Dominic Coyle answers your financial queries.

Application of tax to pensions and Approved Retirement Funds

In reply to Mr CG's query a couple of weeks ago, you state "withdrawals from an ARF are subject to income tax as are your existing pension payments".

This surely is incorrect since the capital content, ie €7,500, has already been subject to income tax where applicable. If tax were applied to the whole of the ARF on withdrawal, this would constitute double taxation of the 7,500. I can understand and accept the application of tax on any interest earned.

The presumption is that, this "PRSA" pension scheme incentive was launched to encourage increased accumulation of personal pension funds - this will certainly not be achieved if it results in a loss of capital invested - by way of "double taxation".

Mr F.F., e-mail

It is certainly correct that any withdrawal from an Approved Retirement Fund (ARF) will attract income tax, presuming your income is over the income tax threshold. Income is income, for the purposes of the tax code, whether it is earned from a job or a pension.

The €7,500 you refer to relates to the transfer of money from a Special Savings Incentive Account (SSIA) to a pension, be it a Personal Retirement Savings Account or some other pension product.

This is the initiative outlined by Minister for Finance Brian Cowen in the last Finance Act and will see the Government grant such a transfer, a bonus on the basis of €1 for every €3 transferred up to a maximum bonus of €2,500.

The problem here seems to be your understanding of taxation on SSIAs. These accounts are not subject to income tax but to exit tax. This tax is charged only on the interest or investment gain earned on the SSIA - not your capital contributions and not the Government's 25 per cent bonus top-up. It is charged at 23 per cent.

However, one of the features of the Cowen incentive on transferring payments from an SSIA to a pension - apart from the cash bonus - is that such transfers are excluded from exit tax. As such, the issue of double taxation simply does not arise.

For what it is worth, while the €1 for €3 bonus applies only on the first €7,500 of an SSIA transfer to a pension, any additional sum transferred is also free of the exit tax.

PRSA providers

Who provides PRSAs? The post office? Banks?

Mr M.McE, e-mail

In all the talk about the tax incentives, it is sometimes easy to forget the simple question, such as where to avail of these products in the first place.

Ten companies are registered with the Pensions Board as suppliers of Personal Retirement Savings Accounts (PRSAs). Their names, and the products they are registered to offer, appear on the Pensions Board website.

Some will only offer the standard PRSA, where charges are capped at 5 per cent of contributions and a 1 per cent annual management fee. Bear in mind that low charges mean nothing if fund performance is poor. Consider also that 6 per cent is not a bad margin for what are generally passive index tracking funds where the fund manager is taking minimal risk.

The providers currently registered are:

• Ark Life (formerly part of AIB but now a subsidiary of Hibernian)

• Canada Life

• Custom House Capital

• Eagle Star

• EBS Building Society

• Friends First

• Hibernian

• Irish Life

• New Ireland (part of Bank of Ireland)

• Standard Life

As you can see, it essentially amounts to the two big banks and the major life assurers in the Irish market. An Post is not registered with the regulator as a provider of PRSAs.

SSIA pension bonus scheme

Am I right in my understanding that I (age 67) and on a pension can place the sum of €7,500 in a pension scheme now and, with the appropriate letter from my credit union stating that this sum is the proceeds of SSIA savings, I can earn €2,500 if the money is left in for 12 months? If so, do you know of any short-term pension schemes?

Mr F.M., Dublin

You are right that you can use €7,500 of your SSIA savings to boost your pension savings and receive a €2,500 bonus from the Government for doing so, provided that:

• your income last year was less than €50,000

• you transfer the money to a pension scheme within three months of your SSIA maturing.

When it comes to the length of time the money has to stay there, it depends. Effectively, the rules governing the drawing down of personal pensions are designed to ensure that you do not fritter away your retirement assets before you die. To that end, the Government says that a person must ensure they have a minimum guaranteed annual pension of €12,700 if they want free access in retirement to their funds.

If they do not have that annual guarantee, they must set aside €63,500 of their personal pension fund until they are 75 or to buy an annuity. If their personal pension assets are less than the €63,500, then all that sum must be retained.

You already have a pension, although you do not say what amount it comes to in a year. If your existing pension, including your State pension, is €12,700 a year or more, you can certainly draw down your Cowen initiative pension fund, including the bonus, after 12 months. If your pension is less than that sum, you may be forced to wait until you are 75.

Your credit union, assuming that is where you held your SSIA, will forward a letter confirming the transfer. In relation to providers of personal pensions, the answer to the previous question points to providers of Personal Retirement Savings Accounts (PRSAs), probably the cheapest pension option in the State.

Irish Nationwide and inheritance

My father had a share account with Irish Nationwide and after he died, as his executor, it was possible for me to transfer the account to my name as one of the beneficiaries of the will. It was not possible to transfer it to anybody else. Hope this is helpful.

Joe

Indeed it is. This is precisely why I suggested to our reader last week that she get professional legal advice on this issue. It appears from the building societies legislation that Irish Nationwide should not be allowing the sort of transfers that it did in your father's case. However, if it did, it may expedite the situation she and her relations find themselves in.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2 or 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 queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.