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Retirement Planning Seminar 21/09/2018, Westbury Hotel, Dublin

Many thanks to all who attended our recent Retirement Planning Seminar in the Westbury Hotel and to our panel of speakers who provided useful information on the night.

To date, IPF have held 20 Seminars around the country for Public Sector employees.  We have had over 2,000 attendees in total to these seminars.

These events prove to massively popular and are always oversubscribed.

Our next Seminar will be in The Kingsley Hotel in Cork City on the 5th October 2018. Those interested in attending should book their places as soon as possible through sarah.connolly@ipf.ie.

 

Here is the usual agenda for the seminar:

“Retirement Planning and how your benefits work”  Claire Hanrahan, Financial Advisor

“Keeping Safe in Retirement” Sgt. Dean Kerins, Crime Prevention Officer, An Garda Siochana

“General medical guidelines for over 60’s”  Dr. Rita Galimberti, Consultant, Femplus Womens Health Clinic

“Taxation; Essential information for you pre and post retirement”  Ray McGovern, Chartered Accountant, McGovern & Associates

“Investing in a Challenging World” Stephen Dixon, New Ireland Assurance

“Active Retirement and managing your newfound free time”  Pat Murphy, Planning Consultant, Retirement & Life Planning

 

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Death and taxes: what it costs to inherit the family home

It’s something that frustrates, enrages and outrages in equal measure: inheritance taxes on the family home. For many people, having paid down a mortgage with after-tax income throughout their lives, leaving a legacy of a substantial tax bill for their children feels akin to double taxation.

And yet, despite the outrage, most of us are shockingly ignorant about just how Ireland’s inheritance tax regime works. A recent survey from Irish Life, for example, revealed that while a quarter of over 65-year-olds expect to leave estates of more than €500,000, half of adults think their family home is exempt from inheritance tax.

Unfortunately, for many families leaving homes valued at Dublin prices, having to write a large cheque to the Revenue Commissioners in the aftermath of a death can come as an unwelcome, and sometimes unaffordable, surprise.

So what do you need to know about death taxes on the family home in Ireland?

How to inherit – tax free

It is possible to transfer property to someone else – without incurring a tax bill – in a number of ways. Firstly, inheritance tax doesn’t apply if the value of the property falls within the tax-free thresholds.

“For the vast majority of people that would be the case, particularly outside Dublin, where properties wouldn’t hit the exempt thresholds,” says Darragh McCarthy, head of private client services at EY.*

This means, for example, that a property worth €400,000, shared by two children, won’t incur a tax bill, as the transfer to each is within the parent-to-child thresholds (€310,000).

Similarly, if five nieces and nephews inherit a house worth €162,500, no liability will apply, as it’s again within the thresholds (€32,500), while if you inherit a share in a property from someone who isn’t related to you, and it isn’t worth more than €16,250, again there will be no bill.

Should you go over these thresholds, however, tax at a rate of 33 per cent will arise – even on the family home. A property worth €600,000 inherited by one child will incur a tax bill of €95,700.

“Although many people intend to leave significant amounts to their children and grandchildren when they die, most of them are unaware that those family members could be liable for a very substantial tax bill on those inheritances,” says Kate Connor, protection manager with Irish Life.

For example, a property worth €600,000 inherited by one child will incur a tax bill of €95,700 (33 per cent of €600,000-€310,000), while a property worth €100,000 left by someone with whom you have no recognisable relationship with will incur a bill of €27,637 (33 per cent of €100,000-€16,250).

If you’re married or in a civil partnership, no tax is liable on asset transfers, which means that a family home or investment property can be transferred with no tax liabilities.

Remember, however, that it only refers to legally recognised partnerships; common law partnerships are not recognised by the Revenue Commissioners, which means that even if a couple have been together for 60 years, should one of them die, there will probably be a tax bill to settle. Yes, their life insurance may in fact pay off the mortgage on the property, but the surviving spouse will still incur a tax bill on the transfer of this property to their estate.

Any special cases?

Another way of passing on a property tax-free is to avail of the so-called dwelling house exemption – but its use has been restricted.

Used by thousands of people to pass on properties to their children, free of tax, the dwelling home relief was once a very popular tax exemption. However, its use was tightened significantly from December 25th, 2016.

“In practice it doesn’t have wide application,” says McCarthy. “I wouldn’t expect to see it much into the future.”

But it might still be of use to some.

The key criteria that now allow someone to inherit a property tax-free is that the property must have been the “only or main home” of the person who died. In addition, and this is where it gets tricky, is that the person inheriting must now have also lived in this property as their main residence for the three years prior to the transfer. Other requirements mean that to inherit tax-free, they cannot have an interest in any other property, and they must also stay in the house for six years after the transfer.

But there are some ways of getting around some of these points.

First of all, the three-year rule as well as staying in the property for six years subsequently does not apply where people are aged over 65.

Moreover, people can avoid this requirement in a number of ways. Firstly, if they sell the property they’ve inherited and invest all of the proceeds in another property, the relief stands. It also stands if the successor has to move either somewhere else in Ireland, or abroad, for work reasons.

Another quirk is that even if the owner of the property goes into a nursing home in the final years of their life, the person inheriting can still avail of the relief if they were living in the house.

Wait until death?

For many families, a discussion about what happens in the event of the parents’ death never really happens until after the fact.

Others, however, are more proactive, and may wish to downsize – particularly at a time of a housing crisis when children may be eyeing up enviously their parents’ home.

But according to McCarthy, while each case will be different, transferring the family home during your lifetime can be more expensive than waiting until your death. This is because Irish stamp duty applies to lifetime gifts to property, which would not apply to inheritances on death. This means, for example, that the transfer of a house worth €500,000 would incur stamp duty of €5,000, while a property worth €2 million would incur duty of €40,000 – enough perhaps to make you think twice. And the rate of duty on investment properties is 6 per cent.

And of course, if the parents pay the stamp duty on behalf of a child, this could give rise to a capital acquisitions tax (CAT) liability.

One way to deal with the transfer of investment properties would be to house them in a company structure, as the company cash could then potentially be used to settle CAT charges. As a related point, McCarthy advises families at the early stage of property investment to consider co-investing, as in the event of the deaths of the parents, the children’s CAT liabilities will be restricted to the deceased’s share rather than the entire portfolio.

There can definitely be a sting in the tail for individuals who have foreign property, as they can often completely ignore foreign estate issues

And be careful also of other implications when considering a transfer during your lifetime. While a parent can sell a home to a child at a discounted price, the difference between the sale price and the market value will be considered to be a “gift” by the Revenue Commissioners, and will thus attract CAT if the child has already exhausted their tax-free threshold.

A nifty way to approach this, says McCarthy, is to make use of the €3,000 annual small gifts exemption (unchanged since 2003, it should be noted, and thus ripe for an increase).

If the property exchange was funded via a “loan” from the parent, for example, the parents could then, potentially, pay off the loan to the order of €6,000 a year without a CAT bill arising – of course, depending on the size of the shortfall, this could take some time to pay off in this manner.

Another consideration is if capital gains tax (CGT) and CAT both arise, you can use the CGT you have paid as a credit against the CAT. In the context of the family home, this is unlikely to apply, as it won’t be subject to CGT, but may be appropriate for investment properties.

If so, McCarthy warns that the “sequence” of transfer/sale of assets is very important to maximise tax efficiency.

For example, in such cases he suggests that it can be more efficient to transfer the family home in the first instance and use up the thresholds, and then subsequent gifts that would give rise to CGT would be made after these thresholds are exhausted.

Finally, we’ve spoken so far of Irish-based properties – but property abroad can cause further challenges. Not something people think much about, perhaps, when buying a place in the sun.

“There can definitely be a sting in the tail for individuals who have foreign property, as they can often completely ignore foreign estate issues,” says McCarthy.

Settling a bill

Given people’s general ignorance of potential inheritance tax liabilities, it’s helpful to learn that the Revenue Commissioners are willing to receive CAT bills in instalments. It’s less helpful, however, to learn that they’ll charge you an arm and a leg – 8 per cent interest – on such an agreement.

“This is something we’d like to see reduced,” says McCarthy, although he adds that “at least it prevents a forced-sale scenario”.

You could also consider starting to save for any potential CAT bills now, as the Revenue still allows two tax-efficient savings schemes to enable you to do this.

Section 72 policies, for example, cover the cost of settling an inheritance tax bill in the event of your death and, crucially, don’t incur a tax liability themselves. They allow you to save towards a life assurance policy, with the proceeds going to pay off an expected inheritance tax bill. The key advantage is that the proceeds of the policy is not subject to CAT. However, there are some downsides – they’re expensive (expect to pay about €218 a month for €100,000 of cover); they need careful planning to ensure they match the tax owed; they have no cash-in value; and they need to be taken out early to be worthwhile.

You could also consider a section 73 savings plan. Again Revenue-approved, this allows you to gift the proceeds of this plan to your estate to meet any tax bills – and again, this gift is not liable to inheritance tax. Moreover, you can choose to keep the funds yourself if you so wish. However, they again need careful thought and can be expensive.

THE TAX-FREE THRESHOLDS

Between spouses  All tax free
Group A (parent to child) €310,000
Group B (relatives such as nieces and nephews) €32,500
Group C (stranger) €16,250

 

Fiona Reddan, irishtimes.ie

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Financial Advice for people in their 20’s

Build a budget

Set up a budget with three sections: essentials, savings, and social. Start allocating money to your essentials first, like rent, utilities, food, transport and loan repayments.

Next, allocate something — no matter how small — to savings. Your first priority should be an emergency fund, and you should think about your own situation (job security, health benefits at work, your personal support system) to determine a comfortable amount.

With the essentials and some savings covered, you can spend the rest however you please. Remember to update your budget periodically, since your financial picture will inevitably change.

 

Start an AVC

Retirement may seem like a long way away yet, but the earlier you start contributing to your pension, the more options you will create for yourself in the future.

IPFs Additional Voluntary Contribution Scheme for Public Sector employees offers the following benefits:

Full tax relief on contributions at your top rate
Tax-free growth on your savings
A wide range of investment options

Potential AVC Fund Value (€20 gross per week, €12 from take home pay) *

*Assumes 3% growth & higher rate tax payer. Unit prices may fall aswell as rise

It might make sense for you to save some tax now and begin to build a supplementary pot of money for your retirement.

A meeting with a Financial Advisor can help you identify your priorities and build a Financial Plan. To arrange an appointment, you can call 01 8298500 or email sarah.connolly@ipf.ie.

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Why Irish 20-somethings have it so tough financially

A guide to the financial issues facing young people and what they can do about them
Tue, May 8, 2018, 06:00, Fiona Reddan, www.irishtimes.com

It has become much more difficult for today’s 20-somethings to buy their first home.

“Generation rent”, the “lost generation”, or wasters who throw away their money on avocado toast: accurate descriptions of today’s 20-somethings or media hyperbole? The truth, perhaps, is somewhere in between.

Eoin Magee, a financial adviser with Prosperous Financial Planning, has buckets of sympathy for this age cohort. “I’d say people in their 20s have been dealt the worst cards possible,” he says, “It’s a very difficult environment to be starting out your life in.”

Magee points to the lower salaries of many 20-somethings as being a key challenge.

“When they came out of college, jobs weren’t freely or readily available, so they took whatever job they could get, but started on a lower salary than they would have otherwise done.
So while someone could have previously expected to start on 30,000, they might have started on €25,000. “And you don’t make up that gap again,” says Magee.
At the same time, house prices and rents started running away from them.

“They have got caught in a perfect storm,” he says, noting that the generation behind them might have it a bit easier. They will have auto-enrolment in their favour for one, which will help with retirement planning, and perhaps a different view of the property market.

“People in their 20s, they’ve seen house prices being decimated, so they may not work hard to save a deposit because they have a different perception of what normality is,” he notes.
But just because things are tough doesn’t mean 20-somethings should shy away from doing what they can to make their own circumstances that little bit better. The huge advantage 20-somethings have is their age though this only works in their favour if they take some steps now. So what are the typical mistakes you might make?

Not paying yourself first
How you establish your savings habits in your 20s is going to have a huge impact on your future financial health. Do you put whatever you’ve left over at the end of the month into a separate savings account? Or do you just leave whatever is left resting in your current account?
Maybe you’ve agreed a savings plan with a parent, whereby you cough up some rent and they save on your behalf. Whatever approach you take, the critical point is that this money goes into your savings when you get paid – and not at the end of the month when your accounts may have been decimated.
Magee suggests you target a figure of 20 per cent of your income, including pension savings.
“My priority is that you start to build a savings pot and you’re very disciplined in doing so,” he says, noting that this will then give you options, and can be allocated to a deposit on a house, or a masters, or whatever financial goals you may have.

Going the other route of planning a budget and trying to live by it over the month can prove challenging.
“I don’t believe in budgets” says Magee, likening them to a calorie-controlled diet – and we all know how well they work for most of us. Yes, we’re good for five days of the week and then splurge and ruin all our progress.

Relying too much on deposits
But if how you save is important, so too is where your money is saved. With savings rates on the floor – and nearly underneath it – earning less than 0.5 per cent a year can make saving an almost joyless experience.
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“You can’t save for more than five years in a bank account, as you won’t even beat inflation,” advises Magee, saying if you don’t invest in a well-diversified equity portfolio, “you’re going to have to save harder”. And that may be just too much for people already strapped for cash.
Moreover learning about investing, funds, shares, exchange-traded funds, etc, at a young age – even if you make the occasional mis-step – will undoubtedly improve your financial health over time.

Not talking to friends/family about money
One of the best financial resources you have is the people that you know. Carty gives example of people locking their savings away in notice accounts so they can’t access them – with one 20-something taking it so far as to put their savings in a credit union 20km away so it’ll be difficult to withdraw.
Magee has another tip for parents and live-at-home children alike; parents could charge the market rent to their offspring – less any savings they contribute. So if it would cost them €500 to rent a room, charge them €300 if they can put away €200 a month, and so on.
However, Carty notes that while 20-somethings might share their life on social media, they can still be shy when it comes to talking about money.
“It’s a bit of misnomer that they share so much,” he says.
But try and shrug this off as you’ll pick up some great tips long the way.

Thinking pensions are for later on
OK, so your 20s may not be the time to get in deep with pensions. But if you can do one thing, make sure you’re maximising contributions from your employer. If they match your contributions, try and put in the most you can to get the maximum contribution from them. It’s (almost) free money.
Not planning to buy a home – well in advance
As the resident financial planner on RTÉ’s Crowded House, which aims to help 20- and 30-somethings move out from home, Magee is keenly aware of the challenges facing today’s younger generation.

Whereas their predecessors may have bought their first home during this decade, it has become much more difficult for today’s 20-somethings to do so. A recent study from the UK-based thinktank Resolution Foundation found that about a third of millennials will never own their own home.
So if you want to be in the 66 per cent that do, it may require considered planning. “You may never want to buy a house; but you don’t want to wake up at 29 years of age and think ‘I definitely want to buy a house’ and have done nothing about it,” warns Magee.

Magee has crunched the numbers and found that it will take nine years for someone on the average income to save a deposit to buy the average house in Dublin, or seven years in Galway.
“So if you’re 21 years of age today, and if you’re not saving for a deposit for a house, you won’t be buying in your 20s,” he says.
Some 20-somethings are well ahead of the curve in this regard; Rory Carty, head of youth banking with Bank of Ireland, has fielded questions from second and third year college students about how they can save to buy.
“They are quite savvy and are saving quite early,” he says. And for people fearful of a preparatory chat with a lender about getting a mortgage, Carty says “don’t be”.
“People should come in and speak openly around their financial situation and get advice,” he says.
Thinking renting – and not saving – is viable
Maybe you’ll never own your own home; maybe you don’t want to. And don’t worry, never owning a home can be a legitimate financial decision. Look at the example of Germany, or France, where people are content to rent forever. Just 14 per cent of those living in Berlin, for example, own their own home.
However, years of experience have meant that these take a different view; yes they’re not forking out €4,000 to upgrade the boiler, but they are also aware that in retirement, unlike a homeowner, they will always have rent to pay on their home. So they take the money they would otherwise have spent on maintaining a property and save it for this eventuality.
And as Magee notes, while renting long-term can make sense, “you need absolute discipline for that”.
Spending what you don’t have
There are always temptations to spend more, but Magee is clear: “Don’t spend more than you earn”.
Given the proliferation of easy credit, such as through credit cards or car loans, urging us to upgrade our lifestyle, this can be more difficult than it sounds – particularly when it comes to the temptation of a shiny new (ish) car.

“There is no doubt that 20-year-olds are getting caught up with it ([extended purchase arrangements like] PCPs), and are driving better cars than they would have otherwise,” notes Magee.
He also cautions against saving, while you have a considerable balance on your credit card. Saving at 0.4 per cent while owing €1,000 on a credit card at 20 per cent, doesn’t make sense. If you use your savings to clear this debt, you can still fall back on the credit card should an emergency arise before you get a chance to rebuild your rainy day fund.

Allowing your lifestyle to inflate

This can be a major danger – or opportunity – to how your life is going to be. If you’ve just started work, you won’t be used to earning €400-€700 a week for example.
“So don’t get used to it,” Magee advises, urging 20-year-olds to try to put away 20 per cent of their net savings (this includes pension savings) each month. “And if you’ve never gotten used to spending a certain amount of money, you won’t miss it either. You’ll be just as content a person,” he says.
Not only that, but he wants you to bring this lesson with you through life.
“If you get a pay rise, don’t get used to it,” he says, cautioning against “lifestyle inflation”, whereby your lifestyle expands to fit your income. This is the biggest thing they can to help themselves financially,” he says of 20-somethings.

The challenges facing today’s 20-somethings

Soaring rents: Average Dublin city centre two-bed is €2,000
Priced out of the property market: Average age of first-time buyer 2006: 29 Average age today: 34
Unaffordability: Average house: average income 1995: 2.5 (national); 3 (Dublin) Average house: average income 2016: 4.7 (national); 6.6 (Dublin)

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Retirement Planning Seminars March 2018

This March, Irish Pensions & Finance hosted two Retirement Planning Seminars in The Glasshouse Hotel, Sligo and The Westbury Hotel Dublin.

These Seminars were greatly received by the 300+ attendees.

Speakers covered topics such as Financial Planning, Health & Wellbeing and Safety in the Home.

We would like to thank all the speakers and attendees for their participation on the night.

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Grey matters: Demystifying pensions

Pensions can seem complicated, but they don’t have to be. People have common questions when starting to plan their pension and at Zurich we like to help with simple yet informative answers.

Putting a little aside today could help you live an active and enjoyable life when you retire. There is more than one way to enjoy your retirement and there is more than one type of pension. We can help you choose the one that is right for you, but most importantly, you have full control when it comes to deciding how your pension is invested – after all, it’s your money. With tax relief, employer contributions and optional lump sum payments, you may be able to save more than you think.

When choosing a pension having all the information you need is key. By answering some common questions we hope this helps explain pensions and how they work.

1. How does a pension work?

Each payday, each year or as often a you like, you save some money into a retirement fund. Your fund is put away and invested and is encouraged to grow over time so that when you finally decide to retire you’ll have enough saved to live out your life, happily. Essentially, a pension is a way of saving for the long term. But its different for two reasons: tax and time.

When you save money in a pension you may get tax relief on it, so the real cost could be less than you might think. Secondly, any returns you earn on your investment are reinvested over-and-over. Of course it all depends on how your investment performs but even a small amount saved in a pension when you are young could become very large by the time you retire.

2. How much do I need to save for my retirement?

How much you put into your pension pot depends on the type of lifestyle you would like to have and the length of time you will spend in retirement. Obviously, no one knows exactly how long they will live for and therefore how long their pension will need to last for. One thing we do know is that the sooner you start a pension, the bigger it should grow.

Due to better health for an ageing population, life expectancy is increasing. Most of us can now look forward to around 30 years in retirement, which is great news. How you support yourself financially during those years is the big question. It is important when planning your retirement to ensure you have built up a substantial pension fund by the time you retire.

3. How is my money invested?

A key factor in helping you grow your retirement fund is the investment return you could earn on your pension contributions. Any contributions you make into a pension will be invested in a fund, with a view to growing your money. Where your money is invested and how much risk you are prepared to accept is completely up to you. However, a general rule of thumb is the further you are from your retirement, the more adventurous you can be with your investment choice. An expert such as a financial broker or advisor will be able to help you work out what investment choice might best suit you. Zurich Life offers you access to a wide range of investment funds and choices – from very low risk options such as cash funds, medium risk options like multi-asset or managed funds, and higher risk options such as equity and property funds.

4. How does the tax relief work?

Saving for your retirement is down to you, but to encourage you to save for you future, you will receive valuable support from the government in the form of tax relief. It’s one of the most compelling reasons to save through a pension. Other forms of savings, like bank accounts or savings plans, do not attract such generous incentives.

Every contribution you make to a pension plan receives tax relief based on the rate of income tax you pay (most of us pay income tax at a rate of either 20% or 40%).

5. If I have my own pension will I still be entitled to the State pension?

You can still have your own pension and receive the State pension as long as you meet the criteria. To qualify for the contributory State pension you must have started paying social insurance before reaching 56 years of age. You must have paid at least 520 full rate social insurance contributions and have a yearly average of at least 48 paid and/or credited full rate contributions from the year you started insurable employment until you reach 66 years of age. If you don’t have the above then you must have a yearly average of at least 10 paid and/or credited full rate contributions from the year you started insurable employment to the end of the contribution year before you reach the age of 66.

6. Is it too late for me to save for my pension?

Planning for retirement is an important step to take, and it’s never too soon or too late to start planning your pension, which will help you to have the lifestyle and financial stability you desire in your retirement.

Although it’s never too late to start saving for your retirement, obviously the sooner you start the better. Regardless of your age, whether you’re self-employed or an employee, we’ve created pension plans for all circumstances. See which pension is right for you.

7. When can I access my pension savings?

In Ireland, tax relief is given for saving for retirement, therefore withdrawing your funds ahead of time is not encouraged and is often only allowed if there is a case of ill-health, such as that caused by a long-term disability. If this is the case and you are experiencing a serious illness, then you can access your personal pension at any age. Otherwise, if you want to access your pension early, you must wait until you’re 50 to draw it down if you are in an occupational pension scheme and you must be 60 if you have a PRSA (50 if you’re an employee and leaving service) or a retirement annuity pension.

8. What are my options at retirement?

After you have taken your retirement tax free, cash lump sum you can choose between an annuity and/or an Approved Retirement Fund (ARF). An annuity is whereby on retirement you receive a regular income for the rest of your life. Annuities may be more suited to people who wish to avoid potential risks such as stock market volatility, and would prefer a guaranteed income for their retirement.

There are several choices you need to make when purchasing an annuity: A single life annuity is payable for the rest of your life only. With a joint life annuity, a percentage of your pension is payable to your spouse after you die. If you choose to include a guaranteed period, your pension will be payable for a minimum of the guaranteed period, even if you die during that time. A level annuity means payment of the annuity remains the same throughout your life and an escalating annuity means payment of the annuity increases at a fixed rate each year.

An ARF is a personal retirement fund where you can keep your money invested after retirement. You can withdraw from it regularly to give yourself an income, which will be subject to income tax, PRSI (up to age 66) and USC. Any money left in the fund after your death can be left to your next of kin.

There are certain restrictions to investing in an ARF. A Financial Advisor will help guide you on the option that might best suit you.

9. Defined benefit vs defined contribution

Company pensions can generally be categorised as being either defined benefit or defined contribution. A defined benefit pension plan (DB) sets out the specific benefit that will be paid to a retiree. This calculation takes into account factors such as the number of years an employee has worked and their salary, which then dictates the pension and/or lump sum that will be paid on retirement.

A defined contribution pension (DC) is an accumulation of funds that makes up a person’s pension pot. A person contributes a portion of their salary to a pension scheme. Ideally, although not always, their employer also contributes and these contributions are invested in a fund in order to provide retirement benefits. There is tax relief on this type of pension and the benefits at retirement will depend on a number of different factors such as the contribution levels, how the investment fund performs, plan charges and fees and the annuity rates available when you retire.

The main difference between a defined benefit scheme and a defined contribution scheme is that the former promises a specific income and the latter depends on factors such as the amount you pay into the pension and the fund’s investment performance.

10. What are the fees associated with my pension?

There are different sets of fees depending on the type of pension you take out and which organisation you hold your pension with. The Pension Authority advises that consumers get to know the typical charges that can apply. These might include entry fees, contribution charges or bid/offer spreads, annual management charges (AMC), policy charges/per member fees, switching charges and Pension Authority fees.

11. Do I need to speak to a financial broker or advisor?

We know talking about pensions won’t get your pulse racing. And of course, you’d rather be living your life than worrying about your retirement. But we also know that the sooner you deal with it, the better off you’ll be come retirement.

As this is your money and your future, it’s always advisable to speak to a financial advisor. You can call us on 018298500 to arrange an appointment with one of the IPF team.

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as at November 2017 and may change in the future.

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End of Year Awards 2017

 

Congratulations to the winners of our staff awards on Friday night, Jennifer Fitzgerald (Administrator of the Year), Marcin Czekalski (General Insurance Advisor of the Year), Louise O’Brien (Manager of the Year) and John McEntee (Assistant Financial Advisor of the Year).

These awards are given to those who have excelled in their fields over the last twelve months and have gone above and beyond to support their colleagues and clients.

Well done to all!

 

Also, voted Colleague of the Year by her peers was Brid Holligan. Congratulations!

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Generation Rent: The importance of being earnest

Couple looking at a house

Generation Rent: The importance of being earnest

17/08/2017

According to Savills 18% of people in Ireland now live in private rental accommodation, which is 497,111 households. With no real history of long-term letting or leases and the introduction of Rent Pressure Zones to try to slow down rent increases, the growing concern is how renters can protect themselves in this progressively volatile market.

A report from Goodbody Stockbrokers in May showed that the average price of a house is set to soar, escalating by 10% this year and by another 8pc by the end of 2018. In turn, more people are renting accommodation, with an earnest focus on saving to get onto the property ladder.

The rise of generation rent is evident but it is a culture that before now was not commonplace in Ireland. Traditionally, third level students aged 18-25 years and single people aged 20-35 years was the profile of renters. This profile has extended to include individuals and young families in their 30s, 40s and 50s. Other mainland European countries, such as Germany, have had a longer history with long-term renting, where accommodation leases are available for up to 10 years and subletting apartments to hold onto a lease is the norm. The introduction of longer rental leases here could be a solution by offering more security to renters and landlords, both benefitting from the longer-term arrangement.

According to daft.ie, our rented sector can be split into categories: ‘movers’ and ‘stayers’. One of the main reason people choose not to move regularly is if rents are rising rapidly in the market and there is a lack of availability, even if the accommodation they are in is not 100% suited to their needs. The former Minister for Housing Simon Coveney brought in Rent Pressure Zones (RPZs) in reaction to the increasing market rents, which came into effect in December 2016. This means that rent increases in these areas can be capped at 4% annually, and is seen as another reason why the amount of stayers has risen significantly.

Stated in the Daft.ie rent price report for Q1 of 2017: “Since 2013, market rents nationally have risen by just over 50%. However, sitting rents have increased by just 27%. In other words, those who have stayed in the same lease have enjoyed a discount relative to market rents, with rents increasing by just half the increase seen on the market.”

Sitting tenants now enjoy not only a discount relative to the market rent, but also protection of that lower rent into the future. Meanwhile, movers in the private rented sector face not only far higher rents but almost no availability in the market.”

Rent Pressure Zones

At a recent off-site strategy meeting with the now Minister for Housing Eamonn Murphy, it was suggested that a new city be formed in the midlands to help with the “choke” on Dublin. However, while the capital remains the most expensive place to rent, prices across the country have also seen increases but with varying degrees. Figures from Daft.ie, show that in Dublin, rents are now an average of 15.4% above their previous peak while in Cork and Galway cities, rents are 9.7% and 17.8% above levels recorded nine years ago. Outside the cities, the average rent is 3% above its previous peak.

In the three of the counties closest to Dublin – Meath, Kildare and Louth – rents have increased by more than 60% since 2012, which is to be expected considering a lot of people have turned to commuting from further distances in order to be able to find accommodation and affordable rent.

All three cities in Munster saw their rents increase by at least 10% in the year, as did Waterford, Cork and Clare counties. However, fewer than 800 homes were available to rent in Munster on May 1st, a decrease of almost 100 on the same date a year earlier. In fact, Ronan Lyons from Daft.ie reported that there were “fewer than 3,100 properties available to rent nationwide on May 1st compared to 4,000 three months previously.”

Getting protection

With a concerning fluctuation in the number of houses available, for sale or let, the importance of protection for generation rent is crucially important. The rental market is an added pressure in itself for renters, leaving them vulnerable in many ways. But how would they cope if, for example, they became ill and couldn’t pay the rent?

Renters like mortgage holders need similar protection and a life insurance policy could be used to offer that much-needed security. Zurich Life offers serious illness cover that enables you to gain assistance at a time when you need it most. If you have to stop work due to a serious illness diagnosis, this cover provides you with financial support that could cover your rent during your treatment.

Regardless of your living arrangements, a life insurance plan can be used to protect you and your family from financial strain should you become ill and are unable to provide for them. There is no reason why as renters, you can’t have similar financial protection to mortgage holders. To find out more about the right protection plan for you visit Zurich Life or speak to a financial broker.

Reference: ZurichLife

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What can I do with my pension if moving job?

Q&A: Dominic Coyle, Irish Times, 1st August 2017

‘I’m hoping you can give me some general guidance on a pension matter. I will be leaving my job next month after 10 years to return to college.

I have a defined pension contribution with my employer (Investment fund name Dynamic Pension and investment with Zurich). The current value stands at approx €65,000. Do I just leave it sitting there and transfer it to a new employer when I start a job in two years hopefully? Or someone mentioned to me about converting it to cash so that it doesn’t lose its value?

Pensions are foreign territory, so any help would be greatly appreciated!’

Ms M.O’D., email

 

Pensions are foreign territory to pretty much everyone, not least because there are so many different scenarios and the industry itself does little or nothing to make them more readily understandable.

I can pretty much guarantee that, regardless of what I say to you, someone in the industry will contact me to tell me that there was a different approach that I should have considered.

For this reason – and more importantly because you have significant savings of €65,000 tied up in this pension – it is important that you talk to an independent financial adviser, not be someone from Zurich which, naturally, cannot consider itself independent as it currently manages your fund.

 

Having said all that, there are a few things you should consider .

The Dynamic fund in which you are invested seems to have performed at or above average over the past decade or so. That’s hardly surprising as it is currently 92 per cent invested in stock market shares, or equities as they are also known. Stock markets have enjoyed sustained growth in recent years, and generally outperform other asset classes over the long term.

This is fine if you are younger with a reasonably long horizon before retirement. As you come nearer to retirement age – and you have less time to recover from nasty investment shocks – most advisers will move you away from equity-heavy funds to something with a lower risk profile, generally with a heavier weighting of cash and government bonds.

As you don’t give me any indication of age and retirement expectations, I can’t comment further. What I can say is that the Zurich Dynamic fund is classed as medium to high risk by the company itself, with a ranking of 5 on a scale of 1-7. You can find an explanation of Zurich risk rankings here: https://www.zurichlife.ie/funds/risk-ratings/.

As this is a defined contribution scheme organised through your current employer I assume you will have been given some advice of selecting this fund in the first place, and are happy to take on a reasonable amount of investment risk in the hope of securing higher investment returns – though your comment about “foreign territory” does make me wonder.

 

So what are your options now?

In general, when you leave an employer – and assuming you have been there more than two years, as you have been – you have three alternatives:

1. Leave it there: you can leave the pension where it is in your employer’s scheme and it will continue to grow (or diminish) according to market movement. It may well be open to you to move the savings within the employer’s fund to a slightly lower risk investment option if you are concerned about volatility, but you should certainly take professional advice before doing so. You will not be able to add further to this fund once you have left your current job.

When you retire, as with any other pension you have at that time, you will be able to draw some of it down in cash and take the rest by way of an annual annuity payment or transfer it into an Approved Retirement Fund where it can remain invested and, hopefully, continue to grow.

2. Purchase a buy-out bond: a buy-out bond, or a personal retirement bond as it is also known, allows you to transfer your current benefits to a personal pension plan controlled by you. You can change the way it is invested but you cannot add further to it. Your choices at retirement are the same as with any of the other options.

3. Transfer to a new employer’s pension scheme: obviously this is not relevant during the time of your study but you could still transfer from your current scheme to a new employer’s scheme when you secure work after your course. Any decision to do so would be based on the investment options offered by the new employer compared to your existing one and the charges involved.

 

In your particular case a fourth option is available. You can transfer the money for your current pension fund to a Personal Retirement Savings Account (PRSA). As I understand it, this is confined to people with less than 15 years’ service with their employer, which seems to cover you.

Given the size of your fund, however, you would need to secure something called a Certificate of Comparison highlighting the advantages and disadvantages of such a move. It examines the benefits you are likely to receive under your current scheme and the benefits likely to accrue within a PRSA. It comes with a written statement explaining why a transfer to a PRSA is in your best interest. That certificate and statement could cost you €2,000 or more.

The advantage of a PRSA over, say, a buyout bond is flexibility in that you can continue to add to the PRSA even while in college if you choose but also when you go back to work. You also have considerable control over how it is invested.

However, unsurprisingly, charges on individual PRSAs tend to be higher than you would encounter in group schemes, say with an employer. Also, an employment-based pension scheme generally offers additional benefits such a death in service and permanent health insurance should you no longer be able to work due to illness or injury.

There is also the question of whether your new employer would be willing to make contributions to a PRSA if they already fund an occupational scheme. Employer contributions are a big factor in helping your fund grow.

So, which option should you choose?

That all really depends on you, but you should consider carefully the charges associated with any of the options before selecting one. Charges eat into investment returns, and a small difference in charge can have a large impact on your final pension fund. If you are paying more the fund needs to be delivering a notably better return to overcome that impact.

You also mention the prospect of converting it into cash “so that it doesn’t lose its value”. Two things arise.

First, as you are in your current scheme more than two years, you cannot liquidate it – i.e. get your cash back, albeit after tax. The money is now locked into a pension fund of one sort or another until retirement.

You could transfer the money – possibly even within your current employer’s scheme or else through a buyout bond or a PRSA – so that it is invested only in cash. You would eliminate a lot of the volatility inherent in a fund invested heavily in equities. However, you would also be sacrificing any opportunity for that investment to grow as it will need to to provide a reasonable retirement income.

And the scheme will still lose its value. The impact of inflation will eat into the value of cash anyway. While inflation is low currently, it still has a cumulative impact over time, and policymakers are actively trying to raise the rate of inflation to around 2 per cent per annum.

In addition, a cash fund still has management charges even if they are lower than with an actively-managed equity fund, and those will also eat into the value of your pension.

Personally I don’t think a 100 per cent switch into cash makes any sense for you, but that is speaking as a journalist who writes in this area and not as a qualified professional investment adviser.

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Co-Habiting couples – The unintended Inheritance Tax nightmare!

When the ‘Civil Partnership & Certain Rights and Obligations of Cohabitants Act 2010’ (Civil Partnership Act) was passed, it created the legal status of civil partnership for same-sex couples. This meant that the property and financial entitlements that previously only applied to married couples would now apply to registered civil partners. However, the Act only applies to same-sex couples who have registered their relationship. This has caused some confusion for co-habitants of the opposite sex, who perhaps believed that they too should enjoy these financial entitlements.

Unfortunately, this is not the case as the Act’s logic suggested that opposite sex couples could get married, whereas same-sex couples couldn’t. The Civil Partnership Act defined a qualified Co-Habitant as being “An adult who is in a relationship of cohabitation of 2 years or more (if dependent children are involved) or for 5 years or more in other instances” meaning that either can now legally claim from their deceased cohabitant’s estate. However, little known to many is that inheritance tax will still be liable, and it will be payable at the Group C €16,250 threshold!

 

The Inheritance Tax nightmare

There are two important points to be aware of when arranging a protection policy for non-married/cohabiting couples;

  • If they arrange a protection policy on their own lives for whatever purpose, the surviving partner may be left with an inheritance liability. If the survivor is deemed not to have paid premiums, problems arise!

and

  • That they are still treated as strangers in the eyes of Revenue so for inheritance tax purposes, the threshold which applies being €16,250.

 

Care is needed as to how policies are set up, with the following considerations;

  • Who pays the premiums?
  • Can the small gifts exemption be used?
  • The Dwelling House Exemption?

 

Let’s take the example of Ann and Tom A co-habiting couple, Ann and Tom, decide to take out life cover of €300,000 on a joint life basis to cover any losses each may experience if one of them were to die. Tom is currently unemployed, so Ann will be paying the total premium on the policy until such time as he is employed. What would the inheritance tax situation be if Ann were to die prematurely?

Unfortunately for Tom, as Ann has paid all the premiums, he is deemed to inherit the whole €300,000 from Ann and has to pay inheritance tax on it. Assuming he has not received any other assets under Group Threshold C previously, his tax liability is: €300,000 – €16,250 x 33% = €93,637.50 If Tom was in a position to say he’d paid for half of the premiums out of their joint account, this would help reduce the tax liability by half, as it’d be assumed he’s inherited half of the sum insured. €150,000 – €16,250 x 33% = €44,137.50 Either way, Tom pays Revenue within a certain time frame either the sum of €93,637.50 or €44,137.50.

 

What’s the solution?

The ‘Life of Another’ Arrangement

Under a simple ‘Life of Another’ arrangement, both Tom and Ann take out separate Life Insurance policies on each other, Tom insures Ann and vice versa. This means that each of the policies is owned separately, clearly identifiable and there should be no liability to inheritance tax as they each pay for their own policies.

Tom is unable to pay premiums, he is unemployed? This can be solved by Ann using the Small Gift Tax Exemption by ‘gifting’ the premiums to Tom which Tom will use to pay for the policy he owns. The Small Gift Tax exemption is €3,000 a year from any one person to another, so if the premiums are below €3,000 a year, Tom can claim the premiums were gifts. Therefore, in the scenario where Ann was to die, Tom receives the proceeds of the policy he owns without any liability to inheritance tax.

 

The ‘Section 72’ solution

Alternatively, each could take out a separate Section 72 life insurance policy to pay off any inheritance tax liability. Section 72 policies are set up under Section 72 trust, meaning that the proceeds of such policies are exempt from inheritance tax insofar as the proceeds are used to pay inheritance tax. This arrangement may be more important to cover any tax liability for the dwelling house in which the couple are living. For Tom and Ann, if they buy a house in joint names and one of them dies, the survivor may have a liability to inheritance tax on the value of the house (assuming the house is held as joint tenants). However, in this case they may be able to avail of the Dwelling House Exemption.

The Dwelling House Exemption provides a complete exemption from inheritance tax on the value of their home, provided certain conditions are met, basically, that it was and continues to be their home but with having no other interest in any other property. So, if either Tom or Ann had previously owned a property before they met and continued to own it when they began co-habiting, they would not be able to avail of the relief and would have a liability to inheritance tax on the property – not an unusual situation for couples.

Tom and Ann’s house is valued at €500,000 and they contribute equally to deposit, mortgage repayment and joint mortgage protection policy. Again, if Ann were to die, Tom inherits the house but because he still owns a property purchased a few years back, he is unable to avail of the Dwelling House Exemption. The mortgage is cleared by the mortgage protection policy and he inherits Ann’s 50% of the property, so his inheritance tax liability is 50% of property = €250,000 Threshold for Tom = €16,250 Residual taxed = €233,750 x 33% = €77,137.50 The solution in this case would be to either increase the sum insured on the mortgage protection policy to cover the inheritance tax liability or take out a Section 72 policy so the inheritance tax liability is cleared.

Both Tom and Ann could take out a policy on their own life and hold it under Section 72 Trust, with the other being the beneficiary. In the event of either dying, the sum insured is payable to the survivor as beneficiary, who uses the money to pay off any inheritance tax liability. In conclusion, when considering protection policies as a co-habiting couple, it is necessary for the adviser to clearly:

  • The needs of the clients,
  • Trace whatever tax liability they may face in the event of either dying, and
  • Put a structure in place that will ensure the proceeds of policies are paid out in the most tax efficient manner.

 

 

Ref: Zurich Life, Tech Talk, June 2017