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.
Bank deposits
At present, I have a deposit account in the Republic with Ulster Bank. I work in England. Where can I get a higher interest rate on my account in the Republic?
P.L. England
The simple answer is that you are just not going to get as good a rate on your savings in the Republic as you will get in England at the moment. This is because interest rates are higher in Britain than they are in the Republic. As a result, banks and building societies can afford to offer better rates to savers as they are receiving a better return on the money they lend to their customers.
After the most recent rate rise in Britain, some institutions are offering gross savings rates of 6.81 per cent on any sum from £1 upwards on demand deposit (deposit which can be withdrawn at any time without notice).
Of course, it is also true that some of the best rates on offer in Britain are available only on the Internet, through postal accounts or via telephone banking where the overheads for the institutions are lower. However, competition means it is worth looking around for the best deal.
If there is some particular reason why you wish to keep your money on deposit in the Republic, the best rate of offer at the moment for deposits available on demand is undoubtedly the 4.25 per cent on offer from Northern Rock on amounts in excess of £1,000. The British institution has only recently entered the Irish market and it remains to be seen if it can continue to better the rates on offer elsewhere to the same degree.
For the moment, the Northern Rock rate is considerably better than what you will be getting at Ulster Bank. But even there, the same bank would offer you 6.75 per cent gross on a postal account in Britain.
AVCs
I have been making extra contributions to my pension scheme by way of AVCs. The bulk of the AVCs will be converted into an annuity on my retirement. The annuity will be worth about £250 a month. On retirement, I calculate that I will be paying a modest amount of tax (at standard rate) on my pension. What is the tax position on my annuity?
As it is, to a great extent merely a return of my capital sum, will it be largely tax-free? Do I have to show my annuity as income on my tax return? If there is some element of tax payable, how is it calculated? Will it be deducted at source?
Mr B.T., Clare
It might help to consider first the status of both your pension payment, when you eventually retire, and the payment from your Additional Voluntary Contribution (AVC) fund. In fact, both of these are annuities.
If you have a defined benefit pension scheme, the sum you receive at the end will be a portion of your final salary. To pay you this, the scheme will buy an annuity with funds from the pension scheme. If the scheme is defined contribution, whatever funds you personally have amassed in the fund through contributions and investment growth will be used to purchase an annuity.
AVCs work in the same way as the latter.
If you have paid the AVCs into a company pension scheme, you will in all probability get only one cheque per month/year. If not, you will get two, but both are annuities.
The second thing to note is that, for tax purposes, it doesn't matter what the source of your income is. If you exceed your tax-free threshold, you are liable to pay income tax. Certainly, if you are due to pay tax on the income from your pension annuity, you will also be liable to tax on the annuity from your AVCs.
The reason for this is that this is money on which you have not already paid tax. Within fairly generous limits, you will not have paid income tax on the capital sum initially invested in your AVCs from your gross salary. As a result, it is only fair that, when it is drawn down, income tax is due. The advantage is that, having invested the capital tax-free, there will be a greater pot to sustain you in retirement than if your contributions to AVCs had been paid from net income.
As to calculating the tax, it will be done in the same manner as your salary. You will pay income tax within whatever income band you are. You will need to show your income - whether from annuities or any other source - on your annual tax return.
As to whether your tax will be deducted at source, that depends on the scheme. If it is a company scheme, the company may well deduct tax at source on the pension; if it is a personal scheme, you may find yourself having to work out your tax liability.
Similarly, if you have AVCs tied to the company scheme, the company may take the tax due before sending you the net amount, whereas AVCs unattached to a company scheme will almost certainly require you to take care of your own tax affairs.
It is worth noting that, if you do have a company pension scheme, it is nearly always more efficient to pay your AVCs into that scheme if allowed. This is essentially because it cuts down the costs involved in administering the scheme, costs that can mount up to a substantial sum over time.
