Q & A

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier 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.

Tax allowances

As far as I can figure out, despite what the Minister for Finance said in the 1999 Budget, we are worse off under standardisation of allowances than we were before. When I worked out the figures on a family income of £35,000, with two people working and claiming personal and PAYE allowances on Tax Table B paying income tax at the higher 46 per cent rate, the newer system leads to a tax payment which is £2,287.12 higher than under the old. Can this be right?

Ms M. McD., e-mail

No, it can't. It is a case of judging apples and oranges and such sums never work out. What you have done is taken the income of £35,000 and deducted the 1999/2000 allowances at the standard rate in one case and in full in the other. Take the personal allowance for a married couple - £8,400. In one case, you have used this bald figure, whereas in the other you have standard-rated it to £4,384 - (£8,400 x 24 per cent) divided by 46 per cent = £4,384. Now, I know that if you work this equation out it will give a figure below £4,383 but the revenue mathematicians have determined that it should be £4,384 and so £4,384 it shall be for the purposes of tax.

In any case this is a ludicrous comparison. If one compares a full allowance (the old system) with a fraction of one of the new standard-rated system, you will always benefit more in the former case.

It was precisely for this reason that the Minister widened the tax bands and inflated allowances to a larger degree than usual. The intention and the result is that when one compares, correctly, one's tax in 1998/99 on the old system and with the old allowances and bands and in 1999/2000 under the new system, the tax burden should be more or less the same. In fact, the allowances and bands were weighted to ensure most people's tax burden fell in order to overcome any initial hesitancy about the new system.

On your example of a two-income family claiming basic allowances on PAYE income of £35,000, the family would be better off by about £620.

Exchange rates

I have a general question on the euro. You know the way that all the euro zone currencies are meant to be fixed in relation to the euro? That is, A punts = B euros and C deutschmarks = D euros. Because euro zone currencies are fixed against the euro, should people have to pay exchange rates when changing, say, deutschmarks to punts or vice versa? Should people have to pay if converting a euro zone currency to euros or from euros to a euro zone currency?

Mr K.C., e-mail

The simple answer is no, but then answers are never quite that simple.

Since the introduction of the euro at the beginning of last year, the currencies of those states which have joined it have become merely a denomination of the euro. The fact that we have not yet seen notes and coins in our pockets does not change this.

As a result, when you convert money from, say, pounds to deutschmarks, you are swapping one denomination of our new currency for another. As such, there is no conversion and the can be no charge. Now, while you don't have to pay a commission, you will find that there are still charges incurred in switching between national denominations of the euro (i.e. deutschmarks to pounds, for instance). This is because the financial institutions are charging for the service they provide and for the costs involved in storing the different legal tender denominations securely and the staff costs in processing orders.

While there has been a lot of controversy over the scale of such charges throughout Europe, it is nonetheless true that we do tend to pay charges for most banking services - ATM withdrawals, writing cheques or even making transactions over the counter.

It might be of some solace to know that the European Union is currently investigating the scale of charges on what used to be foreign exchange transactions and has visited banks across a number of euro zone states in the process, including some in the Republic. Obviously, if you are changing money from an EU currency outside the euro zone, say sterling, to one inside the zone, say pounds, then there would be a commission charge as the exchange rate between the two fluctuates and the bureaux de change have to carry the risk of buying the currency in the open market to meet the requirements of customers.

Pensions

I contribute to a defined benefit pension scheme (1/60th of final pensionable salary for every year worked subject to a maximum of 40). The minimum contribution is 5 per cent but at present I am contributing at 5.5 per cent. Am I actually costing myself money since this is a defined benefit scheme and should I reduce to 5 per cent?

Mr T.O'R., e-mail

As you suspect, you are costing yourself money, unless there is some provision for you to take a payments holiday at a later stage on the basis of your overpayment at this point or for you to buy years of pensionable salary which you would not complete through service. This has happened with teachers and the bought-back years of temporary or part-time service can be paid over time. However, this does not happen without some formal structure, notice and proactive choice, so I am sure you would be aware if you were availing of such an option.

In defined benefit pensions, the ultimate benefit you will receive is determined at the start - in your case 40/60ths of final pensionable salary for every year of service. So, too, is the amount of contribution from the employee. It is up to the employer and the fund manager to ensure that the employee's contributions, together with those from the employer, yield the promised pension.

If it looks like they will not, it is up to the employer to increase their payments.

As such, there is no real benefit in your paying extra into such a pension in the ordinary course of events.

Of course, you can certainly pay extra funds, free of tax, by way of additional voluntary contributions (AVCs). These generally, but not always, run in parallel with the main pension fund and allow you to buy extra benefits not provided in the company contributory scheme up to maximum benefits set down by the Revenue.

These include a lump sum, two-thirds pension plus social welfare pension entitlements, indexlinking of pension payments, provision for spouses and cover for certain non-salary elements of your remuneration package.

Again, the purchase of AVCs is not something that just happens and it cannot be done by default, simply by overpaying pension contributions.