Is a single pension contribution at year end an AVC?

Q&A: I came in on the tail-end of a pension discussion on the radio. There was reference made to AVCs and how payments made since 2010 can only be accessed at 75. As I was self-employed in the early 1990s, on a low salary while building up the business, my monthly pension payments were small, and certainly not enough to provide anything more than pocket money. As things improved, I put a single payment in at year end. Am I correct in presuming this is an AVC? If so, am I stuck waiting until, or if, I reach 75 to draw down a lump sum? Should I increase my monthly payments (they are index linked, but from a low base) and cease the annual one?

Ms AD, Wicklow

The rules on pensions are changing all the time, which is of little practical use from a Government with a stated interest in encouraging people to make better financial provision for themselves in retirement. But in this instance, things are not as negative as you might fear.

AVCs are “Additional Voluntary Contributions” made by members of occupational pension schemes outside their regular pension deductions under the scheme rules.

From your letter, your position seems somewhat different. As a self-employed person, I assume the pension you opened in the 1990s is a retirement annuity contract (more commonly known as a personal pension scheme), which is a defined contribution pension product. If so, you should be able to make regular and one-off contributions without the need to avail of separate AVCs but you will need to check the rules or contact the provider.

More likely the radio show was discussing Approved Retirement Funds (ARFs). Recent rule changes mean that people with defined contribution schemes can now switch their pension fund at retirement into an ARF rather than being forced to buy an annuity at what are currently very expensive rates. ARFs offer greater flexibility in how you spend your fund in retirement and mean your pension savings form part of your estate when you die. But the rules on ARFs have also been tightened. Previously, holders of ARFs were obliged to have guaranteed annual income of €12,700 for life to avail of this greater flexibility – not overly arduous when one includes the State pension of up to €11,975 per annum.

Otherwise, they were required to place pension savings under €63,500 into what was called an Approved Minimum Retirement Fund (AMRF). This lump sum cannot be accessed until you turn 75, although interest or investment returns on it can be used. Now, those thresholds have been raised to a more challenging €18,000 annual income guarantee (one-and-a-half times the State pension) and €119,800 (10 times the maximum annual State pension) into an AMRF.

But it is important to note that this does not preclude your ability to take a tax-free lump sum – up to 25 per cent of the accumulated fund to a maximum of €200,000 – from the fund on retirement.

The best way for a novice investor to buy shares?

My 25-year-old nephew would like to start dealing in shares. His plan is to invest a relatively small amount twice a year, approximately €1,000 on each occasion. He intends focusing on the Irish Stock Exchange initially. He is finding it very difficult to find out what is the best route for him to take to purchase these shares.

There does not appear to be a composite list of stockbrokers or a comparison of their charges. He is also a bit confused about what ongoing charges the stockbrokers will levy to “mind” the shares. Can he keep the shares himself? Any advice that you can give to a new investor as to how to minimise the costs of trading would be much appreciated.

Ms G O’B, Email

I suggest a little caution. My primary concern is just focusing on the Irish Stock Exchange. While some Dublin-listed stocks like CRH and Kerry have significant international exposure, many, including our beleaguered financial services sector, are reliant on a domestic economy that remains vulnerable to internal and external shocks.

Dublin is a very small fishbowl in the equity world – accounting for a fraction of 1 per cent of the global equity market – and is dominated by a handful of companies. The top five Dublin-listed companies – CRH, Ryanair, Elan, Kerry and Aryzta – account for almost 65 per cent of the value of the entire market.

To find a list of stockbroking firms, search for “member firms” on the Irish Stock Exchange website. There are 25 of them, though only a handful will be interested in providing the sort of retail customer services your nephew wants. He should also consider brokers outside Ireland offering euro accounts, especially if trading in other markets.

As to charges, stockbrokers are not quite as bad as insurance companies when it comes to getting transparency on price comparison but they certainly don’t make it easy.

Broadly, he can opt for execution only – where he makes all the decisions and simply requires the broker to conduct the transaction – or “full service” where the broker generally for an annual fee will provide advice as well. He will pay commission charges for purchases and sales of shares. These vary from 0.75 to over 1.5 per cent of the deal value. Stamp duty also applies.

Finally, he can hold shares in paper form – increasingly rare – via a nominee account which offers cost savings and anonymity but less direct control, or by electronic Crest account.

He should do some more reading of the options online before dipping a toe – but beware of message boards ramping up “the next sure thing”. It can be an unforgiving game for the unwary.

This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.