An Irish Times guide to the world of personal finance

SSIAs

Apologies that this is yet another query about SSIAs. I am puzzled as to why the term "tax credit " is used in the literature on the savings scheme to describe a "bonus " paid by Government funds into savings accounts.

At the end of the five years savings span does the term "tax credit" indicate that one will get real money lodged to one's account or will the credit be offset against our income tax bills?

Perhaps this is a very naive and uninformed question but neither the AIB, the Bank of Ireland, nor indeed the local credit union office could tell me why the term tax credit is used throughout their booklets on the SSIAs.

Thanks for any help which you may be able to give on this use of terminology.

Mrs A.L., e-mail

Just when you thought we had seen the end of questions about the special savings incentive scheme following the passing of the deadline for opening such accounts last week, along comes another. To be fair, there are likely to be a number of ongoing queries about the scheme. After all, more than one million Irish adults have put their money into the SSIA scheme.

Mrs A.L. makes a good point. In the era of tax credits, such items are credited against tax on our annual tax bills. In this case, however, the credit will be paid directly into the account. As a further point of interest, this "bonus" money will not be paid into the account at the end of the period but on an ongoing basis through the five-year life of the scheme.

Rates

On April 8th, I exchanged £162.06 sterling for euro at AIB, Stillorgan and received €257.99. On the following day, the euro exchange rate for sterling quoted in The Irish Times for April 8th as 0.6109. If I had been dealt with at this rate, I would have received €262.28 - i.e. €7.29 more than I actually got. Why should there be this discrepancy? Is this a charge applied by the bank which we are not informed about?

Mr R.J., Dublin

The receipt you enclose shows that AIB converted your sterling cheques at a rate of €0.628158, compared to the rate quoted in the newspaper of 0.6109, which accounts for the whole of the difference between what you got and what the following day's newspaper indicated you might expect to have got.

The bank did not charge any commission, which it would do normally on such transactions, presumably because you are entitled to charge-free banking on the basis of age or otherwise.

The banks have come under sustained pressure from groups both here and in Europe over the profits they garner from foreign exchange transactions. This is especially so following the arrival of the euro, which ate into their profitability through the removal of commission on such transactions.

There is a suspicion - strongly denied by the banks - that they have increased the margin between the official central bank foreign exchange rates and the rates they offer customers. True or otherwise, that is what has happened here. The rates quoted in the newspaper on a following day basis are the official exchange rates - generally those that apply to banks dealing with the central bank in foreign exchange.

There is no requirement for the retail banks to pass on this rate to customers and none to my knowledge do.

Instead, they tailor their rates according to the prevailing rates of the day to build in their profit margin.

Ideally, you should be able to shop around between institutions on a given day for the best rate in the same way you do for other products - and there are several banks and building societies around the area of Dublin in which you carried out this transactions. However, there appears to be precious little difference between them for some reason.

PIP penalties

An item in the financial section of The Irish Times way back in October stated that the Minister for Finance had introduced a 20 per cent penalty surcharge on personal investment portfolios with immediate effect. Since then I have seen nothing further about it. To what does this surcharge apply? Will it be applied to the unit funds whose prices are shown in the weekly unit fund tables given by MoneyMate in The Irish Times every Friday? What are the "wrappers" referred to in the same item?

Mr J.H., Dublin

At the beginning of last year, the Government changed the way tax was deducted from life-assurance investments. Until then, tax was deducted from the fund on an annual basis and paid to the Revenue.

From January 1st, 2001, the Government decided to tax such policies only when they matured or were drawn down - in much the same way as pensions and, indeed, in the same way that life investments are treated in most countries.

Leaving all the money invested in the policy until the end should enhance investment performance, as the account is not being diluted to pay tax; for their part, the Revenue increased the level of tax to reflect the fact that it was deferring collection. The new "exit tax" was set at the basic rate of the day plus 3 per cent.

As with all such schemes, people went looking for the loopholes and in this case found them by using "wrappers". These wrappers were life policies used to accommodate any type of personal direct investment - typically in stocks or property - that would traditionally be taxed at the investor's marginal rate. In essence, the exit tax rate gave such investors a chance to make a further gain on such investments.

The Minister's surcharge, which was reported in The Irish Times on September 27th, effectively raised the tax rate on such tax wrappers to 43 per cent - ahead of the marginal rate.

You are unlikely to be affected by such a product without knowing about it. Goodbody, Davy's and others offered such schemes but they had entry levels in excess of €25,000, so it was not for the small investor.

In any case providers will have written to such investors in the wake of Mr McCreevy's decision.

Standard unit investments, such as those quoted by MoneyMate in the paper weekly, should not be affected by this surcharge. Put simply, if you are facing such a surcharge, you'll know it by now and no-one will be selling such schemes at this stage.

• 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.