Jill Kerby

MORE OF YOUR MONEY QUESTIONS – Part 2

Mr TE writes: A year ago my wife and I sold our house and moved in with my 60 year old widowed mother. We used our own money to create a granny flat for her. She has agreed to sell us the house, worth €400,000 and to accept €250,000.  Will we have to pay gift tax on the €150,000? Is there a more tax-efficient way to buy it? What about the dwelling house exemption clause?

The Revenue requires that when a property is sold the price reflects its market price. Your mother has agreed to sell you her €400,000 property for just €250,000 which leaves a market value 'shortfall' of €150,000. But she can gift you that value, free of capital acquisition tax, as the €150,000 amount falls well within the €280,000 tax-free CAT threshold between a parent and child that will apply from next January. (It is currently €225,000.)

The CAT Dwelling House Exemption is not relevant in this case. Not only is your mother not gifting you her entire property, which is one of the requirements of the exemption, but the fact that you are sharing it with her (and only for the past year) disqualifies you. Under the Exemption rules, only a property that is not the disponer’s principal private residence can be gifted to the person who has lived in that other property continuously for the three previous years. The other conditions are that the beneficiary does not own a property of their own and agrees not to dispose of the one gifted to them for at least another six years. Where a person does share the owner’s principal private property for the three years, has no property of their own, and agrees not to dispose of it for six years, that property can be inherited, CAT-free, when the owner dies.

Mr MD writes:  I invested €70,000 in a single premium investment fund portfolio with a well-known life assurance company in 2013. My broker, who is now an ‘independent’ broker, is now recommending that I sell it and buy a new one with another provider even though the existing fund has done very well. This will cost me €2,500 in early exit penalties. He says it is not just for potentially better future fund performance but because the other company offers better access and lower charges. Do you think this is good advice?

What you describe sounds like a classic case of churning – that is, recommending a switch in order that the broker receives a new set of lucrative commissions.  Investment funds like the ones you describe (company names provided) are designed as long term, not short term investments, partly to recoup initial set-up charges but also to allow the compounding of positive returns over time. The charging structure of both companies is very similar.

I wonder how ‘independent’ your broker really is.  It sounds like he may have been a tied agent of the first company but has now become an ‘independent’ broker by securing the minimum insurance agencies necessary. As I’ve argued many times before, truly independent, impartial financial advisers offer the widest range of investment advice and ideally are fee-based, declining to accept sales commission from the product providers.

Before you do anything, ask your broker to put down in writing why he is recommending the switch, including what he believes are the specific shortcomings of the existing fund compared to the new one. Ask him to also compare all the costs, fees, charges and commissions and exit penalties.  Also, since he can’t guarantee superior performance from the new fund, is he willing to pay the €2,500 early exit penalty for you?  I doubt it. Then find a new, impartial  adviser.

Ms JF writes: My brother Michael has just left Ireland to return to the UK permanently.  He arrived in Ireland in late 2002 and was continually employed here for nearly all of that time. Is he entitled to a tax rebate from the Revenue and if so what are his entitlements?

Your brother may be entitled to a small tax rebate for this year, but he might also be able to claim tax refunds for any unclaimed tax credits over the previous four years such as medical and dental expenses, rent relief if he had been a renter as of December 2010, pension contribution relief, etc.  He should consult a good tax adviser or accountant.

Ms BO’N writes: I am in my early 40s and single. I have had MS for the last 12 years and work full time as a self-employed project manager. My pension is currently worth about €100,000 and I have €30,000 in savings. I have a small mortgage and no other debt. My concern is that I may not be able to work much past age 50 and I’m not sure about my early retirement options.

It is very sensible of you to start planning for the possibility of an early retirement from age 50 due to your medical condition. According to pensions expert Aidan McLoughlin of the ITC Group your options will include buying a guaranteed impaired annuity income with your pension fund; possible access to the entire fund with a reduced tax liability, or keeping the fund invested in an Irish Approved (Minimum) Retirement Fund or possibly in a less restricted UK post retirement invested fund. You will be entitled to a state disability pension until age 66 when the State Pension will be then be paid in its place. You should arrange to get some independent financial and pension advice as soon as possible.

Mr FD writes: We are an elderly couple both over 66 & have an income of roughly €40,000.00 which isn't much and I wonder how much tax we should be paying?

If your joint income is over €36,000 a year, you no longer qualify for the income tax-free threshold for pensioners. But as a jointly assessed married couple on this income, you will only pay income tax at the standard 20% rate, USC at the lower rate of 3% and no PRSI. The usual married couple tax credits will apply.

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie

PENSIONS, INHERITANCE, SAVINGS FILL THE POSTBAG – Part 1

Ms TM writes: I worked for many years in the UK and left behind two private pensions. One is worth £52,000 and other, a defined benefit one, £180,000. I am now 55 and returned to Ireland in 2002. I need to access about £20,000 of this money and am told have to transfer it into a QROPS and will invest the rest. How do I go about it?

Since last April, people with private UK, defined contribution pension plans – not defined benefit ones as these promise to pay an income at retirement - can access their funds from age 55. However, I am told that the UK Revenue authorities are restricting transfer access via the QROPS (to non-UK pension holders unless they belong to pension schemes that allow the Irish person to also retire only from age 55 (not 50 as is the case in certain circumstances for many Irish occupational pension schemes.) Someone who wants to transfer their UK pension to an Irish PRSA, for example, will not be able to do so, as assess to the PRSA fund is only from age 60, not 65.

I am told there are still unanswered questions (from both Revenue authorities) about the tax treatment of the Irish based person’s UK pension savings, if and when they take 25% of it tax free, as is allowed in both countries, if they encash the entire UK fund, or opt to continue to invest it and draw down an income that will be payable (and taxable) here in Ireland.  Double taxation agreements will apply, but the tax situation should be set out clearly from the outset, ideally from an experienced, Central Bank of Ireland regulated pension adviser who is familiar with the UK pension changes. Ignore advertisements from so-called pension ‘administrators’ who claim to be able to arrange to transfer your UK pension money to Ireland. Instead let your Irish adviser deal directly with your UK pension provider and the UK and Irish tax authorities.

Mr NB writes: Since I began working in 2000, I have accumulated a large savings fund of over €150,000, mainly from substantial overtime and bonus income. I only have a small mortgage and no other loans.  I transferred this savings from one Irish bank to another last January. There were no questions asked then about how I accumulated this money or where it came from but now I wish to buy a new house and the bank now wants to know the source of this money. Is the bank allowed to request such proof?

The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended by the Criminal Justice Act 2013) has wide-ranging powers to determine the source of all funds – especially €15,000 or over - deposited in Irish financial institutions. It appears that your second bank was very lax in not formally determining the original source of the €150,000 you deposited with them back in January.  A report last February by the Central Bank into the compliance levels of the Irish banking sector identified several shortcomings and “more work is required by banks in Ireland to effectively manage Money Laundering and Terrorist Financing risk, said Domhnall Cullinan, the Head of the Anti-Money Laundering.”  In light of their wide-ranging powers (and this report) you may have to provide your new bank with copies of your previous bank statements which show that your savings were derived from your income, which presumably was deposited each month in the other bank.

Ms MB writes:  My brother and I are set to inherit our mother’s house some day. She is 84 and she would like to go on a Cruise, but we cannot afford it. We have heard of Seniors Money and are wondering if we could borrow the money against the inheritance?

A home equity release loan, like the kind Seniors Money (see www.seniorsmoney.ie) offered until 2012 must be borrowed by the owner of the property, not family members who may inherit it someday.  No institutions are currently extending these loans. Perhaps you and your brother could borrow the money for the three of your to take the cruise, either as a personal loan or a second mortgage on your own homes?  You will need to have the means to repay the loan before your own banks or credit union will extend the credit, but you, at least can do so in the knowledge that there may be a future inheritance.

Mrs BD writes: I ran a bed and breakfast from my private home for 29 years which ended in 2008.  I am now thinking about selling up and downsizing. Will I have to pay any capital gains tax on the proceeds?

Yes, there will be a CGT liability but the size of the liability will be determined by how much of your house (bedrooms, kitchen, bathrooms, etc) was used exclusively for guests and how much for yourself and your family as your principal private residence and the period of time in which the property was also a B&B. You should engage a good tax adviser to help you pay and file any tax payment when it falls due.

More of your letters answered next week…

jill@jillkerby.ie

THE WAR ON CASH IS HEATING UP

The phasing out of one and two cent coins by a voluntary campaign between retailers and the Central Bank that began on October 28 has probably gone unnoticed by most of you. 

Coin rounding is part of a wider programme however, to move Ireland closer to a cashless society. And some people suggest it’s a trend that we may come to regret.

Why go cashless?  The positive implications far outweigh the negative, claim its supporters, who include Bank of Ireland, which is about to introduce high cash limits to its teller service to discourage the use of cash by customers.  (The Bank has also been forced to agree to exempt ‘vulnerable, elderly’ customers from these new conditions.)

Cash notes and metal coins are expensive to produce, distribute and secure and they need to be physically replenished and replaced, we are being told. They can also be lost or stolen and are an expensive cost for both businesses and the deposit taker. Coins and notes also fuel the black economy and criminal activity and facilitate tax evasion.

To this end, some EU countries like Italy and France have already legally banned cash retail and commercial transactions of more than €1,000 and €3,000 respectively, on top of the standard money laundering rule that requires EU banks (including Irish ones) to question cash deposit or withdrawal limits in excess of €10,000. (The limit is $10,000 in the USA.)

The cashless-society cheerleaders insist that billions of euro can be saved by abandoning paper, ink and metal for plastic debit cards and electronic purses, like the new contactless payment debit cards that allow you to buy up to €30 worth of goods without having to queue at a cash register. They site Denmark and Sweden as countries where very little cash is used for everyday purchases.

So what are the downsides?  Aside from the fact that the transition period is sure to inconvenience some people (cue Bank of Ireland) who are not comfortable with the technology involved, once paper and metal money is phased out, you will have no choice but to deposit your income or savings with a financial institution sanctioned and presumably regulated and supervised by the state that will issue the plastic money card (or phone app) that will substitute for notes and coins..

A very real risk is what happens to your money and ability to purchase real goods and services if there’s a local bank or widespread computer or electricity failure. Does the grocery store or chemist agree to let you walk out with your purchases and send you a bill?  How will you fill up your car at the petrol station?  Or buy a bus or train card to get to work or school?

In an entirely cashless society it would be even easier for the forces of the State to track your income, savings and wealth. Gone will be the private – hidden - mattress, jar or wallet stuffed with notes and coins…because the physical money will no longer exist.

And how tempting might it be for governments to impose emergency levies in the form of, say, a transaction levy on every cashless transaction in the event that the authorities (here or in the EU) believe that they had to ‘save the banks’ or rescue Greece again.

(The State already has laws on its books which allow the Revenue to dip into your state pensions, welfare payments, bank account if you don’t pay your taxes. Since 2010, via the Pension Levy it has ‘dipped’ directly into every private pension fund account in the state.)

Make the transaction levy small enough (say just a cent or two) and most people probably wouldn’t complain, especially since there is no alternative anymore – notes and coins that you keep in reserve – to use in place of your compromised electronic cash card.

Will a cashless society diminish tax evasion and criminality? Maybe. But criminals are already reportedly getting around the crackdown on larger cash purchases by demanding their ‘clients’ pay them via popular pre-paid cash cards and Bitcoin.

The cashless society has been presented as ‘modern’, ‘progressive’ and inevitable. It prompts the naïve to repeat that hoary old chestnut, “if you have nothing to hide, there’s no harm” in allowing the state to monopolise not just the issuing and price of money, but the method by which we make our purchases.

A cashless society may be on its way, but it comes at a cost that hasn’t been debated enough – and the loss of personal privacy might end up being the biggest price of all.

Do you have a personal finance question for Jill or would you like a copy of her new Talking Money Guide (which can also be downloaded directly at www.irishlife.ie? Write to her c/o this newspaper or by email: jill@jillkerby.ie

BIG UK STATE PENSION CHANGES COULD MEAN AN INCOME BOOST

Are you receiving a UK state old age pension? Did you – like hundreds of thousands of Irish emigrants work in the UK, pay National Insurance contributions (popularly known as “the stamp”)?

If you did and are now getting a weekly UK pension, no matter how small or large, you might be interested in an opportunity to boost that pension by between £1 and £25 a week.

A significant programme of pension reform in Britain has been happening for several years. So far it has included a universal private pension plan and last April saw  Pension Freedom Day, which gave people access to their private pensions from age 55. From next April 6 a universal state pension of £155 per week (€216) is being introduced for new pensioners in order to simplify and standardise a hugely complex system of UK state retirement payments.

Here, the state pension is a universal, weekly payment based on a set number of pay related social insurance contributions. In the UK, the system has been earnings related and since earnings vary widely over the years supplementary pensions (SERPS) were added to the ‘basic’ pension, currently £115 for women aged 63 and men aged 65. The second and other supplementary pensions mean that extra payments of c£165 per week have been paid to some people. (Only an official Pension Statement from the Dept of Work & Pensions can provide an accurate picture of individual UK pension value.)

From next April 6, a standard £155 pension payment will be made to all new retirees, and the additional pension top ups will no longer exist. However, to allow existing pensioners or those retiring by April 5, 2016 to boost their state pension income, they can make a once-off, lump sum, Class 3A voluntary contribution anytime between October 12, 2015 and April 5, 2017.

Depending on your age and the size of the lump sum payment you make, your UK pension will increase by £1-£25 a week. Annually, this works out at an additional £52 to £1,300 or €72.44 to €1,808 a year at today’s sterling/euro exchange rate. (UK pensions are paid in Sterling, so payments made to Irish based pensioners will be liable to currency exchange fluctuations.)

The cost of buying this ‘annuity’ is based on the pensioner’s current age: the, younger you are, the more expensive it is. For example, a pensioner aged 75, wanting to boost their annual pension by the maximum £25 a week (c€35) or €1,808 a year will have to hand over the equivalent of €23,436 to HM Department of Work & Pensions. A 70 year old will pay €27,086 and a 65 year old, €31,294.

Expensive?  Not really. Money currently sitting in an Irish bank deposit is earning nearly ZERO interest after inflation and DIRT. Even at 1% net interest, you would need €180,800 in savings to get an annual, gross yield of €1,808 a year. Someone with just €23,436, €27,086 or €31,294 sitting in a deposit account can expect just €234.36, €270.86 and €312.94 in annual interest, not €1,808. 

Are there tax implications?  Yes, but first it should be noted that Irish tax residents pay no income tax in the UK. Pension income from the UK is taxable here, but anyone 65 and over can earn up €18,000 a year (€36,000 for a married couple) and pay no income tax. State pension income (including from the UK) is exempt from USC. Pensioners aged 65+ pay no PRSI.

If your total income still remains below the tax-free thresholds after boosting your UK pension then using your savings to make this top-up is well worth considering. Get independent, impartial financial and tax advice.

A final note: it’s true that pension annuity purchases are generally not popular. Bond yields are very low and the annuity can revert back to the life assurance provider. But this UK annuity top up is not just guaranteed, but is also indexed to annual inflation. It can also be inherited by a surviving, dependent spouse and is especially valuable if that spouse is younger.

For example, a 70 year old today who buys the maximum UK pension top up for €27,000 and lives to 100 will enjoy an additional €54,000 worth of inflation protected income (€1,808 x 30 years). But a younger widow, say 63, might be liable to up to 100% of his pension and the top up. If she lives to be 100, the top up alone could give her extra pension income of nearly €67,000! (€1,808 x 37 years).

My own pension adviser, who happens to also specialise in advising ex-pats and other clients with foreign assets, briefed me on these UK changes. But every good adviser should be up-to-date with pension changes in the UK, US, Australia, Canada etc where so many Irish have lived and worked.

To get more information yourself, see www.gov.uk/additional-state-pension/furtherinformation. To arrange for a UK State Pension Statement, see https://www.gov.uk/state-pension-statement

Do you have a personal finance question for Jill? Write to her c/o this newspaper or by email: jill@jillkerby.ie