Q&A

Dominic Coyle answers your questions

Getting impartial pension advice

In a couple of weeks I reach retirement and I have to make a decision as to where to put my pension fund. After taking 25 per cent cash I am told that I must put a certain amount into an AMRF and the rest into an ARF. However, in this respect I am at the mercy of my advisers and their possibly biased viewpoints. Where can I get an independent assessment of the various options available with specific pointers to the best performers, ie where can I find a league table of ARFs? I would appreciate your advice through your column.

Mr. F.K., email

The range of investment options under approved retirement funds (ARFs) is extensive and there is no such thing as a league table as such.

Effectively, the term ARF is a wrapper that can be applied to investments ranging from cash deposits to equity portfolios or managed funds as long as they are managed on your behalf by a qualifying fund manager. You can draw down on this fund through your manager.

The approved minimum retirement fund (AMRF) is the term used to describe the investment of the first € 63,500 of your fund. Unless you have a guaranteed annual pension income of at least € 12,700, this €63,500 is ring-fenced until you reach 75 and you cannot draw down the capital although you can access investment gains on that capital.

When you reach 75, it automatically becomes an ARF.

However, you are certainly correct that you should be looking at independent advice. This, after all, will be the pot on which you will draw your retirement income and while ARFs certainly provide more flexibility that traditional annuity contracts, they also carry the risk of losses that annuities do not.

As columns such as this always say, you should seek someone who offers fee-based rather than commission-based advice. This, however, is easier said than done. The general reluctance of Irish people to pay for impartial advice means that almost all brokers operate on a commission basis.

Your best bet is to contact the Irish Financial Services Regulatory Authority on 1890 200469 and get a list of authorised advisers - intermediaries registered with the regulator as providing advice across the full range of providers. You can then check whether they offer advice on a fee basis.

Tax liability

In recent years I have been classified by the Revenue as self-employed because I had a rental income from house property that accounted for about 20 per cent of my total income. The other 80 per cent was made up of a company pension and contributory OAP on which the tax was paid under PAYE by deduction from my company pension.

I have recently sold the rental property and am reinvesting the proceeds in equities and a deposit account where tax will be paid by withholding tax and DIRT. Three questions arise.

1) Will this new source of income alter my tax status between self-employed and PAYE?

2) Will the DIRT tax of 20 per cent on my deposit interest discharge my full tax liability on that part of my income even if my total income is now over the threshold of €42,000 for a single income married couple?

3) Can I put the investment and deposit interest income in joint names with my wife to avail of the extra allowance for a married couple with two incomes.

Mr D.N., Limerick.

Taking them in the order presented, your tax status depends on the source of your income. If you earn €3,174 or more from non-PAYE sources, you will remain in Revenue parlance as a "chargeable person he is registered for income tax self-assessment" and are obliged to fill in an annual tax return, Form 11.

Income earned from equity investments by way of dividends would be classed as non-PAYE income. The other point to bear in mind, the Revenue reminds me, is that you are probably likely to have some liability for income tax on rental income this year as you have only recently sold the investment property.

DIRT will discharge your full tax liability on deposit interest regardless of your overall income. However, you might still find yourself liable for the health levy which, regardless of what ordinary folk might think, Revenue does not class as a tax.

You can put your investment income in joint names, although that might involve you having the investments themselves in joint names. It doesn't affect deposit income, as DIRT at 20 per cent takes care of full liability there.

VAT on funds

I have invested in a pension fund where I pay 1 per cent per annum management fees. I now notice I am paying 0.21 per cent VAT as well. Is every type of managed fund liable to VAT?

Mr H.W., email

Every time you think there is a straightforward answer to a question, it turns out to be anything but. So it was here. When I opened your mail, I assumed I could tidy it away in no time. Instead it has taken more than a week and illustrated that, even within the fund management business, there is considerable confusion on the issue.

The simple answer to your question is no, not every type of managed fund is liable to value added tax (VAT), but that is about the only element of the issue that is straightforward.

While not every type of managed fund is liable to VAT, the tax does apparently apply in certain circumstances. The best way to describe it is that you appear liable to VAT if your pension fund assets are being managed on a segregated or unique basis. In other words, if you are receiving bespoke advice rather than investing as part of a group or unitised fund, you will be paying VAT on what is seen as a straightforward, dedicated management service.

However, if, as for most of us, your pension fund investment is pooled with others in a unitised fund or some other manner, it comes under the exemptions provided for in the First Schedule of the VAT Act - paragraph (i)(g) to be exact.

Revenue has confirmed for me that this section enacts EU legislation, as provided for in the sixth VAT directive (Article 13B(d)(6), which provides for the exemption of management services supplied to "special investment funds" as defined by member states.

The intention of the provision was to exempt the management of collective investment undertakings - typically unitised investments.

The interesting thing, to my mind, is the management fee that you are paying - 1 per cent. While management fees clearly vary from fund manager to fund manager, 1 per cent sounds low for a fund that would be managed in the segregated fashion that would see it come under liability for VAT.

Of course, the size of the fund would have some bearing on the charge too but, frankly, I would be surprised if anyone with a fund large enough to benefit from 1 per cent bespoke management fees would be looking to a newspaper column for tax advice.

SSIA warning

Just a cautionary note for your readers, I seem to have been overtaxed by €524.97 on completion of my SSIA in June.

I saved €254 a month over 60 months which, with the 25 per cent Government bonus, amounted to €19,150.

The final value of my SSIA account was €23,054.58, which indicated investment growth of €4,004.48. Exit tax at 23 per cent should have seen €921.03 deducted from the gain. The actual amount deducted was €1446.00 an over charge of €524.97.

My account was set up in June 2001 with Aberdeen Asset Management. Aberdeen exited the market in 2003 and my account was transferred to Quinn Life Euro Freeway Investment fund until maturity in June 2006.

Staff at Quinn Life agree that I have been over-charged but are seeking proof of contributions up to the time of my account opening with them. Being a good shredder, I have disposed of bank statements by now. As I say, cautionary note to readers to check final statements.

Mr W.B., email

A cautionary tale indeed. I have to say that Quinn Life must be able to ascertain very accurately from their own records on your balance at time of transfer, how much you had been contributing. It sounds as though they are being more than slightly awkward in the matter.

In extremis, people can always get statements re-issued by their bank.

SSIA savers should also have annual statements of the progression of their accounts which, the fixed-period accounts still being active, they would be advised to retain.

Still, as you say, it is well worth people checking their closing statements on SSIAs.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 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.