Q&A :The only sensible approach for people looking to put money away for a short period is to leave it on deposit, writes Dominic Coyle
We recently sold the house I had lived in before we were married, making a profit of about €80,000. We are also trying to sell my husband's house, which has become the family home. If we sell two houses in west Dublin, we just might be able to finance a move to the southside, where we're both originally from. What is the best way of investing the €80,000 for what we hope will only be a short period of time?
Ms J.O'R., Dublin
A The general rule about investing is that the greater the risk, the greater the (potential) reward. It is also true that investment is generally a medium- to long-term proposition, allowing your money to weather market volatility.
The current market conditions - which have now existed for 14 months - indicate the nature of such volatility and how it can decimate investments over the short term. That being the case, I would suggest that the only sensible approach for people looking to put money away for a short period - such as in your case - is to leave it on deposit.
The good news is that deposit interest rates are more attractive than they have been for some time. You won't get rich on them but you can entertain reasonable expectations of matching inflation or possibly even staying slightly ahead of it. The one drawback is that some of the best headline rates are available on regular savings accounts rather thafor people with lump sums, like yourself.
Irish Nationwide is probably offering the most attractive demand deposit rate for people in your position - those investing between €60,000 and €90,000 - at 5 per cent.
Retirement options
I am 63 with 43 years' service and am a member of a contributory defined benefit occupational scheme run by company trustees. My wife is 61. My salary is €60,000.
On retirement, I will receive a pension amounting to two-thirds of my salary and I am told I can get this pension at the age of 63. I am also entitled to the State contributory pension at the age of 66.
My occupational pension is index linked to the inflation rate up to a maximum of 5 per cent.When I die, my wife will continue to receive 50 per cent of my pension.
What are my options?
a) Can I convert this pension to an ARF (so the pension fund becomes part of my estate when I die)?
b) How is the fund value cal-culated?
c) Who manages the fund and what are the costs? Can I manage it myself?
d) Is there a smarter way to take this pension?
e) I can still buy AVCs. Is it a good idea?
Mr P.J.H., Limerick
A It strikes me that you have a very good pension arrangement. Your defined benefit occupational scheme guarantees you a certain level of pension regardless of how the contributions - yours and your employer's - have performed down the years.
In the current market turmoil that is a massive comfort for people like yourself approaching retirement. The pension is also inflation proofed and makes provision for your spouse, should you predecease her. In addition, you say you will receive the State contributory pension.
Given your long service, that means you would receive a pension of €40,000 from your employer based on your current salary.
The guaranteed income that is a feature of defined benefit pension schemes is achieved by the pension scheme trustees purchasing an annuity. It is not possible to convert a defined benefit pension scheme annuity to a more flexible approved retirement fund (ARF).
The annuity is purchased out of the general defined benefit pension fund. You do not have an individual fund, as such, so the issue of calculating your fund does not arise.
Your employer's defined benefit occupational fund is managed by fund managers selected by the fund's trustees. Information on the costs involved should be available from the trustees and may appear in the annual report trustees provide for scheme members, such as yourself. You cannot manage it yourself.
Is there a smarter way of taking the pension? Well, you are entitled to draw down a lump sum on retirement. This would give you an amount that you could invest in an ARF or PRSA up to the age of 75. Of course, taking a lump sum will reduce the annual pension you will receive but, if you don't need the full amount for your current financial needs, it is a way of achieving some flexibility and control over your pension income.
On the question of additional voluntary contributions (AVCs), given that you are, at most, two years away from retirement, I would suggest it is probably too late to go down this route.
The costs incurred in setting up the scheme and the fact that you have only two more years on employment income ahead of you would mitigate against it. However, it never does any harm to get advice from a qualified financial adviser on such matters - your trustees may well be able to put you in touch with someone.
However you proceed, there are a couple of things I would suggest you check. First, you say you can retire on this pension this year - at the age of 63. Normally, people retiring early - ie before 65 - pay a price in terms of a reduced annual pension.
Your company may be different but it would be unusual. I would check the financial implications of early retirement on your annual pension with your pension trustees - and get the answer in writing - before proceeding.
Again, while it is possible to receive the State pension on top of your occupational pension, it is becoming more normal that a company pays a pension up to a maximum of two-thirds of salary, including the State pension - a so-called integrated or co-ordinated scheme.
In other words, in your situation and on the basis of current values, you would receive a State pension of €11,611.60 (leaving aside any qualified adult allowance) and an occupational pension of €28,388.40, making a total of €40,000.
Again, you need to check this specifically with your pension fund trustees and, again, make sure you get the answer in writing - and in plain English.
Tax-free injury awards
Due to a road traffic accident, I received a compensation award following an assessment by the Personal Injuries Assessment Board. Is this award taxable? If so, at what rate?
Mr C.C., Dublin
A Awards from the Personal Injuries Assessment Board are not subject to income tax.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irish-times.ie.
This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
