Freezing pensions

Q&A:Your finance questions answered

Q I have a pension that is frozen, worth about €26,000, I was paying into over 14 years. Both myself and my husband have lost our jobs and I need to get my pension to cover us until we get back on our feet again.

Can I cash in my pension, due to my circumstances?

Ms M.O’C., e-mail

AIn terms of providing a pension, €26,000 is not going to get you far but in your current circumstances I can certainly see the interest in trying to access your frozen investment.

Unfortunately, there is no way, as I understand it, that you can do so.

This is one of the most significant disincentives to pension saving. There is obviously very good reason in ensuring that people cannot simply raid their pension fund after the Government has provided significant tax relief to encourage their saving. If we all did that, the Government would be out of pocket and we would all be living off the State pension.

However, even without the current jobs’ crisis, people are reluctant to countenance the idea of locking away money for up to 40 years – or even more depending when they start a pension. This is particularly true of younger people who know they are likely to be taking on hefty mortgage commitments at some stage, to say nothing of the cost of raising a family.

Everyone keeps talking about the “simplicity” of the €1 for €4 SSIA model rather than the current even more generous tax relief scheme for pension saving, as though adopting the SSIA model would be a panacea to the States pension time bomb. But that is simplistic. A major element of the success of the SSIA model was that you had access to your money after just five years – and even earlier in extremis, if you were prepared, effectively to forgo the Government contribution.

With pensions, the system is much more strict – at least until the Commission of Taxation reports next month. You can only access your contributions, subject to tax, if you have been a member of a scheme for less than two years. Once you go beyond that – and you clearly have – the best you can do is freeze your pension or transfer it to a different fund.

There is no way you can access the funds until you reach the retirement age stipulated in the pension contract, generally 60 years of age.

As we are now finding out, especially people in your position where both partners have lost their jobs, knowing there is a nest egg at some point in the future is no consolation when you are struggling to make ends meet in the present.

Q I am a part-time nurse working in the health service. I am not a member of a public service pension scheme and as far as I know, I do not receive a payment in lieu of membership of such a scheme, ie a gratuity for long service. Yet the levy has been deducted from my salary since March 2009. I’ve got confusing answers from both the Health Service Executive and the Department of Health. Can you help me?

Ms M.C., Dublin

AFollowing the last query on this subject, the Department of Finance very helpfully sent me several bits of information, including a "Frequently Asked Questions" document which covers most of the issues people are likely to have in relation to the pension levy. Included in the information is a section on "Who is subject to the pension-related deduction".

The department information seems very clear. You are liable to the levy if you are a public servant, and (my emphasis) you are:

a) a member of a public service pension scheme, or;

b) are entitled to a benefit under such a scheme or;

c) receive a payment in lieu of membership in such a scheme.

You state you are not a member of a public service pension scheme and that you receive no payment in lieu of such membership. Unless, you receive some benefit from such a scheme, it would appear you should not be liable to the pension levy deduction.

Rather than looking to Revenue or the Department of Health, I would suggest you approach your employer and ask them to explain very clearly and in basic terms under exactly what terms are they taking money from your pay for the levy.

Q I have €10,000 to invest. Given that interest rates on deposits are at an all time low, would you advise now to dip into the stock market and maybe buy some bank shares, or have I missed the boat and should I have bought a few months ago? I am prepared to wait for one to two years for a good return.

J.R., Wexford

AThe one good bit of news is that, in the current crisis, you have money to invest and can lock it away for a couple of years.

However, that is not to say that throwing it into the stock market is necessarily a good idea. I should point out, at the outset, that I am not in a position to give specific stock advice. The financial regulator would have something to say about that. I am a journalist not a registered financial adviser.

You are quite correct when you point to the recent rise of the bank stocks although a look even at the volatility of last week would give one pause for thought before investing money in a bank stock at this point.

The stock market will certainly turn at some stage but there is no consensus that that we have yet reached that point. Stock market professionals note that most of the business currently being done in the market is down to small retail shareholders – presumably grasping at any good news in trying times.

The institutions, which are generally the main investment force in the market, are, we are told, still sitting firmly on the sideline. It is true that they may well miss the turn when it comes but it is also true that current market volatility means you could lose most or all of your €10,000 very quickly. Just because the market has fallen precipitously and then recovered some of that ground, there is no rule which says it cannot fall again, and fall further.

And even within the general stock market volatility, banks performance has been notably erratic.

In any case, I cannot imagine any sensible adviser suggesting you enter the stock market at this point if you have only a two-year investment window in mind.

You are correct in saying that interest rates on deposits are at historically low levels – but that is not to say that there are not some reasonably attractive deals out there. Some banks – notably Anglo Irish Bank – are desperate for funds and are offerings interest rates on some accounts that are well ahead of the market average – and of inflation. Its regular saver account is offering a rate of 5.5 per cent on sums of up to €1,000 a month which is not bad. I believe you can also get a 3.6 per cent rate on certain accounts if you lock your money in for a period.

However, I would caution that you need to keep a close eye on bank deposits. Leaving aside the State guarantee, which runs to the end of September next year, bank deposit rates are moving more rapidly than they have for some time. By all means take professional advice but, on a one to two-year timeframe, your options are limited.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.