Q – I have € 25,000 to invest over a longer term. I have read recent advice regarding the benefits of investing in NTMA state savings bond over a 10 year period yielding a total tax-free return of 22%. I am employed, aged 42 and have an Additional Voluntary Contribution fund in addition to my employer pension – my total contribution is 14%. My question is – should I invest in state savings or my AVC fund? Tom – Cashel Co Tipperary
A – Tom it was Albert Einstein who said the hardest thing in the world to understand is income tax, but when it comes to pensions and AVCs, income tax is a sinch. You really have three choices – invest in a deposit account, invest in your AVC or place in an alternative investment. At 42 years of age, you are entitled to invest up to 25% of your net relevant annual earnings into a pension fund so that is another 11% of your annual income to maximise your tax relief you could be investing more into your AVC. With pensions there are two simple questions to ask
- What will my monthly pension amount to when I retire ?
- Can I afford the contributions now to maximise the tax relief on them ?
If your pension is currently underfunded and you are on the 40% tax rate, it may make sense to add to your AVC. Leaving it in the 10 year National Solidarity Bond would give you a net return of up to 2.1% EACH YEAR. The average annual growth rate on the stock market from 1991 to 2020 was 10.72% and while tariffs, wars and the cost of living are currently affecting all aspects of the global economy, resolution and normality will prevail and stock markets will flourish again plus you have at least 23 years to gauge the performance. Ensure independent financial advice.