Wednesday 19 December 2018

Should I pay into PRSA after London move?

Your questions answered

'If you let a room in your home, the income you receive may be exempt from tax.' (stock photo)
'If you let a room in your home, the income you receive may be exempt from tax.' (stock photo)

Gerry Stewart Partner, Fagan & Partners (www.f-p.ie)

Q I have been paying into a Personal Retirement Savings Account (PRSA) for several years as my employer doesn't offer a company pension scheme. I've been offered a good job in London and will be moving there shortly.

Should the job work out well, I imagine this could be a permanent move for me. I'm unsure what to do with my PRSA now. Can I continue to contribute to it from abroad - and would my new employer be able to contribute to it too (on my behalf)? If I can't contribute to it from abroad, should I shut down my PRSA? I'm concerned about the tax implications of shutting down/cashing in the PRSA now. I'm also a bit reluctant to transfer this PRSA to a British pension scheme in case it is adversely impacted by Brexit.
Alan,
Sallins, Co Kildare

You have the flexibility to stop and start your PRSA contributions whenever you wish and there is normally no penalty to do this. You can also close your PRSA but it may be beneficial to leave it in place in case you return to Ireland in the future.

If you leave Ireland, your PRSA will remain here and hopefully continue to grow in value (depending on your fund choice). You can contribute to it from London - however you would no longer be entitled to tax relief on the contributions so my advice would be to consider a similar investment with tax benefits in Britain. Your new British employer cannot contribute to your PRSA.

There are no tax implications to stopping your PRSA payments or closing it down. It will continue to grow tax-free until you draw it down. You can draw down your PRSA at any time from the age of 60 to the age of 75. You may also be able to take your benefits earlier - for example, if you retire from employment at the age of 50 or over, or if you become seriously ill or disabled. At that stage, you can normally access 25pc of the value as a tax-free lump sum and draw down a pension income in retirement from the balance.

Releasing value from home

Q My query relates to how I might leverage the value in my home - my principal asset. My wife and I are both in our early 70s. We live in a four-bedroom semi-detached house in a sought-after location in north Dublin. The house is mortgage-free and must have a value in excess of €600,000. Our problem is that as a result of having to take early retirement and decimation of my pension pot (both as a consequence of the crash back in the Noughties), we now find ourselves with an income well below what would allow us to live in the modest comfort we would wish to have in our later years. For strong family reasons we wish to stay in our current house (downsizing is not really a viable option) and so my query is: are there any options in the market that would enable us to release some of the value of our home and remain living in it?
Dominic,
Co Dublin

You are in a similar position to many people in Ireland. You have a valuable mortgage-free property that is presently increasing in value and you would like to stay in your house and do not want to downsize.

In the past, you could have availed of a home-equity release where you took out a loan secured against your house and that loan did not need to be paid back until you sold your house, permanently moved out, or passed away. With some, you would have retained full ownership of your house and could continue living in it for as long as you wish. With the limited credit availability, these lenders left the market in the downturn.

However, most of the Irish banks offer another form of equity-release loans today, where you can either top up your mortgage or get an equity release loan - as long as the value of your home is greater than what you now owe on your mortgage and you repay the loan by the age of 70 (though it can be earlier with some banks). You should check if your bank offers any form of equity release loans and if you are eligible for one. Even if you can get such a loan from your bank, be sure you can afford the repayments on the loan and are not putting yourself under too much financial pressure by taking such a loan on.

Another option to consider is the rent-a-room relief scheme. If you let a room in your home, the income you receive may be exempt from tax. The income you receive cannot exceed €14,000 in 2017 and there are conditions which must be met - which are detailed on the Revenue's website.

Typically, the rented room or rooms must be let on a long-term basis but can be a self-contained unit within the house, such as a basement flat or a converted garage. However, if this unit is not attached to the property it cannot qualify for the relief. Short-term stays do not qualify for relief.

You could also consider AirBnB (or similar sites) as a means of generating an income. This is where you rent a room, shared room or house to short-term guests. Unlike the rent-a-room relief above, income from this source is assessable for tax.

Freezing PRSA contributions

Q I left a full-time job a few years ago and became self-employed. I set up a standard PRSA a couple of years ago. However, I recently lost a major contract and so will struggle to pay anything into my PRSA this year. I will have to either freeze my contributions until things improve for me financially - or else come out of the PRSA altogether. I'm a bit worried about the impact which charges would have on my PRSA if I froze contributions for a while. Would the charges on the PRSA eat into the value of the fund more quickly if I am no longer paying contributions into my PRSA? Is it possible to close the PRSA altogether and if so, would it be wise to do so?
Gary,
Killester, Dublin 5

There are two types of Personal Retirement Savings Account (PRSA): a standard PRSA and a non-standard PRSA. With both, you have the flexibility to close the PRSA or stop and start your contributions whenever you wish and there is normally no penalty to do this - so I would leave it in place.

You say your PRSA is a standard PRSA so this means that your annual management charges are fixed at 1pc per year. The impact of this charge on the value of your PRSA depends largely on the fund you have chosen. For example, if you are invested in a very low-risk low-return cash fund (similar to a low-interest deposit account) and the returns in this fund were less than the 1pc annual management charge, then you would be losing money. If however, you are invested in a fund which has the ability to return a larger long-term return, then you should see your PRSA value grow.

PRSAs are also portable so if you ever decided to go back into employment, you can move your PRSA to your new employer's pension scheme. In the meantime, your PRSA funds will continue to grow (depending on your fund choice) tax-free until you retire. You can normally draw down your PRSA funds from the age of 60 to age 75. You may also be able to take your benefits earlier - for example, if you retire from employment at the age of 50 or over, or if you become seriously ill or disabled. At that stage, you can normally access 25pc of the value as a tax-free lump sum and draw down a pension income in retirement from the balance.

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business