Wednesday 15 August 2018

What's best way of helping grandchildren?

 

'My own opinion is that when retirement is distant, a medium- or higher-risk approach to investing your pension makes sense.' Stock photo
'My own opinion is that when retirement is distant, a medium- or higher-risk approach to investing your pension makes sense.' Stock photo

Patrick McGettigan

Q I recently became the proud granddad of two grandchildren. What's the most tax-efficient way of me making a financial contribution to my grandchildren's future? I have in mind an annual contribution of a varying nature - depending on my future ability to do so. Michael, Co Kildare

As of now (that is, since the Budget announced in October 2016), each of your grandchildren is entitled to receive up to a total of €32,500 in their lifetime from you as their grandfather - without incurring a tax liability. Gifts or an inheritance received over this amount are subject to Capital Acquisitions Tax (CAT - also known as gift or inheritance tax) in their hands at the prevailing rate, which is 33pc.

You mention providing an annual contribution of a varying nature depending on your capacity to do so - in this case using the annual gift exemption can help you.

With this tax exemption, you can provide financial assistance up to €3,000 annually to each of your grandchildren - and this €3,000 will be exempt from tax and won't impact the €32,500 lifetime limit referenced earlier.

Note too that the annual gift exemption can be received each year from any number of individuals. For example, each of your grandchildren could receive an additional €3,000 from their grandmother, without incurring a gift tax liability.

First steps in drawing up will

Q I'm in my early 40s and my husband and I have three young children. It's been on our mind for some time to draw up a will, but we never seem to get around to it. What information would we need to gather together so we can draw up a will?
Emma, Co Wicklow

As a cornerstone of financial planning, I would recommend for everyone that they have a will in place. There are several good reasons why you should make a will, and indeed regularly review that will.

By making a will, your estate will be distributed according to your wishes. You can appoint legal guardians for your children should both parents die when your children are minors. If you have substantial assets, it will allow you to plan to mitigate (as far as possible) possible inheritance tax liabilities that might arise on the transfer of assets to children and others - for example, you can leave your entire estate to your spouse free of inheritance tax. There is less legal delay and dispute for dependants when a person dies and has left a valid will, rather than if no will is left. Where a person dies without leaving a valid will, the Succession Act 1965 sets out who should inherit from the deceased's estate and in which proportions. In your case (assuming your spouse and children survive you), two-thirds of your estate will go to your spouse; with the rest divided equally among your children.

A solicitor does not have to write a will, and it could be argued that you don't need legal help to make a basic will. In my experience though, making a will is best handled by a solicitor. 'Home-made' wills can be dangerous and lead to legal disputes after death if the wording in the will is unclear.

To draw up a will, the following information will be required: personal information about you and your spouse (such as legal names, dates of birth) - and similarly for your children; information about your current and previous marital status; a summary of your assets; a summary of your debts; and an outline of beneficiaries.

Pension investment strategy

Q I am 40 and recently took up a new job with a new company. The company offers a pension plan where it will match my 10pc contribution. The company offers two different investment strategies. The first is a default option which automatically changes my asset mix as I approach retirement. Under that option, as I near retirement, I will have 25pc invested in the cash fund and the rest in a pension fund or an Approved Retirement Fund (ARF). The second option is where I will make my own investment decision by selecting what percentage of my contribution goes to the following funds (global equity fund, multi-asset fund, bond fund and cash fund). Should I go with the first option or the second option? If I go with the first option, which would be better: a pension fund or an ARF? If I go with the second option, what would be the best percentage split of my pension savings?
John, Dublin 3

I'm presuming from the details that you have provided that the company scheme is an occupational scheme and not a PRSA scheme.

It is worth noting that as you are in your 40s, you can contribute up to 25pc of your salary - to a limit of €115,000 towards the pension plan and avail of full tax relief at your marginal rate. The employer contribution does not impact on this.

For most individuals, their pension plan will be the biggest-income producing asset they will ever possess. Unfortunately, due to the long-term nature of the planning, very often a casual approach is taken.

At this point I must stress that it wouldn't be possible for me to advise on which is the best strategy for you. To accurately and responsibly advise you on your investment decision here, a full risk analysis would be required so that there is clarity on what your risk profile is. People have differing capabilities to deal with short-term fluctuations in the value of investments.

My own opinion is that when retirement is distant, a medium- or higher-risk approach to investing your pension makes sense.

You have no short-term use for the money, and if markets decline, you have time to wait for a recovery. A market drop can also work in your favour as it means any new pension contributions you make can take advantage of lower market prices.

Your company should have a pension adviser, or you could engage the services of an independent financial adviser or planner, to give you more insightful information based on your risk profile.

However, here is a broad outline of the options referenced by you. The first strategy you mention is planning for a pension fund (annuity) or an ARF through the default investment strategy.

An annuity is designed to provide you with a guaranteed income for the rest of your life on retirement. Annuities tend to be more suited to people with a low appetite for risk and who would prioritise a guaranteed income for their retirement years.

A single life annuity is an income on your life only. With a joint life annuity, part of your pension is payable to your spouse after you die.

An ARF gives you more control over how your retirement fund is managed. An ARF allows you to keep your funds invested, to control the investment and to take a flexible income during retirement.

It is suitable for long-term estate and tax planning as it can pass after your death to your spouse or civil partner and become an ARF in their name, or it can be passed to your estate - so it doesn't die with you.

The second strategy you reference moves you away from the default strategy and gives you access to four different investment classes.

Most commentators would consider the global equity fund to be highest on the investment risk scale - with the cash fund having the lowest risk.

 

Patrick McGettigan is principal at McGettigan Financial Planning (mcgettiganfp.ie)

While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice

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