Q & A

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.

PRSAs

I have just joined a company that does not currently offer a pension scheme and I have signed up for a personal pension plan with Bank of Ireland's Lifetime. Could you advise me whether it would be best to put this plan on hold and wait for the new PRSA products to be introduced? I believe that there is a 2 per cent annual charge on the personal pension plan but that the new PRSAs will be capped at 1 per cent per annum. Alternatively, would it be possible to transfer the existing plan without charge when the new PRSA product becomes available? One final question: as a 30-year-old looking to retire at 60, could you advise me as to how much per month I should be investing in a pension?

Mr G.F., e-mail

You say you have signed up for this plan but later imply that you have yet to commit fully. Certainly, it would appear foolhardy to proceed at this point when personal retirement savings accounts (PRSAs) are just around the corner.

As you say, these will feature lower charges and will be far more flexible as a pension option that the existing personal pension plans.

While it is true that you will be able to transfer, you will find there is no such thing as free in the world of pension fund management. Pension plans, like most investment products, frontload charges. This means that, even if you do not pay a charge to transfer - and it's likely you may not have to - you will have little to transfer.

Most advisers will tell you that the amount you will receive upon encashment in the early years of long-term investment products - like pension plans - will be less than the amount you have put in to that date.

In light of that, it would seem to make sense to hold off for the arrival of PRSAs, which are due to come on the market early next year. This is especially so as you say you are 30 and a year's delay is not likely to make a huge difference to your eventual pension provision - notwithstanding the fact that the earlier one starts a pension, the less one needs to contribute to secure the same pension.

In the meantime, you can get into the saving habit through one of the Government-backed special savings incentive schemes. Even if you save for only the first year until PRSAs are up and running, the Government will top up your contributions by 25 per cent and they can be left there to accumulate interest (deposit) or returns (equity-based products).

As to pension contributions, you would be best advised to get advice from a financial adviser. While underfunding a pension is the more common problem, there are upper limits on what you can receive. At 30, the necessary contributions should not be too onerous.

Insurance

I've been shopping around for house insurance and am getting conflicting advice when it comes to setting a value on property. One company tells me that as the insurance is to cover rebuilding costs, my insurance valuation can safely be below the market value as the site will still be there whatever happens. Another company suggested an insurance value at or above the market value to allow for expensive demolition costs. Can you offer an objective view?

Mr P.M., Dublin

I'm not too sure why you are getting such differing advice, as the issue of rebuilding costs is an area in the insurance market where there is a degree of consensus. That is thanks to the Society of Chartered Surveyors, which each year produces a guide to rebuilding costs. The figures it gives include an amount for site clearance, including demolition, and this should be known to the insurance companies you went to for quotes. Any reputable insurer will also tell you that market value has no correlation with rebuilding costs. Costs are determined by labour and materials.

A copy of the guide is available on the society's website at www.scs.ie or from its offices at Wilton Place in Dublin.

What you do need to take into account is that the guide relates to prices as of July in any given year. You will need to allow for increases in building costs since then and inflation in the construction industry has been running at a higher rate than elsewhere. In addition, as you will see from the guide, it quotes for "average" homes. If your property stands out for any reason - a period home or some other defining feature - you will need to allow for that. Similarly, you will have to allow for boundary walls, garden sheds, garages and even fitted kitchens. Still, it is a worthwhile ready reckoner.

Savings

I would like to avail of the Government savings scheme and, given my age, financial circumstances, etc, believe that the best option is to avail of a savings scheme that allows me to invest the 25 per cent provided by the Government in equities. I want to avail of a scheme that has the cheapest administration charges - ideally nil. I also want a guaranteed return of the 25 per cent (assuming that there will be a tax hit on this), regardless of how the scheme I buy into performs. In other words, I want my 25 per cent over five years as a minimum guaranteed return, even if the equities dive.

Mr A.Q., e-mail

Don't we all. I'm afraid you are going to have to prioritise. You want an absolute guarantee on your capital, preferably no charges and to invest in equities. Quite simply, it's not an option. None of the equity offerings allows for absolute security of capital and, even if they did, the charge structure would be prohibitive.

If you want an absolute guarantee of your capital being secure, go into the deposit option.

Equally, none of the equity offerings has a nil charge structure, understandably. After all, it is going to cost the institutions to set up and run your account. They're not charities and, in any case, savers are getting a generous enough handout from the Government.

Again, if you want no charges, go for a deposit option. If you do want an equity-based option, the one with the lowest charge structure as of now is Quinn Life. However, you do not want to be blinded by charges. Quinn Life is a relatively new company with a short track record. There is no saying how it might perform over the next five years.

For that matter, there is no way of predicting how any equity-based offering will perform. The only sure thing is that they will need to outdo the deposit return as they have to take account of charges. Also remember that five years is a very short space of time for equity-based investments, on which charges are generally frontloaded.

All in all, I would opt for a deposit product given your priorities.