Offshore funds and AVCs

My brother invested £20,000 in an offshore account in 1972, taking it all out in 1982. On the last day of the amnesty, he wrote a letter to the Revenue telling them about it and I brought it in, as there was a postal strike.

He has now stuck his head in the sand again. Did I read somewhere that you have two months to make your own assessment of what is owed and send a cheque to the Revenue?

He says to let them do it and by the time they get around to him, he'll be dead!

Ms W.B., Dublin

It does appear as if your brother has stuck his head in the sand and, besides being very annoying from your perspective, it is an extremely reckless approach.

There is a whole generation of tax evaders discovering the folly of assuming they would never be discovered or, if they were, at least not in their lifetime.

It's true that your brother is comparatively small fry - assuming the initial £20,000 invested was taken from previously taxed income - but the Revenue is prioritising this issue and he would be foolhardy in the extreme to bet that they will not get to him.

Frankly, if he is adopting such an approach, I am at a bit of a loss to understand why he contacted the Revenue at all.

There is indeed a deadline and the report you would have read recently referred to an extension that had been granted in this.

The original deadline was last Friday, May 28th.

Following lobbying from accountants, who claimed they had insufficient time to track down the necessary information to ensure a full disclosure, this date has been moved out to Thursday next, June 10th.

The thing is that your brother, or his financial adviser, has to submit both a computation of their liability - the original DIRT or other tax owed plus interest and penalties as laid out by the Revenue - and a payment of this amount.

If your brother fails to do this, he will be treated as though he failed to take advantage of the voluntary disclosure deadline (it wasn't an amnesty), for which you hand-delivered the letter.

Not that it is likely to overly concern him, given his apparent attitude but, if he does die, it will fall to the executor of his estate to clear known liabilities and that would include this debt, which will of course be higher by dint of his ignoring the voluntary disclosure deadline.

AVCs

I will be taking early retirement shortly and my tax-free lump will be covered by my redundancy lump sum. This leaves me with over €100,000 in my AVCs.

What are my options for this money? I am in a good company pension and have no urgent need of it.

Mr M.D., Kilkenny

What you can do with additional voluntary contributions (AVCs) is in part dictated by the contract under which you have made those contributions.

In general, such payments have been used to increase income upon retirement either by boosting the lump sum payment taken or augmenting pension benefits. However, there have been recent changes in the law that have widened the possibilities.

Traditionally, the options for AVCs were:

• buy a larger annuity
• buy added benefits in an annuity, such as spousal provision or inflation-proofing
• maximise the tax-free lump sum that one can take upon retirement
• cash them in, although this will mean paying income tax at your marginal or higher rate.

Now, however, subject to the terms of your AVCs, you can transfer them to an approved retirement fund (ARF).

For someone in your position, this sounds like the tailor-made option for several reasons.

First, you make the point that although you are taking early retirement, you will be in receipt of a lump sum and a company pension which, between them, will be more than adequate for your current needs.

You also make the point that your lump sum allowance will be taken up.

In those circumstances, there is no room to maximise your tax-free cash payment and little point in paying the top rate of tax on AVCs that have been husbanded in a tax efficient manner.

That leaves you with the options of beefing up your annuity or moving the funds into an ARF.

Given that this is early retirement, any annuity you buy will be lower than it would be at traditional retirement age.

You will reasonably expect to spend longer on retirement income and that is a cost to the insurance company that provides the annuity.

As a result, they will reduce the annual payment that any given amount of money can buy.

The current low interest rate environment only worsens that situation because low yields mean it takes a larger retirement fund to buy the same annuity as, say, a couple of years ago.

You could always buy added benefits on the annuity, like inflation proofing or spousal provision, but I would imagine you would have greater flexibility through investing in an ARF and drawing down these funds as you need them.

The advantages of an ARF are that you retain control over the investment of your money and, if you do die, anything in the account passes to your estate, unlike an annuity that dies with you.

The downside is that you are assuming an investment risk on the money in the ARF.

You could see your income fall if the investment returns disappoint. However, the probability is that your income will be higher than it would be with an annuity.

Another thing to bear in mind is that, unlike an annuity which pays a regular income regardless of events, the money in your ARF could run out if you live beyond your means.

The key advantage, though, for someone in your position is the flexibility granted by an ARF. You get to draw the money down when and as you need it and not when someone else determines.

It is always a good idea on fundamental decisions of this kind to take professional independent financial advice but my instinct would be to go with the ARF option.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. 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 queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.