PERSONAL FINANCE:Your queries answered
Q
I am due to retire next year. Because of a serious family matter, I was wondering if I could get my pension in one lump – that is, the accumulated payments I made over 40 years. The company would certainly gain. I have some bonds that I don’t want to cash yet and I think I could manage on the State pension.
- Mr DG, Dublin
A
I don’t see how you will be able to do that. There is provision in all pension plans for people to take a lump sum free of tax upon retirement.
Generally, self-employed people with a personal pension plan will be able to take 25 per cent of the fund free of tax. In the case of an occupational pension scheme run by a company – such as yours – the maximum for people with more than 20 years’ service is one and a half times your final salary. People with less service can avail of lower tax free sums.
Thereafter, however, any pension paid from the fund is taxable – not surprisingly, given that it was exempt from tax when it was paid into the fund.
The rules of your scheme will determine how the pension is paid but occupational schemes in Ireland – whether defined benefit or defined contribution – usually pay an annual annuity, generally on a monthly basis. While you are right that giving you the lump sum would be cheaper for the fund, there is no provision of which I am aware that would allow this.
AIB said no to my mortgage payback, why?
Q
I have a a relatively small home loan with my bank, AIB, €140,000 with 22 years outstanding. I have a tracker mortgage at 1.6 per cent.
Obviously AIB is losing money on my loan, somewhere in the region of €30,000 on a straight line basis over the life of the loan (taking, for the purpose of this exercise, a typical loan rate of 3.25 per cent). I am aware they probably borrow at a slightly lower rate. I contacted AIB to negotiate a deal to clear my entire mortgage. Naturally, I would require a significant discount off my outstanding loan as the bank will make a substantial gain on the transaction. It will get rid of its long-term loss on the loan, will be able to use the money to lend at a significantly higher rate and have one less bothersome tracker on its books.
To my surprise, it rejected my offer. It seems AIB is happy to carry the long-term loss rather than cut its losses and make a mutually beneficial deal.
- Ms MC, Dublin
A
As you say, it would appear the bank is cutting off its nose to spite its face. Given that AIB – and the other banks – would pay more than 1.6 per cent to borrow money in the open market, the deal would seem to make sense, with the only haggling necessary being over the precise scale of any discount.
Of course, the open market is not so readily available to Irish banks right now and given the post-crash backlash, no bank official is likely to be seeking to make a name for themselves with innovative solutions, even if some lenders have been encouraging troubled borrowers to abandon tracker rates as part of any loan restructuring.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@irishtimes.com
This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.
