Dominic Coyleanswers your questions.

Life review

I have a comprehension problem with regard to a life insurance policy taken out by me when the Celtic Tiger was not even a cub.

I paid half-yearly premiums with no tax benefit accruing. The policy was subject to review after 11 years, which was taken by me to mean that the premiums would probably be reduced because, by that time, the premiums paid would exceed the amount to be paid out in the event of my death. Seems logical?

However, it turned out that the premium, at best, will remain the same or possibly be increased. The concept would appear to me like betting on a horse when you have predetermined the result - in other words, one continues to pay for a benefit which does not increase (surely illegal?). Can this be right?

Mr J.M., Dublin

The sort of policy you're talking about is called a unit-linked whole of life policy (or universal whole of life policy, as it is called in the US). These were popular in the 1980s and 1990s when they doubled as protection and savings policies. At the time, they were very attractive, offering substantial life cover at a low premium.

These policies were subject to periodic review. In general, they took place every 10 years for younger customers, falling to five years when people reached retirement age and becoming subject to annual review for those living long enough.

Two issues led to the likely upward revision of premiums at these reviews. The first is that the units bought with your premium are allocated between both parts of the policy - the life protection element and the savings element. The younger you are, the fewer the units required to purchase the life cover end of the equation; as you age, a greater number of units is required.

The second, and more problematic, issue is that the growth assumptions used when these policies were sold were, initially at least, very optimistic. Growth generally failed to match these projections - in much the same way that endowment mortgage policies all-too-often failed to grow sufficiently to meet the lump-sum mortgage payment required at the end of the term.

Ultimately, these factors mean that, when review time comes around, the life companies generally need to push premiums up - especially when you consider that life cover is assessed on a "current age" basis.

I would resign yourself to continuing increases in this policy,ultimately to the point where it could become unaffordable.

So there is nothing illegal about the practice. However, such reviews are a good time to assess your life cover needs. This type of policy may have been appropriate 11 years ago when you might have had heavy mortgage obligations and young children, but times change. How much life cover do you need? What is provided by any mortgage protection and/or death in service benefit you might have? Would you be better off with a different type of policy?

On the threshold

I took out a standard PRSA on October 31st, 2006, to avail of the €2,500 Government incentive on investing €7,500 when the SSIA matured. I invested €10,173: €7,500 of my SSIA money, the €2,500 Government bonus and a €173 refund of tax deducted on my SSIA gain.

The current value of the PRSA is about €9,600. I will be 75 in March. My gross income from the State pension is €36,375 for the year to the end of December. This is below the €38,575 tax-free allowance in my case, so I am not liable for income tax. My spouse has no income and does not qualify for a social welfare pension. May I now withdraw the full €9,600 and qualify for the Government incentive? Will there be any income tax liability?

Another query, regarding Dirt exemption for over-65s. If one has several savings products, is it permissible to claim exemption on one product and allow Dirt to be deducted from the others, provided the addition of the interest element of that one product to one's total income does not exceed the tax-free income allowed?

Mr J.M., Kildare

One thing confuses me here. You say your gross income from the State pension is €36,375. I don't see how that can be so, but maybe you are also in receipt of an occupational pension.

Assuming that to be the case, you are, as you say, below the income-tax threshold of €38,575 for a married couple over 65 with one dependent child - but not by much.

Can you cash in your PRSA without jeopardising your Government incentive? On the basis that you have a guaranteed pension income of more than €12,700 a year - a figure you appear to comfortably exceed - even allowing for the fact that your pension covers both you and your wife, there is no reason why you cannot encash the PRSA.

However, you should take two things into consideration. First, on your figures, your PRSA is worth less than you invested in it. You can keep the PRSA going until you turn 75 and, by then, market conditions and the value of your PRSA may have improved. Of course, that is only four months away and the market may not turn in time, or may even fall further.

Second, if you encash the full PRSA, you will face a liability to income tax. PRSA funds are, like any pension, considered income when they are drawn down. As your current income is within €2,000 of your income exemption threshold, taking the full value of the PRSA (€9,600) could see you paying tax of up to €1,520. That would leave you with little benefit from the Government bonus.

There is nothing to stop you drawing down just €2,000 of the PRSA to avail of this year's income tax exemption and draw down the balance next year - when your exemption threshold will be at least €2,000 higher after Mr Cowen's Budget.

Turning to the second query, given that you have to notify Revenue of each application for Dirt exemption - a process that is currently being streamlined - I guess there is nothing to stop you pursuing your suggested course of action, odd though it is.