There are decisions to be made about what to do when your SSIA matures - should the money be put into an investment or your pension, writes Caroline Madden.
In the Irish market at the moment, one investment offer towers above the rest when it comes to generous terms. Many investors in this scheme are guaranteed that their money will almost double immediately.
It isn't an exotic property fund, a shady pyramid scheme or even SSIA mark II. No, the biggest giveaway on the investment front is a pension.
The total tax relief available on pension contributions for higher-rate taxpayers is 47 per cent (41 per cent income tax relief and 6 per cent PRSI relief). The effect of this relief is that a €100 pension contribution only costs the taxpayer €53, which beats the €1 for every €4 SSIA top-up hands down.
Even for standard rate taxpayers, the incentives on offer beat the effective 25 per cent relief offered by SSIAs.
The simplicity of the Government savings scheme captured the imagination of the State in a way that pensions have never managed. So, although almost half the workforce has made no financial provision for their retirement, one in four people with no pension took out an SSIA.
In an effort to encourage people to plan for their retirement, Minister for Finance Brian Cowen introduced an SSIA-style pension initiative that promises to "turn €7,500 of your SSIA into €10,000". Under the scheme, the Government will add an extra €1 for every €3 of SSIA funds rolled over into a pension, up to a maximum bonus of €2,500.
Therefore those who invest €7,500 of their SSIA will get the full value of the offer. The Government will also grant a tax credit for a portion of the exit tax deducted from the SSIA at maturity.
However, despite the 33 per cent top-up and the extra tax credit up for grabs, for most people the Government incentive isn't the great giveaway that it may seem on the surface.
The offer is open to anyone earning less than €50,000 in the year before their SSIA matures, but it simply doesn't make financial sense for those on the higher tax rate, as normal tax relief (which would be more valuable) cannot be claimed on amounts on which the Cowen incentive relief is being claimed.
Alan Morton of Moneywise Financial Planning feels that the merits of the scheme are very limited. For the higher-rate taxpayer, taking part in the incentive is out of the question, he says.
"You should let this Government offer bypass you," he advises. "Walk away."
The incentive is primarily aimed at lower earners. Morton says that "for those earning all their income at the lower bracket, or for those not earning at all, there is a debate to be had [ about taking part in the incentive]".
Joe Byrne, chairman of the Irish Association of Pension Funds (IAPF), suggests that people in the top tax bracket should consider cashing in their SSIA and "drip-feeding" it into a pension by means of additional voluntary contributions (AVCs), rather than availing of the Government incentive.
Full tax relief is allowed on AVCs as long as they stay within annual limits, which are based on a percentage of the person's income and increase with age.
The limit for a person under 30 years is 15 per cent of their income, for example, whereas for someone over the age of 60, the limit rises to 40 per cent.
Depending on the person's age and income, it could take a few years to transfer the entire SSIA lump sum to a pension in a tax-efficient manner.
For those who don't have access to an employer-provided occupational pension scheme, they can take out a personal pension plan, such as a retirement annuity contract (RAC) or a personal retirement savings account (PRSA) and make lump-sum pension payments into these vehicles instead.
One key difference between an SSIA and a pension, of course, is the investment horizon.
With SSIAs, funds were locked in for five years; with a pension, the saver won't see their money again until their working days are over, possibly decades down the line. Is it worth the wait?
"The decision is really whether they require short-term access to this money or long-term access," says Maeve Corr of Deloitte. "If it's long term, [ a] pension is clearly the best route."
Morton feels that transferring the entire fund to a pension is not the best course of action.
"In general I'd say why would you tie up that capital until you're retiring? I think pensions should be funded from your income, not from capital. Hold on to a nice piece of capital that will give you options down the line," he advises.
Whether or not someone stows away their SSIA nest egg for their retirement, they will have to decide what to do with up to €254 freed up each month now that their monthly SSIA contributions are at an end.
One option is to make regular voluntary payments into their pension plan, as opposed to lump sum payments.
"With regard to ongoing pension savings, we would see an increase in additional voluntary contributions to company schemes," Corr notes. "People are now used to saving this amount each month and are now diverting it for their long-term pension planning."
