Q&A

Dominic Coyle answers your financial questions.

Tax deductions on pension funds

I will shortly be 65 years of age. At which time my income from pensions will be €32,000 per annum. This is below the €33,000 age exemption limit, so therefore I should not be subject to tax. However, I will also be in receipt of €3,000 per annum deposit interest from which DIRT tax has been deducted.

1. Will this be subject to further taxation?
2. Does the health levy apply to this at age 65?
3. As my pensionable income is below the threshold, can I reclaim DIRT?

Mr D M, e-mail

You are certainly unlikely to have any further tax deducted as your income is, as you say, below the age exemption limit. In fact, last week's Budget raises that exemption limit for married couples to €34,000 which gives you even more room for manoeuvre.

In fact, for as long as DIRT is deducted form your bank interest, you will be entitled to a refund of tax as you are paying 20 per cent Deposit Interest Retention Tax (DIRT) on the entire €3,000 interest paid on your account each year. At the same time, your income level is €2,000 shy of the age exemption limit. Effectively, you should be paying tax at 20 per cent on only €1,000 of your overall income, including the bank interest.

Your bank will continue to deduct DIRT on the entire interest amount but you will be able to reclaim two-thirds of this by completing a Revenue form 54D and returning it to the tax authorities. You will need to file a separate form for each year in which you are reclaiming DIRT.

As far as the health levy goes, it appears you will still be liable to pay this. The recent Budget raised the income threshold under which no health contribution levy was payable to €440 a week, which amounts to €22,880 a year. The levy stops being payable by pensioners once they are over the age of 70. It is worth noting also that PRSI is no longer payable by people over the age of 66.

AVC charges

My wife has been thinking of a top-up for her retirement pension and gratuity. We have had a visit from an AVC provider who gave some details and left us a booklet to study. It is clear from this that there is a consultancy fee of €835. In addition, it would seem that the insurance company takes 5 per cent plus 1 per cent handling fee. Is this usual or is it excessive. Do all providers make these charges?

Is there a league table that we might access to see which company most efficiently manages the monies invested?

My wife is a nurse and can stay on five years or 10 years. Which do you recommend?

I see a sobering sentence in the booklet as follows: "You should bear in mind that if you have made less than one year's contributions to an AVC, it may have no value should you stop contributions." Does this mean that the first year's contributions go on consultancy and other charges?

Mr M D, Limerick

The main thing to remember in purchasing additional voluntary contributions or any other financial service is that you do not buy anything you don't understand, you never pay a charge that has not been satisfactorily explained to you and you always shop around.

It makes perfect sense for anyone to use AVCs to top up their pension but it is worth bearing in mind that any pension saving is designed to be a long-term investment. It would make only limited sense to look at an AVC for a five-year investment.

The warning in the booklet you have received quite properly points out that you will see little benefit from the first year's contributions - the reason, as you suspect, being that most of these will disappear in commission, fees and charges.

On the subject of fees and charges the 5 per cent and 1 per cent figures you quote are not out of kilter with industry norms. The standard Personal Retirement Savings Accounts (PRSAs), which are designed to be a low-cost pension option, are required to charge no more than 5 per cent commission and a 1 per cent management fee.

The consultation fee is a different matter. This was certainly not agreed by you in advance of the meeting and there is no obligation on your wife, even if she does decide to proceed with an AVC, to purchase it through this particular provider.

There is not necessarily a league table of providers although the industry does publish monthly performance tables for managed pension funds which gives a good indication of the relative standing of the different players in the market. This table is published early in the month and usually appears in the business pages of The Irish Times.

Pension woes

I left an employer and a defined benefit pension scheme in the 1990s. On the advice of the broker, who also handled the employer's pension scheme, I transferred my paid-up pension fund to a pension buyout bond. At the time I did not understand the guarantees and advantages of defined-benefit schemes. Was I given correct advice by the broker?

Mr P O'B, e-mail

It is very hard to see how a person would be properly advised to leave a defined-benefit pension scheme in favour of a buyout bond which would necessarily have to be placed subsequently in an investment of a defined contribution nature. However, without seeing the precise terms of the particular pension scheme of which you were a member, it would be impossible to say with certainty that the advice you were given was correct or otherwise.

I suggest you contact the Pension Board which regulates the industry and would deal with such issues.

PRSI refunds

Is a self-employed person entitled to a refund of PRSI contributions to PRSAS or private pension plans. If so when do I need to apply?

Mr M K, e-mail

Anyone, self-employed or otherwise, is entitled to make pension contributions within Revenue limits from gross income - that is free of income tax or PRSI.

If tax or PRSI has already been paid, you are entitled to a refund but will have to apply for the income tax refund first and then apply for the PRSI relief in writing, enclosing a copy of your P60.

• Please send your queries to Dominic Coyle, Q&A, The Irish Times, 10-16 D'Olier 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. No personal correspondence will be entered into.