Friday 30 September 2016

Will my €70,000 lump sum work harder if I save it with An Post instead of the banks?

Ross Curran

Published 01/05/2016 | 02:30

Today, the deposit interest rates being paid by the banks and An Post are very low.
Today, the deposit interest rates being paid by the banks and An Post are very low.

I am in my late 50s and will have approximately €70,000 to invest shortly. With the banks giving so little interest and the State taking so much of the interest in tax, I was thinking of putting it into one of the An Post savings schemes.

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I have ruled out the 10-year National Solidarity Bond. Which other one would you recommend I invest in?

Bernie, Limerick City

At this point, there really needs to be a recognition that the days of using either the banks or An Post for long-term savings are over - at least in the short- to medium-term.

Today, the deposit interest rates being paid by the banks and An Post are very low. So irrespective of DIRT (the tax paid on savings interest), the interest typically paid on money in deposit accounts makes it very difficult to beat inflation. Therefore, over time, inflation eats into the value of money left on deposit.

This means that you - and the rest of us - must ultimately decide what alternatives are appropriate. If you have debt, especially consumer debt, pay it off. If you are making a purchase like a car or holiday in future, use the cash you have, instead of borrowing. And if you want any real growth on your savings in the future, you need to dip your toe into 'investing'.

Before you do so, however, find an independent, fee-based advisor who will look at your overall situation and advise you appropriately. This is particularly important as you are in your late 50s - you don't have the same time to recover from stock market swings as someone in their 20s or 30s has.

Don't invest in anything you don't understand and stay away from investment or tracker bonds that come with a capital guarantee - that is, where you are guaranteed to get most or all of the original amount of money you put into the bond back once it matures. Most of these bonds won't match what you would earn on deposit.

I recently took up employment in the private sector after being employed for 12 months in the public service.

On inquiring about a refund of pension-related deductions, I was informed that this was no longer possible. Is this correct?

Joe, Mullingar, Co Westmeath

There is a provision to request a taxable refund of the pay-related deduction (PRD) as long as you can demonstrate that you are not entitled to any preserved pension benefit, transfer payment or compensation payment in lieu.

The financial emergency measures in the Public Interest Act 2009 (which was revised in January 2016) notes that if you leave the public service before completing the minimum period for accruing a pension benefit, which is two years, then a PRD refund may be provided. The refund is treated in the normal gross pay situation as regular pay - that is, if €100 PRD was deducted, then €100 is refunded as gross pay and is subject to tax, PRSI and so on in the normal way.

I worked for a large organisation for a number of years and left to work for myself in 2010. I had built up a reasonable defined contribution pension fund in the company and was advised on leaving to move it to a Personal Retirement Bond (PRB) so I could manage it myself.

I'm now in the unfortunate position of needing some cash - and accessing this pension would be a lifesaver. I was told that because I couldn't access my original company scheme until age 65, the same rule would apply to my retirement bond - but is this the case? I am 52.

Alan, Salthill, Co Galway

You were slightly misinformed when you were told that you couldn't access the retirement bond before age 65. In fact, because your employment with the original company is terminated, you are no longer constrained by the 'normal retirement age' of 65.

If you still worked for the same employer, your options would be relatively limited - with poor health being the only factor that would allow you access. However, because you are no longer in employment with that company, you can actually access the fund from age 50.

This means that you should be able to get the 25pc tax-free lump sum, with the remaining part of the pension fund put into an Approved Retirement Fund (ARF)/Approved Minimum Retirement Fund (ARMF) structure that you can also draw on as you please. (ARFs and AMRFs are personal retirement accounts where you can keep your money invested after retirement.) From the age of 61 you will have to draw down at least 4pc per annum, but you can leave it alone until then.

For individuals transferring from a defined benefit scheme into a PRB, the capacity to 'retire' your scheme at 50 is also available, giving you the tax-free lump sum option, but the remaining fund will have to be converted into an annuity payment instead of an ARF, making it far less attractive.

While you have the capacity to implement this early pension access, I would like to point out that this is not a decision to be taken lightly.

I would strongly recommend you meet with an advisor and explore all options before committing to this course of action, which is ultimately irreversible.

I gave up a full-time job several years ago so I could look after our four children at home. I had a pension with that job, which I could no longer contribute to after I left the company because it is only available to employees.

I will be returning to the workforce very shortly. (My eldest is now 18 and my youngest turns 10 soon). What can I do to make up for the years I haven't been paying into a pension?

Kate, Bray, Co Wicklow

If you've been out of the workforce for some years, you need to consider the implications for your pension. In particular, you need to consider whether you should save more to make up for the loss in pensionable service while you were out of the workforce.

There are four key questions you should address because of your break in employment, according to the Pensions Authority.

First, if you were a member of any pension scheme before your break in employment, are you entitled to any benefits from these schemes?

Second, if you return to the same employer, have you looked into the possibility of re-joining your employer's scheme and examined the terms that would apply?

Third, have you considered making additional voluntary contributions (AVCs - pension top-ups), taking out a Personal Retirement Savings Account (PRSA), or, if you are a civil or public servant, buying notional years service (buying added years) to supplement your pension and make up for the missing years?

Fourth, if you have changed your name or address, have you informed the administrators of any pensions you paid into of this?

Remember, women often live longer than men, which can leave them vulnerable in retirement - particularly if they were relying on their partner's pension. So it's important you start to build up your pension when you return to the workforce.

It is worth knowing, too, that you should still qualify for the contributory State pension - despite the years you spent at home as a full-time stay-at-home mum. In 1994, the Government introduced a scheme - known as the Homemaker's Scheme - which makes it easier for stay-at-home mums or dads to qualify for a contributory State pension.

You, however, will not qualify for the Homemaker's Scheme if you are looking after children who are over the age of 12 - unless those children are ill or disabled. As your youngest turns 10 soon, it is likely you still qualify for the scheme. However, once he turns 12, any gap in your social insurance record from then on is likely to eat into your entitlement for the State contributory pension.

Managing director of Curran Financial Services

www.financial-planning.ie or twitter @curranfinancial

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