Q&A:Q I KNOW you have covered this in other aspects, but I do not believe you have addressed this angle.
We have a Capital Plus deposit account with Anglo Irish Bank that started in July 2007 and ends in April 2011.
This is capital protected, but locked in.
a) Is this account still covered by the bank guarantee after September 2010?
b) No withdrawals are a feature of the account – surely there is a case for the Government to change deposit accounts of this type with Anglo?
Mr GMcS, e-mail
A I have had two queries about this range of products in the past week. As I understand it, the Capital Plus product was sold as one that guaranteed the capital deposited up front while aiming to deliver superior returns. This was done by investing in indices that, at the time, held out the prospect of superior returns.
There were several versions of the account between 2006 and 2008 – with maturity dates ranging from March next year to as late as 2012 – and each were invested in a slightly different fashion. Many were tied to the performance of certain indices – equity, property, commodity, etc, as far as I can ascertain.
A second feature of these products, as you note, is that they prohibited early withdrawals – at least without sacrificing the guarantee.
The problem from your point of view is that, while these products did offer a capital guarantee, that guarantee is only good as long as the group offering it – ie Anglo Irish Bank – is around to honour it. Of course, the bank has since collapsed and is now on life support in the hands of the State.
The lifeline is the State banking guarantee put in place during the banking crisis. This provided an absolute guarantee on bank deposits for a two-year period, which runs out in September 2010. From your point of view, this still leaves your position uncertain, as your investment will not mature until 2011.
The European Commission has approved an extension to the bank guarantee for up to five years. However, it appears to relate to products sold or issued between December 1st of this year and June 1st of next year. Quite what this means for people with existing term savings that fall outside the two-year window of the original guarantee is uncertain.
Until the Government transposes the guarantee approved by the commission into Irish law by way of a statutory instrument, probably later this month, we will not know precisely how the extended guarantee will operate.
It is worth noting that even outside this absolute guarantee, there is an underlying bank guarantee that offers significant protection. During the bank crisis, the level of cover was increased so that it now provides protection for customer deposits up to €100,000. As long as your investment is not greater than this, you should be protected regardless of the precise terms of the bank guarantee extension.
Q Your column last Friday stated that the tax authorities would not apply the income levy to deposit interest.
I was assured by the tax office of precisely the reverse. They checked up the legislation in my presence and I think that only interest on saving certs and bonds would be exempt.
Also, is it not the case that deposit interest may be liable to PRSI, subject to the applicable ceilings? If the charge is to be levied then, because the levy changed twice in 2009, it will make the reporting of interest all the more complex.
Mr BC, Dublin
A All I can tell you is that I spoke to the Revenue Commissioners directly and they responded in writing to say that “the income levy introduced in the Finance (No2) Act, 2008, does not apply to deposit interest”.
As I mentioned last week, deposit interest may be liable to PRSI and the health levy, depending on personal circumstances.
Q I am a pensioner aged 70 who has been self-employed for some years. I benefit from the capital allowance on my car. In early 2007 I transferred €7,500 of my SSIA proceeds into a once-off PRSA contribution, in order to avail of the Governments additional contribution to create an initial €10,000 fund.
Had that value been sustained, I could have taken out €2,500 tax-free, and committed the balance to an annuity or to other investment uses.
Had I done so, what then would have been my tax liability on the €10,000 fund and also on the balance of my original SSIA of €7,500?
The most recent valuation of my fund is €7,300 approximately. Hence, the accrued loss is €2,700 to date. I do not need the cash currently, but do not wish to see the value continue to slide.
I realise that by holding on for a further period of years, the value could eventually grow back to its original gross value but, not being immortal, I may not be around to see its future value match the original €10,000. So it may be best to “cash in” now and find some other vehicle in which to invest the remaining sum, less tax due.
What do you reckon would be my current tax liability – given the circumstances described above?
As the capital allowance on my current car will cease this tax year, I am contemplating trading it in and buying a higher-priced used car so that my “new” capital allowance will be offset against my future tax liability for a few years. Do you consider that a good idea?
What other alternatives would you advise me to consider?
Mr JD, Dublin
A As you say, the stock market volatility of the past two years has undone much of the benefit for people in your position who availed of the additional bonus offered to investors in special savings incentive accounts (SSIAs) who transferred those funds to a pension scheme.
Of course, there is always the prospect that the fund will recover fully, but there is no guarantee of this and, even if it does, there is no guarantee on the timeframe, as you point out. Markets certainly remain fragile, as the Dubai default of the past week has proved.
Still, on the tax front at least, you’re not out of pocket. As Maireád O’Grady, taxation partner at Russell Brennan Keane, notes, people transferring the proceeds of an SSIA to a pension saw the 23 per cent exit tax on the interest or investment gains in the SSIA waived.
They also received a bonus top-up from the Government of €1 for every €3 transferred up to a maximum bonus of €2,500.
The saving for you was therefore the additional €2,500 pension contribution along with possibly €100+ being the 23 per cent exit tax saving.
O’Grady notes that you are now entitled to take 25 per cent of the fund – €1,825 – as a tax-free lump sum. The balance of €5,475 would be subject to income tax if fully cashed in.
The level of tax payable depends on your personal circumstances and can be anything from nil (if under exemption limits) to 41 per cent (if a high earner).
If as a result of cashing it all in now, a tax liability arises. O’Grady suggests another option might be to cash in the pension gradually and pick years where no taxes arise.
The alternative to cashing it in fully is to allow it to remain in a post-retirement PRSA and grow, tax free. Whatever is chosen, examine the risk-level mix of the investments and consider other issues such as the eventual beneficiary of the pension.
Finally, as regards capital allowances on cars, you receive a tax deduction because you are self-employed and use it in your business.
Capital allowances on certain cars are available up to €24,000 over a period of eight years. The decision to change your car should not be based on tax, but any relief received will certainly lighten the initial outlay, particularly if you are paying tax at the higher rate, O’Grady points out.
Given the current economic climate, cash is very important and should be protected at all times, so plan your options carefully.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irishtimes.com.
This column is a reader service and is not intended to replace professional advice.
