What is the exit tax liability on my investment?

Q&A:In early 2007, I transferred €7,500 of my SSIA proceeds into a once-off PRSA contribution with an Irish financial institution to avail of the Government's additional contribution and in order to create an initial €10,000 fund.

Had that value been sustained, I could have taken out €2,500 tax free and committed the balance to an annuity or to other investment uses.

I have left that initial amount in my investment plan since that date. It is now valued at 89.14 per cent of the amount originally invested and I am inclined to cash it in as it has not yet even restored its original value – let alone maintained its real value in the interim.

I would like to know what my exit tax liability – if any – would now be, given that my original PRSA investment is still “below water”?

Mr J D, email

There was one thing no-one countenanced back in 2006 when then minister for finance Brian Cowen announced a special added incentive for transferring up to €7,500 from their hugely successful Special Savings Incentive Accounts (SSIA) into a pension by way of a Personal Retirement Savings Account (PRSA) – that you could end up losing money on the deal.

But that is what has happened to you and, presumably, thousands of others who took Mr Cowen up on his offer as their SSIAs matured in 2006 and 2007.

The initiative was open to people with annual income of less than €50,000 and was designed to encourage pension savings.

Effectively, the State agreed to augment every €3 transferred with €1 from the Exchequer, up to a maximum Exchequer contribution of €2,500.

The bad news for you is that, once put into the PRSA, it becomes subject to pension rules in relation to tax treatment, rather than those applying to investment. That means the issue of capital gain or, as in this case, loss does not apply. Rather, the PRSA is subject to income tax.

You have the option of taking a quarter of the diminished fund as a tax-free lump sum; for the balance you can transfer it to an Approved Retirement Fund (which will be subject to income tax on real or imputed drawdowns of at least 5 per cent), an annuity, where the payments will be subject to income tax, or draw it all down and face a tax bill this year on your marginal rate on the full sum.

From your letter, I am assuming the original €10,000 investment (your €7,500 and the State’s €2,500) is now worth €8,914. On that basis, you could take a lump sum of €2,228.50.

Paying tax at the standard rate on the balance would leave you with a tax bill of €1,336.60. Alongside the capital loss on the investment of €1,086, you will eventually have €7,577.40 in hand, fractionally more than your own personal investment into the PRSA.

That position is slightly bettered when you consider that you did not have to pay the tax due on the investment/deposit gain in the SSIA on maturity for the sum you transferred across. It’s not a king’s ransom but the 23 per cent on any gain is still a benefit to you. On the other hand, as you point out, inflation, albeit very low overall in the period, will likely have reduced the real value of the original sum.

Should you remain invested or cut your losses? It’s very much a personal call, determined largely by the other uses to which you could put the money. Pension investment returns have been poor over the period. Certainly, they could improve, potentially recovering your loss, but there is no guarantee.

Should I get my deeds now that mortgage is paid?

After I finished paying the mortgage I had with ICS a few years ago, I never received the deeds of my house. I rang and was told that the deeds were quite safe and were held in a central office.

What is your advice? Should I request my deeds?

Ms R C, email

It’s a little odd but that does not necessarily mean that there is anything to worry about. It would have been standard practice for the lender to ask you when you finally paid off the mortgage what you would like to do with the deeds. These will have been held by the lender for the course of the mortgage as security, but, clearly, once the mortgage is paid, they have no right to hold such security.

Among the choices they might have offered at that time could be the option for the institution to keep the deeds in safe keeping for you. This is especially so if you had accounts with the institution other than the mortgage.

I’m surprised you did not get such a communication together with a letter confirming your mortgage was paid and thanking you for the business.

However, as I said, I wouldn’t be jumping to conclusions that the lender is pulling a fast one; it sounds most unlikely. You should contact your local branch and check the following:

1. On what basis are they happy to hold on to your deeds?

2. Are they charging you for the privilege and, if so, how much?

3. What steps should you take if you require access to the deeds, either temporarily or permanently?

You will know from previous correspondence here that some people have awful problems finding secure storage for their deeds after their mortgage is paid off.

That being so, I would not instinctively grab your deeds if they are being properly stored on your account by the lender, especially if they are not charging for the privilege. However, you do need to be secure in your own mind that they are available to you.

This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.