to take.
You should consider investing for a period of at least five years to give your money a chance to grow. There may be penalties if you want to exit a managed fund in the first few years so know where you stand here.
A good rule of thumb before investing in a managed fund is to set aside six months income in a deposit account in case you need money in an emergency.
In the same way that you may compare the deposit rate of your bank with those of other financial institutions, you should also seek independent advice on your choice of managed fund – and shop around. The managed fund recommended by your bank may not offer the best value out there.
John Fagan is principal partner of the Dublin taxation and financial advisers, Fagan & Partners
Sunday Indo Business