I have a bit of a dilemma. I owe €91,000 to the bank for a graduate medical student loan at APR of 4.5 per cent and I pay back €275 per week on that. Needless to say, it’s going to take me the best part of 10 years to pay it off as it is. My brother and I are coming into an inheritance of €88,000 in the form of an AMRF. It earns 8 per cent per year for the next four years if we leave the cash there, or we can take it out now and forgo that.
I want to pay a chunk off my student loan. Should I take the cash now, or wait for the AMRF to mature and use my half of that in four years to pay off some of the loan? I can’t figure out if there is any benefit to waiting or not.
Ms EC, email
Living under the shadow of extensive borrowings can be very wearing, especially for young graduates who have enough of a challenge trying to establish themselves in the workplace. And that is why there is no easy ‘right’ answer to your question. In simple financial terms, it might look as though it makes sense to wait. You are paying interest of 4.5 per cent per annum on your borrowings, while your locked-in savings are earning 8 per cent each year.
No brainer? Well, not quite. While the headline interest rate on your savings appears to be close to twice the money you are being charged on your borrowings, you need to remember that there are tax implications related to your inheritance. The rules governing inheritance of an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF) are set down in section 85 of the Capital Acquisitions Tax Consolidation Act 2003.
Essentially when a holder of an ARF/AMRF dies, the fund passes into their estate. This is one of the advantages of the flexibility of ARFs/AMRFs: previously a traditional annuity would have died with the pensioner and no family would benefit.
As part of the estate, how it is taxed depends on who it passes to, and how.
If the balance of the fund is transferred directly to an ARF/AMRF in the name of the person’s spouse or civil partner, there is no liability either to inheritance tax (capital acquisitions tax) or to income tax at that point – although any money the spouse/partner subsequently withdraws from the fund will be treated as income and taxed accordingly.
If, however, the spouse takes the money from the fund as cash on inheritance, it is treated as income of the deceased person and taxed accordingly in the year of death. No inheritance tax bill applies.
Moving more directly to you, if the AMRF passes to a child over the age of 21, it is taxed as part of your income in the year you receive the inheritance (not the year you draw it down). You will face an income tax bill on the full amount – €44,000 in your case – at a special tax rate of 30 per cent in the year your parent dies. For you, that means a tax bill of €13,200, which is deducted at source.
While there is no separate inheritance tax implication, the challenge of finding €13,200 to pay the taxman this year when you are already battling to pay off your student borrowings is likely to be a significant challenge.
If you were younger than 21, there would be no income tax issue but you would need to consider any liability to inheritance tax on the amount. As of now, that is levied at 33 per cent – or €14,520 in this case – although a child can receive up to €225,0000 from parents over their lifetime before they face a tax bill.
Finally, if you are not a partner or child of the person who owned the AMRF, you get hit with a double whammy. First, the money is treated as the deceased person’s income in the year they die and taxed accordingly. Whatever then passes to you is then subject to inheritance tax and, for “strangers” as they are termed, the lifetime exemption before you pay inherirtance tax is just €15,075. If you were a grandchild or other “linear relation” of the original AMRF owner, the lifetime limit on gifts from relations other than parents is currently €30,150.
Apart from the tax implications, you may also have to consider the issue of investment performance. You say the AMRF does not mature for another four years. You quote a set interest rate of 8 per cent per annum. I’m not sure how any fixed income or cash fund would deliver such a high return and a fund invested in property and/or equities may only be guiding such an expected return rather than guaranteeing it. You need to be sure of the status of that 8 per cent promise.
If, in fact, it is a projection rather than a commitment, you need to factor in the possibility that eventual performance might undershoot, which would further reduce any benefit to holding on. For you, the first fundamental question is: “can I afford a €13,200 tax bill without cashing in the AMRF?”
From what you outline of your circumstances, my guess is that you should seriously consider cashing in the AMRF to meet the tax bill and set some or all of the balance against your outstanding borrowings. Bear in mind that you will struggle to match the 4.5 per cent annual student loan interest with the €30,000-odd balance of your inherited AMRF without accepting a fair degree of risk. Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice.