QA:Q What do you suggest I do regarding pension plan options? At 55 next birthday, I have rejoined the workforce (having been out of it for many years raising the children), and have no private pension provision in place. Is it worth my while to join the firm's pension plan? I could afford to pay extra contributions if it is worthwhile in the long run. Would I be better off just opening an online savings account, as I see they offer quite high interest rates?
Ms A.K., Dublin
A On the assumption that you might work until the standard retirement age of 65, you have about 10 years to build up a pension pot. While one would ideally start a pension earlier in life, better late than never. Certainly, if your employer is offering an occupational pension, you might be well advised to avail of it.
In the first place, you will receive tax relief on any contributions you make to such a scheme. Employers offering occupational pensions will also generally make contributions to the scheme, further enhancing the pot.
On top of that, as you note, you will be in a position to make extra contributions to a pension. You would be advised to consider making additional voluntary contributions (AVCs), which are also eligible for tax relief. The trustees of your employer's occupational pension fund should be able to provide you with various AVC options.
At 55, you can claim relief on contributions to a pension scheme of up to 35 per cent of your gross earnings. Given that you have no private pension provision in place, it would make sense to avail of the scope this relief allows you, insofar as financial circumstances permit.
Pension investments are, of course, dependent on the vagaries of the markets in which the money is invested but, given the timeframe and the tax relief available, experience suggests that the returns available would comfortably exceed anything you might receive from a deposit account - online or otherwise - even in today's improving interest rate environment for savers.
Q A couple of weeks ago, a correspondent spoke about a five-year guarantee on his defined benefit pension. I understand that a five-year guarantee on the pension means that the pension will be paid for a minimum of five years in the event of the death of the pensioner before that time. If the pensioner dies after that time, the annuity ceases. As an annuity, it will automatically continue for the rest of the person's life. Is five years not a standard guarantee? Perhaps 10 years is available but may also be reflected in the annuity rate given.
Mr N.G., Galway
A A five-year guarantee on a pension annuity does indeed mean that the pension will be paid for a minimum of five years, regardless of circumstances. Naturally, if the pensioner survives beyond the guarantee period, the pension will cease on their death unless there is a specific spousal provision in place.
It is not unusual for a five-year guarantee to be offered on annuities but I'm not sure that this could be described as a "standard" position. Guarantees, as with any other enhancement to an annuity, cost money. The greater the enhancement, the lower the annuity per €1,000 of pension savings.
It would be possible to organise a 10-year guarantee but, as you suggest, this would also come at a cost.
Where a person in receipt of an annuity dies and the guarantee period is five years or less, the Revenue will allow the outstanding "guaranteed" payments to be cashed in and paid as a lump sum to the estate.
However, in the case of longer guarantee periods, the payments will continue to be made to a surviving spouse for the term of the guarantee.
Q My wife and I are jointly assessed, both over 66 and with full contributory old-age pensions. I also have a retirement pension from my employment of 40 years. Our total income from these, along with some deposit interest and dividend income, would slightly exceed €60,000.
On rereading a query and answer item from one of your articles last year on marginal exemption relief, I noted the various credit reliefs available.
The gist of my query relates to the PAYE tax credit and whether we are both entitled to claim this. My wife worked full time before marriage and for periods of time subsequently.
I recently brought this query to the notice of a Revenue official who confirmed that my wife was entitled to it and issued an amended tax credit certificate, which reduced the net tax credit figure by almost €4,500 due to Department of Social and Family Affairs pensions.
The standard rate band was also reduced by €22,800. Does this seem correct and does it mean I won't owe as much tax at year end, as we had been getting the pension element untaxed?
Mr P.J.H., e-mail
A The simple answer to your question is that you are entitled to the PAYE tax credit, also called the employee tax credit, of €1,830 on your pension income. As you and your wife are jointly assessed, you are each entitled to this credit on your respective pensions.
However, if you look to avail of marginal relief, tax credits slip out of the equation.
For people over the age of 65, the first €20,000 of income is exempt from tax. In the case of married couples, this figure doubles to €40,000.
The issue of marginal relief applies if your income is over that exemption limit but less than twice that limit. With gross income of €60,000, you fall into this category.
The downside of marginal relief is that, once your exemption limit is deducted from your income, the balance is taxed at 40 per cent - amounting to €8,000 in your case. There is also an allowance for dependent children but that does not seem to apply in your case.
The tax authorities will only apply marginal relief where it means that you pay less tax than you would under the tax credit system.
I do not have full details of your tax credits but, assuming you are each eligible only for the PAYE credit of €1,830 and an age credit of €325, as well as a married personal credit of €3,660, your total tax credits would be €7,970.
The 20 per cent standard rate of tax applies to the first €44,400 of your income plus your spouse's income up to a maximum of €26,400. The balance is taxed at 41 per cent. Once you work out the tax bill, you deduct the tax credits.
In relation to the social welfare pension, you state that this was heretofore untaxed. That is not quite the case.
It is true that social welfare pensions do not come under the PAYE system - although they are eligible for the employee/PAYE tax credit. However, they are liable to tax.
Where the Revenue is aware of your social welfare pension, it will, as you state, lower your standard rate cut-off point by the amount of the State pension and your tax credits are reduced by the tax liability on that pension.
If your credits were not adjusted in this way - "coded in" is apparently the technical Revenue term - you would have to pay tax as a self-employed person in a lump sum by the end of October each year.
The bottom line is that, if you were not paying tax on the State pension last year, you may owe more this year.
Furthermore, you may have an outstanding liability to the tax authorities in relation to that previously untaxed social welfare pension.
Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irish-times.ie.
This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
