Making Cents: Your financial questions answered

The must-read guide to saving money

Question
Liam, I’m sending you an email to ask for your advice about a Personal Retirement Bond I have in place since 2013. It’s not that high in value ie about €33,000 and we have other funds in place that we consider to be our real pension funds, so I’m looking at options at maybe getting a better return for this fund. And given that we don’t really include it in our future plans, does it make sense to apply more risk to get a better return.

Answer
The fund you are invested in carries a risk rating of four and its returns over the past 11 years have been fine and are in line with a fund of that risk profile.
But if you want to get a better return and I think it’s something you should consider particularly when you said you have other funds in place, you should consider increasing the risk rating.
And with that in mind, I looked at two different funds and how they would have performed over the exact same time period to your bond. One has a risk rating of five and it delivered returns of +195.08% which was 99% more than what your fund delivered.
The second fund which has a risk rating of six delivered returns, again over the same time period as yours of 249.25% which is 153% more than your fund.
And if that trend continued, the difference in monetary terms is significant ie over 10 years you’d have €33,554 more in a fund carrying a risk rating of five and €51,855 more with a risk rating six. And going forward even if the returns on the two funds I’m referring to were 50% less than what they were, they’re still quite a lot more than the fund you are invested in.
It’s important to say that these returns aren’t guaranteed and past performance is all you can look at when comparing funds against one another, but if you want to increase the return and you have time on your side to leave these funds invested and you are comfortable with increasing the risk knowing that it could equally fall in value, then I would give serious thought to dialling up the risk rating because the difference in returns is quite significant.

Question
Liam, I have a daughter who has just started university. Up until now she has received a minimal allowance from us each month as we tend to purchase things for her when she needs them, and I’m sure this is the case with most parents. She has never been taught how to manage money because there wasn’t a need which is a slight concern for me. She will continue to live at home and will travel to university by public bus. I’ll give her money for bus fares, lunches, and some money for coffee/treats, but I was wondering what is the best way to give her money so that she can learn to budget. I don’t think I should give her exactly what she needs and I was thinking of giving her a little extra so that she can learn to manage the money but I have no idea how much. What do you think is the best way to go about this? Do I give it to her money on a weekly basis or a monthly basis?

Answer
First off, great question and thank you for asking it.
Okay what other parents have told me work for them, is paying their children an amount on a monthly rather than a weekly basis. This helps them to budget and spend money much more consciously and more effectively because they know it has to last them until the end of the month before they get 'paid' again.
And I think there will be a bedding in period for the first month where your daughter and you begin to figure out what the actual costs will become. And you'll know what the fixed costs are, it’s the variable ones that you have to watch out for, but over perhaps a month or two you’ll be able to figure out what the total costs are.
And when you do know what they are I would suggest you add somewhere between 10% and 15% as a buffer for them. And if over six months your daughter doesn’t spend this buffer, well then they can be free to keep it which is just an incentive on their part not to spend it, just because they have it and they can.
So, I'd say figure out what those costs are over the next month or two, then Revolut her a months’ worth of costs plus 10% or 15% and leave it to her to see how she gets on and I think monthly catch ups between you both to see how things are progressing is a conversation worth having.

Question
Liam I’ve read about an increase that’s going to happen to the Standard Threshold Fund (STF) and it may impact me because I have a Defined Benefit pension. I recently received a letter from the administrators of my pension scheme saying that in the next year or two I could breach the existing STF number and if I did I could have a big tax bill at retirement. So, I’m wondering if what is being proposed is a good thing for me.

Answer
Yes it should be a very good thing for you and I’ll explain why in a moment but first let me tell you what’s in place at the moment and then I’ll explain what is being proposed and what impact it will have.
At the moment, the current STF number is €2m which means that if the value of your DB scheme amounts to more than this number, the excess is subject to what’s referred to as chargeable excess tax (CET) which is calculated at a rate of 40%.
So, let’s assume the value of someone’s DB pension at retirement is say €2.4m.
The €400,000 excess is subject to tax at 40% which amounts to €160,000 meaning they either must (a) pay this amount from AVC’s that they may have built up and hope they cover the tax bill of €160,000 or (b) if they have no AVC’s a commutation factor of 15.55 will be applied to the €160,000 which will reduce their annual pension by €10,289.
So, let’s say their annual pension was going to be €125,000, now it is going to drop to €114,71, to account for that tax bill they must cover.
The commutation factor I used in the above example is based on an individual at age 60, the number changes as you get older ie at age 61 it would be 15.26, at 62 it could be 14.97 and at age 65 the number could be 14.03.
Anyway, what is being proposed by Minster Jack Chambers is a phased increase of this SFT amount where it will increase to a maximum amount of €2.8m.
And the minister has decided to increase the SFT in a phased basis rather than in one go. It will increase to €2.2m in 2026, which will become €2.4m in 2927, €2.6m in 2028 and it will top out at €2.8m in 2029.
What it means for the example I’ve just given, is that person who has a fund value of €2.4m at retirement will be under the €2.8m threshold and therefore won’t end up with having a tax bill of €160,000 and they subsequently won’t end up with their annual pension being reduced by €10,289 either.
What’s also linked to the SFT number is the factor at which a DB is valued at and this is changing also.
For example the current factor for a defined benefit pension for someone retiring at age 65 is 26, and that’s now going to be reduced to 19. The current factor for someone aged 60 is 30 times their annual pension and this is going to reduce to 21.
So, if you had a DB pension that would pay you €90,000 at 65, this pension had a value from an STF perspective of €2,340,000 (€90,000 x 26) and that would have brought them over the current €2m threshold.
But with the changes being proposed that value would become €1,710,000 (€90,000 x 19) which is not only lower than the ‘old’ STF amount but much less than the new ones as well.
So, the STF number and the factor at which an annual DB pension is applied are linked and for someone to exceed the new €2.8m threshold and have a chargeable excess tax bill, they’d first have to have an annual income that would be greater than €147,500.
What these changes mean is that some individuals can work longer knowing they may not be hit with a big tax bill if they continued working. At the moment when someone hits that €2m threshold from a financial perspective it may not make sense for them to continue working and they and their company suffer this loss of perhaps them retiring early when maybe there was some more really good years left in them.
Anyway, let’s wait for the publication of the Finance Bill 2024 which is going to be published around October 8 to see what changes may be implemented for 2025 and later.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie