Q&A

Dominic Coyle answers your financial queries.

 Confused over two pensions

I am really hoping you can give me a straightforward answer to my dilemma re my personal pension.

In my previous job with the community sector, I set up a personal pension plan with Friends First in December 2001, along with other employees, to which my employer at the time contributed 10 per cent of my gross salary.

On leaving this job in February 2003 to take up a post in the public sector, as I was not entitled to join this company's pension scheme at the time I began making monthly contributions of circa €280 per month to my personal plan, claiming the relevant tax relief.

In June of this year I became entitled to join the public sector company's scheme and my employer informed me I was required to backdate contributions to date of commencing employment amounting to 6.5 per cent of gross salary, with the Government contributing 3.5 per cent.

I have sought advice from the Pensions Board, the Revenue Commissioners, my employer and personal pension provider, but I am still confused so maybe you can help! My combined contributions come to 12 per cent of my gross salary (I am 34).

As my current post is not permanent, I do not know if I will be working in the public sector for ever. So my questions are:

• Now that I have joined the company scheme, do I have to discontinue my personal plan as it has been mentioned that it is illegal to hold more than one pension plan at any one time?

• If I have to discontinue my personal plan, should I freeze the current amount in case I need to reactivate it at a later date if I am once again in employment where I am not eligible to join that company scheme?

• Or should I withdraw funds from my personal plan and invest them as Additional Voluntary Contributions before the end of October?

Any clarification gratefully received!

Ms J.McS., email

There is nothing like moving between private and occupational pension schemes to totally confuse a situation - as you have discovered.

The key issue has always been relief. Tax relief on pension payments is among the most generous reliefs available to the ordinary taxpayer. Naturally, the Government would be concerned to ensure that people would not be able to claim relief on two separate pensions.

The good news is that the growing mobility of the Irish workforce has been recognised by the Government, which changed the rules in the 2003 Finance Act to allow people to hold both a personal and an occupational pension plan. Given that commissions and charges are front-loaded on personal pension plans, forcing people to freeze or close them should they change jobs and enter an occupational pension scheme would be counterproductive for a government that is looking to encourage greater take-up of personal pension provision.

It would also penalise people like yourself, who might yet find themselves requiring a personal pension plan in a new employment down the line and be faced with a further array of set-up charges.

Anyway, the situation is that you do not have to discontinue or freeze your personal pension plan contributions. You can hold both plans at the one time.

However, you will not be able to claim tax reliefs on any contributions you have made to the personal pension plan while you are also paying into the scheme run by your new employer.

You need to check the small print on your personal pension plan to see if you are allowed to freeze contributions altogether, if that's what you do decide to do. It should be fine.

The only problem I do see is the tax treatment of relief on the back-payments you have been told you have to make now to the new employer's occupational scheme. As you say, you have been making payments to your personal pension scheme for the past two and a half years and claiming relief on them.

Now you are being asked to contribute to the occupational scheme for the same period in arrears. On the face of it, you will be contributing to two policies in the same period and should therefore not be allowed to claim relief.

However, since your combined contributions are only about 12 per cent of salary, and the payments to the personal policy took place when you did not realise you would have to be making retrospective payments to the occupational scheme, you might get away with it.

The truth is that only the Revenue can ultimately rule on this. The figure at stake is about €3,400 so you will need to work out whether it is financially worth your while fighting an adverse ruling.

You could consider operating AVCs as you will receive no relief on payments into your personal pension scheme and, on the basis of your age, you are entitled to receive relief on pension contributions of up to 20 per cent of net relevant earnings.

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.