Making Cents: Limerick's financial questions answered
QUESTION
Liam, we are selling our house and will have circa €300,000 left over for our next purchase which we hope will be in the next 6 months. Where would you recommend we put this money in the interim so we can get some kind of return?
Answer
Unfortunately, there isn’t a product currently available that will give you any decent return where your capital is 100% guaranteed and where you will have immediate access to funds.
And when I say decent return, I should have said no return.
So, there isn’t anything out there that you’re losing out on which is why I’d leave it in cash and sit tight for the time being and do nothing. It isn’t earning anything but that’s okay because the purpose of what you’re using it for is too important to do anything risky or stupid with it.
I encountered an individual who was in a similar situation to yours last year and had €250,000 from the proceeds of a sale. He decided to invest the funds himself in a low-risk fund on February 22, 2022, and in May he came across a property and decided to make an offer and was successful.
So, he withdrew the funds he had invested at the end of June to complete the purchase and in that four-month period, the fund declined in value by 4.19%.
This meant the €250,000 he put in, came out at €239,525. He lost €10,475 in just 4 months.
So, you could be lucky and the monies make something for you or you could be unlucky just like what happened to this gentleman.
It’s a bit of a double-edged sword, in that it can go well and not so well.
In your case, because what you need the funds for, I don’t see the upside for the risk you’d have to take, which is why my advice is to hold tough, to sit tight and to do nothing.
Question
Liam, lots of talk recently about UK pensions and buying back years. I worked there for three years and I’m wondering what if anything I need to be doing as I’m a bit confused.
In order to qualify for a UK state pension, you must have a minimum of 10 qualifying years on your national insurance record, which is the equivalent of our PRSI contributions.
If you have less than 10 years but more than 3 years on your national insurance record, and these 3 years are consecutive - and they have to be - then you could make voluntary contributions to enhance your national insurance record, and bring it up to the minimum of 10, which would secure you a UK state pension.
All good and fine but a clock has begun ticking which allows you to buy back those years, and that clock stops at midnight on April 5.
Generally you are only allowed to buy back 6 years’ worth of contributions, and this is particularly important for anyone who has 3 years’ worth of contributions (or less) because buying back 6 years won’t do it for them.
Anyone who falls into that category has the window of opportunity to make voluntary contributions where they can buy back years between 2006 and 2016, even if they weren’t living or working in the UK during that time.
However, as I said after April 5, they won’t be allowed to do this anymore.
So, if you need to buy back years, what you have to do is complete the required documentation which is a UK State Pension Forecast Application Form and a HMRC Claim Form.
You post these documents to the appropriate departments in HMRC and Pensions Centre, and they will then revert and confirm what your current entitlement is and how many years you can buy back and how much each year will cost.
And if you’re happy with the numbers the provide, you then make the payment to HMRC.
I came across a worked example recently given to a client of mine and it looked like this:
They had 7 years' of national insurance contributions and they were allowed to buy back 15 years at a cost of £158.60 per year so a once off payment of £2,379 was required.
By doing this it meant the annual benefit they’d receive from the UK at age 66 would be £4,126.
So, it was well worth the investment of £2,379 because they’d make it back in 1.7 years.
The process to find out entitlement and buy back years and cost etc. can be difficult and time consuming and I’ve seen some financial advisers offering to complete the paperwork for people, and interact with the authorities in the UK.
If they are successful, some I believe are charging people as much as €3,500 which seems steep.
But on the flip side, if you are unsuccessful and you can’t buy back years or if you can but it’s too costly, they won’t charge you anything. So it might be worth exploring further and getting someone to do it for you, if you don’t have the confidence to do it yourself but again, just know what the costs will be if you’re successful or not.
Liam, if I wanted to project the growth of my savings for the next 30 years, what is a reasonable interest rate to use? Thank you.
If you invest in a medium risk fund i.e. where the weighting in equities and bonds are similar, based on past performance, you could expect returns over that time period of about 7%.
That’s your top line number but you need to also account for (a) annual charges on then fund at c. 0.75% (b) inflation at say 1.31% which is the average rate in Ireland for the past 20 years (c) exit tax on gain which is currently 41% and (c) you might want to include a margin of error just in case things don’t go according to plan i.e. your investment doesn’t hit the 7% annual average.
And if you did, I think a more realistic figure you should plan to end up with after you factor in everything is 3%.
Liam, my son has completed third level studies in the UK. The fees paid were £36k over 4 years. I'm aware of tax relief available on student fees, could this possibly apply in this case?
Tax relief is available for tuition fees paid for approved full-time and part-time undergraduate courses in both private and publicly-funded third-level colleges in any EU member state or in the UK.
The maximum amount you can claim is €7,000 for each academic year, minus what's called a disregarded amount which is deducted from the total qualifying fees, and that disregarded amount is €3,000.
If your son's qualifying fees were £9,000 per year which is about €10,325 in Euros, you deduct €3,000 and relief is granted on the balance at 20%.
So, €10,325 - €3,000 x 20% = €1,465 per year.
It looks like the tax relief available in this instance over the 4 years is about €5,860.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie