Jill Kerby

Royal Navy Pension is torpedoed by Irish tax

MB writes from Dublin: I am in receipt of a small Ministry of Defence pension from the UK as I served in the Royal Navy. My understanding is that I don’t have to pay tax on it here in Ireland where I am resident. I am at present fully employed but retiring in 2014. Is this correct or am I just living in hope?

As a general rule, all income is subject to Irish income tax if you are tax resident here, including your Royal Navy pension that you should be declaring in an annual income tax return. However, if this pension is already taxed at source by the UK authorities, in order to avoid you paying tax twice on the same income, you can claim a tax credit here if the combined tax exceeds your Irish tax liability of either 20% or 41%. The Revenue ROS.ie on-line pay and file tax deadline is November 15.

Meanwhile, you can always request from the UK authorities that your MOD pension is paid gross, not net of tax (if this is the case) so that you only pay income tax once here in Ireland. 

It may be helpful for you to know that from 2014 as a pensioner aged 66 or over, you will also be entitled to earn €18,000 or €36,000 (as part of a married couple) entirely income-tax free, in addition to unlimited income and Dirt-free returns from state savings.

Also as a pensioner you will no longer be liable to the 4% PRSI charge on any income, not even on unlimited amounts of unearned income. (Unfortunately, from next year, non-pensioners will be liable to 4% PRSI on unearned income like rent, deposit interest or dividends that exceeds €3,174 per annum.)

However, until you turn 70, you will be liable for the universal social charge (USC) at a 4% rate if your total individual income (excluding yields from tax-free state savings) is between €10,036 and €16,016, or 7% if it exceeds €16,016. Over age 70, USC reduces to 4% on qualifying individual income up to €60,000.

TMcG writes from Blackrock:  I heard recently that the €3,000 CAT-free limit for gifts from a parent to a child could be increased to €6,000 if the gift were to be made by the two parents, i.e. €3,000 from each.  Inquiries made by colleagues has provided conflicting answers.  Perhaps this is something you could clarify?

You don’t say who provided the information your colleagues passed onto you, but they were misinformed. Under capital acquisition tax (CAT) rules anyone – whether a direct relative, a friend or stranger is entitled to give another person up to €3,000 a year, as a gift, tax-free. The gift does not have be reported to the Revenue by either the benefactor or recipient.

As parents, this means that both of you can give each child €3,000 a year in perpetuity, along with every child of your acquaintance if you so wish. This can be a valuable succession planning or inheritance tool as the tax-free gifts of up to €3,000 per annum have no impact on lifetime CAT thresholds; that is, the aggregate value of inheritances or gifts within the three CAT tax-free threshold groups, that is, Group A, parents and children; Group B, linear ancestor/descendents like siblings, nieces or nephews and Group C, strangers.

CEO’B writes from Wexford:  We owe just over €100,000 on our tracker mortgage, which matures in eight years, comprising the ECB rate of 0.5% plus 0.75%. However, we have been saving hard over the last few years and we hope to be in a position soon to clear the mortgage.

Our question is, do you think that due to the fact that our tracker mortgage is costing the bank money, they would agree to reduce the capital sum if we clear it before years’ end? Also, what size discount could we expect and how should we approach them?

The question comes up periodically, and the mortgage experts I speak to usually say the same thing. First, is it in your interest to use your precious capital this way? Could you get a better return than 1.25% net (the current cost of your tracker) over the next eight years on the €100,000 by investing it in another, albeit higher asset. 

Financial advisors are particularly keen on reminding clients that a low cost, properly invested pension plan that grows tax-free not only attracts marginal 41% tax relief on contributions, (you are paying 41% income tax on every euro you earn over €32,800) but due to the magic combination of time and compound interest on the invested assets, the long term returns from a pension should exceed the mere 1.25% compound interest at stake here.

Whether or not your lender agrees to discount your final capital payment is another matter. Yes, trackers are a loss-leader, especially on top of all the payment difficulties so many tracker mortgage clients are experiencing. You, on the other hand, are an ideal client who is already repaying the tracker faster than required.  The advantage to the bank in you repaying the loan sooner is not as great than if you were in serious arrears and suddenly had a lump sum with which to bargain.

All you can do is ask and hope, but keep in mind that there is nowhere else you can take your business if the bank turns you down.

Even if that happens, keep your eye on the endgame. There is a lot to be said about clearing a huge mortgage early – my husband and i did so 11 years ago and have never regretted it. Not only do you finally own your home outright, saving thousands of euro in future interest payments but you also now have those accelerated monthly payments to spend, save or invest  - even in a worthy, tax efficient pension if you so wish.