Consumer Corner: A guide to key financial terms you need to know this year

From PAYE to PRSA, experts share the key terms we all need to know 

Consumer Corner A guide to key financial terms you need to know this year

Financial terms can be tricky to understand. As we navigate loans, insurance, mortgages, and our wages each month, we encounter financial jargon.

We have asked some experts about the financial terms we should all know this year.

Marian Ryan, consumer tax manager with Taxback.com, says that there are basic tax terms that will give you a better grasp of your payslip and what is happening to your wages.

‘Tax bands’ are the amount of money that you can earn and at a specific rate of income tax.

There are two tax bands: The standard-rate tax band, whereby your income is taxed at 20%; and the higher-rate tax band, whereby any income you earn is taxed at 40%.

Paye as you earn (PAYE) is the tax system for employees: Your employer deducts income tax and other charges from your salary every time you are paid and then forwards the deducted amount to Revenue.

The universal social charge is a tax levy on your total pay and pay-related social insurance (PRSI), contributions made by you and your employer towards the cost of social-welfare benefits, such as the state pension and illness benefit.

Ms Ryan says people often confuse tax relief and tax credits. “Tax credits, essentially, reduce the amount of income tax you pay,” Ms Ryan says. “Tax reliefs can reduce the amount of income that you pay income tax on or allow you to claim a refund on tax already paid.”

Mark Reilly, pension proposition lead at Royal London Ireland, said that the language used to describe pensions can be a deterrent.

“It’s understandable that people would be put off making decisions around pensions, when they don’t understand half or more of the options and what impact those options could make on their life,” Mr Reilly says.

For the self-employed and those who don’t have a pension through work, personal retirement savings accounts (PRSAs) are often the easiest way to open a pension.

“A PRSA is, essentially, a personal pension plan, which you take out with a life-insurance company or other approved pension provider,” says Mr Reilly.

People may have also heard of a tax-free pension lump sum.

“When you retire, you can usually take part of your pension fund as a tax-free lump sum. The amount you can take depends on the type of pension plan you have and how much you have taken in tax-free lump sums from other pension plans.”

Glenn Gaughran, head of business development with the Independent Trustee Company, says that as people approach their retirement, they need to understand the difference between an annuity and an approved retirement fund (ARF).

“An annuity is a guaranteed annual pension, which you buy with the money in your pension pot. An ARF is a personal retirement fund, where you can keep the money in your pension pot invested after retirement and which you can draw down an income from.”

The contribution rate is the percentage of your salary that goes to a pension scheme. Additional voluntary contributions (AVCs) are those made to a company pension scheme that are over and above the amount an employee is required to contribute under the rules. “They can be a particularly useful way to boost your pension pot, though it is important not to contribute more than you can get tax relief on.”

Trevor Grant, chairperson of the Association of Irish Mortgage Advisors, says that there are three types of interest on mortgages.

A fixed-rate mortgage is a home loan in which the interest rate remains constant for an agreed number of years, regardless of fluctuations in the broader market.

Variable rates often follow the increases and decreases of eurozone interest rate changes, but not necessarily. With tracker mortgages, interest rates are ‘tracked’ against the rate set by the European Central Bank.

Paul Walsh, CEO of Peopl Insurance, says there are three main types of car insurance: Third-party, third-party, fire, and theft, and fully comprehensive.

“Third-party insurance is the basic legal requirement for operating a car in Ireland,” Mr Walsh says. “It solely provides cover for claims made by other individuals, in the event of damage or injury caused by you.

“Fully comprehensive also allows you to claim for damage to your own car, regardless of who is at fault.” 

Home insurance is not mandatory, but if you have a mortgage, your lender can insist that you have home insurance, so that you can afford to recover financially from unexpected events, such as fires, theft, storms, or floods. Life insurance is a policy for which you make regular premium payments in exchange for a lump-sum to be paid to your spouse, dependents, or estate when you die.