Personal Finance Q & A

Your queries answered by DOMINIC COYLE

Should I be paying DIRT at 30 per cent?

Q

I had a standard deposit account with Ulster Bank. When I went recently to close it, I found that they were charging me DIRT at 30 per cent even though the interest was paid in 2011. The bank tells me this is a Revenue rather than a banking issue. Can they be right? Surely I am being overcharged?

– Mr D McC, Cavan

A

Unfortunately, you have fallen foul of an accident of timing. The new 30 per cent rate of deposit interest retention tax only kicked in this year, following measures announced by the Minister for Finance in the Budget. Although the interest on your deposit account accrued in 2011 – or most of it did – it was only credited to your account when you went to close it in the new year.

As it is paid in 2012, it falls under the new tax rate. The fact that it relates to 2011 deposit earnings is irrelevant.

The bank is correct in telling you that this is a Revenue issue rather than one of its own choosing.

You raised separately the issue of whether the bank should have notified depositors of this possibility in the aftermath of the budget – and before the new year. In an ideal world maybe, but, at a practical level, it is a little unrealistic.

In any case, banks are loathe to do anything in the current environment that could be construed as suggesting to clients that they withdraw their funds, however temporarily.

Are we obliged to draw down AVC immediately at retirement?

Q

You might be able to clarify something for me in relation to my husband’s pension. He wants to know if one has to draw a percentage of the AVC pension as soon as one retires. He finds it difficult to get a definite answer from anyone.

My husband is in the public sector and availing of this early retirement scheme. He is 63 and would prefer to wait until 65 to start drawing it.

– Ms M M, Cork

A

Your husband does not have to draw down a sum from his Additional Voluntary Contribution (AVC) fund when he retires but it might be advisable.

As he is retiring early, the first thing he needs to do is determine when he can access the funds in the AVC. In general, AVCs can be drawn down from the age of 60 but there could be specific time triggers in his particualr plan.

If he can access the AVC, his options are to augment his lump sum payment from the public service pension – if he has not reached the Revenue ceiling; to purchase additional benefits such as inflation proofing or additional spousal provision via an annuity; or to transfer the funds to an Approve Retirement Fund (ARF) – where they remain invested until he needs them.

The important thing to note here is that the Government has now started to tax AVCs held in Personal Retirement Savings Accounts (PRSAs) and ARFs. Once he has taken a lump sum or moved it into an ARF, the revenue will “presume” that he is spending a minimum of 6 per cent of the fund each year.

If he draws down this much anyway, fine; it is taxed in the normal way. However, if he spends less, the Revenue will apply what it calls “imputed distribution” to deduct tax on the balance up to 6 per cent of the fund each year. As a result, he will only be able to leave the fund untouched if it does not mature until he is 65. He should get advice from the trustees of his pension fund on this.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.