The Sunday Times - Money Questions 15/02/09

Posted by Jill Kerby on February 15 2009 @ 22:24

MM writes from Galway:  A few months ago I read your comment about fixed mortgage rates and the cost of getting out of a fixed rate. We have a loan of €400,000 from the Bank of Ireland that was drawn down in May 2008 at a fixed rate of 5.25% for three years until June 26th, 2011. Now we would like to change to a variable rate and I was quoted €23,697 as a fine. Is this correct?


Bank of Ireland told me that they do not charge a penalty to break fixed contracts.  That sum you were quoted is the "funding sum", based on the outstanding balance of the mortgage, the interest accrued and any cost directly incurred by the bank as a result of breaking out of the contract.   I can understand why you want to break this contract now that the Bank’s variable rate is just 3.6% APR and it has just launched a new five year fixed rate APR of just 4.1% and just 3.5% for two years. However, the €23,697 penalty you have been quoted is the equivalent of a about a year’s worth of interest on your loan, which would certainly take some time to absorb, even on a lower rate payment.  The repayment difference between a 3.6% rate and 5.25% one on a €400,000 loan over 30 years is at least €400 a month, but even at that lower interest rate it would take several years to absorb that interest penalty, especially if you intend to fund it by consolidating it onto the existing mortgage or further extending the term of the loan.  There are no guarantees that the variable rate won’t go higher either. 





PJ writes from Dublin: Six years ago when my mother-in-law sold her house she set up a trust fund of €30,000 each for our two boys in her own and my wife’s name. All taxes were paid. The fund was Bank of Ireland Life Smart Portfolio and Balanced Managed fund S9. Its value is now €53,000 in total and dropping. We were advised to leave it as it would be a bad time to get out.  If the Bank of Ireland was nationalised what would happen to the investment?  If the money was taken out and just put into their Credit Union accounts what questions would be asked by the credit union and are we liable for more tax?  What would you advise to do with the money as we don’t want the boys to have direct access to the money until some kind of maturity has set in.  It is very difficult to get independent advice so any help would be appreciated as we have one elderly woman very worried.

If this investment fund is closed now, the losses will be crystallised.  You don’t say how old the children are or for what use the fund was created – college education perhaps?  The question your mother-in-law and wife need to ask themselves is whether the investment will recover sufficiently by the time the money becomes available.  I’m also not sure from your letter what kind of a trust has been set up, but shifting the money from Bank of Ireland to another institution shouldn’t make too much difference if it is a legal issue that prevents access to the matured fund at say, age 21 or 25 or whenever.  Consult your solicitor about the legal contract.  It sounds to me that everyone’s main concern is that there are no more losses. Bank of Ireland Investment Managers should allow you a free switch into a more secure deposit or asset fund in which the capital is guaranteed. Or you can do as you mention, and shift the remaining money into the boys’ credit union accounts or another deposit institution. Since you have lost money, there will be no exit tax of 26% to pay if you close the fund, but your mother-in-law and wife will have to produce the proper identification to comply with money-laundering regulations if they open a new account.




LD from Dublin: I am 50 years old and joined the public service in 2003. I currently pay around 6.5% of my gross salary into the public service pension scheme. I also have a PRSA which I started around the same time to supplement the public service pension and into which I contribute the maximum amount allowable for tax relief. With the new pension levy, I estimate that I will have to pay an extra 8.8% of my salary into the public service salary, making a total of 15.3% of my gross salary going to my public service pension. To make sure that all contributions are tax efficient, I am considering reducing my PRSA contributions to 14.7% of my salary to maintain the total pension contribution allowance of 30% of my salary. Does this make sense?


If what I have been told by a senior official in the Revenue is correct when the pensions levy legislation is published it is expected to allow public and civil servants to continue to claim the maximum tax relief available on any Additional Voluntary Contributions (AVCs) or PRSA contributions they are currently making up to and including the allowable amounts which are income and age related. IN your case, because you are now 50, you will continue to be able to claim tax relief on the 6.5% mandatory pension contribution, and the 23.5% into your PRSA which brought you up to your 30% contribution limit, PLUS tax relief on the new 8.8% contribution you must now make into your public service pension.  Whether or not you still want to or can afford to divert a total of 38.8% of your gross income into pension funding is another matter, though the actual cost to you will be reduced by your higher rate of tax. But keep in mind that this new 8.8% levyis not actually buying you any extra pension income; it is really nothing more than a gross pay cut, albeit one that attracts tax relief.  It is the PRSA that is buying you a genuine pension top-up.

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