Saturday 18 August 2018

Why is my friend's State pension higher?

Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’. Stock image
Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’. Stock image

Trevor Booth

Q: I am 66. Earlier this year, I got my contributory State pension of €214.20 a week. Why have I that amount while my friend, who has never worked, gets €230 a week? My friend says she has got a higher pension because she has a deserted wife allowance. I am separated and worked part-time for most of my life - until now. I was a homemaker from 1982 to 2004. Would I have been better off not working? Claire, Co Cork

A: Your State pension (contributory) depends on your yearly average Pay-Related Social Insurance (PRSI) contributions over your working lifetime. You appear to have an average of between 30 and 39 weeks PRSI contributions, so you are on a reduced-rate pension. The good news is that this rate of pension was increased in March 2018 to €218.70 per week.

The most likely reason you have not qualified for the full rate pension is that you were a homemaker for 22 years. Until recently, the period of homemaking prior to 1994 was disregarded when calculating the average PRSI contributions, so you got no allowance for the period between 1982 and 1994, thereby reducing your average. In March 2018, the rules changed so the period prior to 1994 can be included in the calculation, giving you up to 20 years of homemaker credits. The Department of Employment Affairs and Social Protection should contact you later in 2018 to invite you to apply for a review to determine if you would be eligible for an increase under the revised rules.

You can also apply for the means-tested State pension (non-contributory) if you wish. You would be paid the higher of the two entitlements, so you should not be worse off due to the fact that you were working.

Cuts in pension tax relief

Q: I understand the Government is considering standardising tax relief on pensions contributions at 30pc. Should the Government go ahead with this, it will represent a major cut in pensions tax relief - as currently you can get up to 40pc tax relief on pension contributions. How could this be possibly justified? Under that plan, could I end up paying more tax if I paid money into a pension than if I didn't pay money into a pension? Would it still be worth my while paying into a pension? I am a higher-rate taxpayer. Adrian, Galway

A: The current system of marginal rate pension tax relief is thought to be a barrier to many entering the pension system. Some people believe that making the system simpler to understand would make it more attractive to those not currently contributing and to those paying standard rate tax. It is also viewed by some as being overly generous to higher-rate taxpayers. There are still a number of features which would make it attractive to many higher-rate taxpayers even if these reforms were introduced, such as tax-free investment growth within the pension and a tax-free lump sum at retirement. Also, you may not be a higher-rate taxpayer in retirement, so making contributions which get 30pc tax relief could be tax effective if the income you withdraw from your pension is taxed at the standard rate of 20pc, plus USC and possibly PRSI.

However, it is unlikely to be tax efficient to make further contributions beyond the point whereby your pension would start to provide you with income which will be taxed at the higher rate. Whilst such a change could make the tax relief rules on pensions easier to understand, pension planning will still be more important than ever to prevent unintended consequences for higher-rate tax payers.

Time to resume pension?

Q: I paid into a company pension scheme from 1999 to 2007 as arranged by my employer at the time. The current value of my pension fund through that scheme is €25,000. Since 2006, instead of paying into a pension, I have been over-paying my mortgage - taking 10 years off my mortgage as a result. I now want to set up a pension payment again. With the Government talking about a State-backed pension incentive scheme, should I hold out for this, or set up a PRSA straight away? John, Kilkea, Co Kildare

A: Well done on repaying your mortgage early, which shows that you are in the habit of saving. You can now direct those payments towards your pension and maintain that habit of saving.

It is worth pointing out that, at present, the Government provides valuable incentives to contribute into a pension. The main feature of this is that you get income tax relief on pension contributions at your marginal tax rate - so the taxable portion of your income is reduced by the amount of your pension contribution. This is a valuable incentive if you pay tax on your income: it could lead to a saving of up to 40pc of your contribution amount if you pay higher-rate income tax. Other advantages of pension saving are tax-free investment growth and the ability to take up to 25pc of your Personal Retirement Savings Account (PRSA) fund tax-free at retirement. Looked at in combination, these factors make a strong argument for contributing to a pension under the current regime.

Although there are a number of potential changes signalled for the future pensions roadmap, it could take some years for these to be implemented. This means it is better to get started now so that you start building up your pension again. While the detail of any future changes is not known, these changes could actually reduce the level of incentive for those who pay higher-rate tax.

You will need to get financial advice before starting a PRSA but, from what you have said, starting a pension again now seems sensible given the current incentives available. Consider how much income you will need in retirement and how that would be provided.

Downsizing windfall

Q: My husband and I have just downsized to raise money for our retirement. We made €200,000. We have no mortgage. Our children have long flown the nest. We are both entitled to the State pension - and on top of this, we each both have a small private pension of about €10,000 a year. What should we do with this €200,000 lump sum? Should we invest it? Geraldine, Blackrock, Co Dublin

A: You will need to devise a plan regarding when and how you are likely to use this lump sum. That plan will inform your investment decisions. For example, if you expect it to be a buffer against the cost of future nursing home care, then protecting the value against inflation erosion will be important. If you intend on using it in the near term, then access and protecting the capital value will be more important.

Some options include a bank deposit, post office savings bonds or certs, or investment in a pooled fund. Four key factors to keep in mind are the investment risk involved, how diversified your investment will be, penalties for accessing your funds early and the expected return.

You should devise your plan and if you are considering anything more complex than a bank deposit for your investment, you will need to speak to a financial adviser.

Trevor Booth is head of personal financial planning at Mercer

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