We are a retired couple with three ARFs with a total value, as of the end of last year, of €48,392.51. We are thinking of encashing them and spending the money on our home. Would this, in your opinion be a good idea?
If we encash them what tax would we pay? We are presently paying tax at the higher rate.
Mr J.K., email
There are two issues here – first, your ability to cash in these funds and second, tax.
The purpose of Approved Retirement Funds (ARFs) is to allow people greater flexibility in managing their income in retirement. No longer must you lock your pension into the rigid, albeit secure, structure of an annual annuity – especially at the miserable rates on offer today – and any amount outstanding forms part of your estate when you die rather than enriching some insurance company.
On that basis, if investing in upgrading, refurbishing or redecorating your home is what you wish to do, the ARFs allow you the flexibility to do so. Do I think this is a good idea? Choices are there to be made. The only caution I would urge is to ensure that cashing in the ARFs would not imperil your future income.
People are living longer in retirement than ever before. As a result, their pension needs to stretch further than traditional pensions were ever really designed to do.
Do you have enough income outside these ARFs to ensure you will not find yourself “economically challenged” in future years?
You don’t give details but from your statement that you are already paying income tax at the higher rate, I assume there is already decent income coming into the home.
If that is from a guarantee annuity, a defined benefit pension and the State pension, then you have every reason to feel secure. If the income comes from other ARFs, then you remain vulnerable to volatile investment returns and possible increased cash requirements in the future for health and/or nursing home care, and these are things you would need to consider before cashing in these other three funds.
Of course, there are rules about cashing in ARFs. Essentially, unless you have guaranteed personal annual income of €12,700 (including the State pension), you need to have a minimum ARF fund(s) of €63,500 in place until the age of 75. You can use the interest on this fund in the meantime but not the capital. It doesn’t sound as if this applies to you but, just in case.
On the tax side, any income drawn from an ARF will be taxed at the rate of tax you pay in a given year. If you are already on the higher rate, then the ARF drawdown – or full encashment – will be taxed at that rate, plus universal social charge.
For those paying income tax at the lower rate, they would need to be careful that the ARF drawdown does not bring them above the threshold that would move them into the higher tax rate.
Leaving four siblings without a big tax bill I'm single with four siblings, all living abroad, and I really don't want to leave them with huge tax bills. As a recent article suggested, it's all about reducing the liability. How? The article focused on the parent/child relationship.
Ms E.B., Dublin
The same issues arise whether one is leaving money to children or to siblings - the only difference is the amount that one can leave without having to take account of inheritance tax (or capital acquisitions tax as it is more formally known).
Where a parent can leave a child up to €280,000 – a figure that was raised in the recent budget, the most you can leave to siblings is €30,150. And that assumes the have received no inheritance or financial gift from any other sibling, or indeed another “linear” relative – i.e. a grandparent, aunt/uncle etc.
The €30,150 threshold under what is known as Category B is cumulative.
One way the reduce the impact of inheritance tax is to dripfeed benefit to your siblings by way of the small gift inheritance - you can each of them €3,000 per annum free of tax and it will have no bearing on the their Category B threshold.
While cross-border inheritance movement of assets can be tricky, Irish tax law says the inheritance tax treatment of Irish assets is dealt with here. Double taxation agreements are in place with most common destinations for Irish emigrants to avoid double taxation.
Making the most of small gift exemption Could you clear up a matter for me please. I am in my seventies. I am aware that a parent may hand a gift of €3,000 to each of his/her children each year tax free. Does this mean that the children can receive €6,000 each year – that is €3,000 from each parent?
Mr B.M., email
This is a hardy annual – not surprisingly given that most financial transactions or wealth transfers tend to carry some tax implications. Each person can give up to €3,000 to any individual. That means each parent is entitled to give up to €3,000 to each child – or to anyone else for that matter. So, yes, that means you can as a couple effectively give a total of up to €6,000 to each child in each tax year.
Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.
