Q&A Dominic Coyle
Assessing the best PRSA options
Two years ago I ceased paying contributions to a PRSA scheme. This decision was made on the back of a fairly significant salary cut that I suffered. Furthermore, I was disappointed that my contributions, made over a period of eight years, were worth less that the amount invested. At this point, I have approx. €150,000 built up in pension funds.
I am now in a position where I wish to recommence paying to a pension scheme, and I would welcome your view on the best possible scheme to invest in. I am willing to invest €1,000 a month. I am 46 years of age and a top rate tax payer.
Mr K.N., Dublin
Would that it were that easy. There are myriad pension options out there and, certainly in the period you’re talking about, precious few of them were delivering the sort of returns we might have expected when we started investing.
There is also no comparative table of returns available for PRSAs. There are, however, monthly performance figures for group managed pension schemes from the main Irish providers. You will find details at Rubicon Investment Consulting (http://www.rubiconic.ie/content/mfrcalculator.html) among others.
Having said that, as I’m sure you have heard before historic performance is no guide to what is likely to happen in the future. Fund managers all have slightly different approaches to investing (and one eye on their rivals to ensure they do not fall too ar behind the consensus). At any stage in an investment cycle, the approach of any one investment manager may deliver better returns than another but over the cycle as a whole hey tend to even out.
Probably the single most important thing you can do in choosing one PRSA fund over another is to look at how much they will charge. You would be amazed at how much charges - upfront and hidden - eat in to your investment returns.
A report on pension charges published last year by the Department of Social Protection measured charges in terms of “reduction in yield to maturity” of the investment. It found that disclosed charges vary from 0.9 per cent to 3.08 per cent across the types of pensions it considered. The impact of charges at those levels on your final fund is between 5 per cent and 28 per cent.
Factoring in “implicit” costs, such as operational charges (like custodian charges, trustee funds, audit fees etc), trading charges (such as brokerage commissions) and stamp duty increases the impact on the projected final fund to between 8.4 per cent and 31 per cent.
Confusion over liability to tax on inheritance
Your reply to an enquiry recently has caused me some anxiety. I did well out of the sale of my home in 2006 and thus was in a position to assist my three children to purchase starter homes.
To take one as an example, the amount received was €400,000 and as this was under the then threshold of €450,000 odd, no tax was payable.
However, under the cumulative rule, should I be in a position to leave this son say €100,000 when I die, he would be liable to pay tax of 33 per cent of €100,000.
That seems clear enough, but is the tax cumulative as well°? Could my son now be taxed now on the basis of the total amount received - i.e. the original €400,000 and the inheritance of €100,000, giving him a total gift/inheritance of €500,000? Allowing for the current threshold of €225,000, could he have a tax liability of 33 per cent on the balance of €275,000, producing a tax bill of €91,667 - €58,334 more than if he is taxed simply on the new inheritance?
This would be retrospection with a vengeance. A decision in 206 under different tax rules would be formalised under “new” tax rules.
Mr G.L., Dublin
You need not worry. While this Government has been the first to break the previously inviolable rule against retrospection in tax affairs with their raid on pension funds, there is no such issue in relation to capital acquisitions tax governing gifts and inheritances.
The money you gifted your son (and the other children) back in 2006 was correctly treated under the parameters of the CAT tax at that time, and your children had no liability.
The only impact of the cumulative nature of CAT is that the €400,000 taken then will be taken into account in determining the tax status of any future gift from a parent or inheritance. This, having previously received a €400,000 gift, any sum over the €3,000 limit for a small gift exemption will be liable to capital acquisitions tax at 33 per cent.
However, there is no provision to go back and retrospectively tax a previous gift which was exempt under the rules pertaining at that time. So, €97,000 of your hypothetical €100,000 inheritance to your son would be liable to taxation at the current prevailing rate – 33 per cent – giving a tax liability of just over €32,000.
This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to firstname.lastname@example.org