DIY Guaranteed Income

It's not currently possible to arrange a Purchased Life Annuity in Ireland. This is distinct from an annuity purchased with a pension fund but rather one purchased with personal savings.

These were fairly popular in the 1990s when interest rates were very high and you could lock in at a fixed rate for a period of time (temporary annuity) or for life (purchased life annuity). Helpfully, Revenue accept that they can't tax you spending your own money and part of the payments from a purchased life annuity is treated as a return of capital and therefore not subject to income tax.

Interest rates have jumped up recently and we are again seeing some interest in locking in some savings at relatively (compared to the last 10 years) high rates.

So, first prize here would be for a Life Company to launch a purchased life annuity something I have been calling for for some time now.

For some people the attraction of a guaranteed income for life without having to ride out the swings in capital markets and make ongoing investment decisions has some attractions and maybe it is worth considering if there is a way of getting some way towards it.

One consideration is the relatively complex investment landscape in Ireland which makes investing either relatively complex (what exactly is a material interest in an offshore fund?) or tax inefficient with most investment products having income and gains taxed at a flat rate of 41% without any allowances, reliefs or exemptions despite Ireland having a relatively progressive income tax regime.

What if there was a way to turn savings into "income"

One way to change the nature of savings and investment capital into a stream of payments subject to income tax is, of course, to buy a rental property and in reality that is what many people in Ireland default to.

But being a landlord or landlady isn't a passive income, its a job with ongoing tax returns, regulatory obligations, maintenance, insurance, the list is endless.

PRSA to Annuity

Anyone under the age of 75 is eligible to contribute to a PRSA and most people I would wager will mistakenly believe that contributions to a PRSA are also linked to some form of employment. Whilst it is true that if you don't have net relevant earnings you can't claim tax relief on contributions for sure, but that doesn't prohibit making a contribution.

Example

James is 70 not married and has no dependents. He owns his own home with no mortgage and has a State Pension of 14,419pa. He has around 500,000 on deposit and in State Savings earning 1% to 2%pa and is wondering if he could make some of his money work harder for him.

If he put 100k into a PRSA and immediately purchased an annuity, according to Irish Life he would secure a rate of around 5.92% (level with a 10 year guarantee) currently.

Based on his current income, James is not making full use of his income tax allowances and reliefs and therefore an additional income would be very tax efficient for him. According to the PWC online tax calculator, James would pay a total of 89 euro in tax (0.44%) on an additional 6,000 income.

In fact, even if he increased his income by another 15,000pa his income tax would only be around 1,889 with USC of 120 giving an average effective tax rate of just 6.8% according to the PWC online tax calculator.

Now, clearly the downsides of this strategy are that on James' death the income payments cease completely (although at least 60% of the investment is protected via the 10 year guarantee). So, this doesn't work well if leaving a legacy is important. But in this example at least James has no spouse or civil partner and no dependents.

It also doesn't work well for people with high income already but, again, for people like James who are not currently taking advantage of all their existing reliefs and exemptions it might be worth considering.

Whereas the advantages are that James has a guaranteed fixed income of almost 6% for the whole of the rest of his life however long he lives. There is no investment risk (other than inflation) and the tax is all taken care at source by the annuity provider.

For education and information purposes only. Not a recommendation to purchase any particular investment. Personal circumstances should always be taken into account before making any investment decisions.