Breaking good: how to protect your personal finances
Taking a gap year or sabbatical can be fun and exciting, but before setting off, there are a number of steps you need to take, says Mark Channing
More professionals are escaping the rat race to fulfil personal ambitions such as travelling around the world or volunteering abroad.
Those working in the civil service can already take career breaks of up to three years and, although there is no equivalent entitlement for private sector workers, benefits consultants say that more companies are allowing their employees to take career breaks.
Patrick Robertson of the benefits consultancy Mercer said: “As the economy has got more buoyant, we’re seeing more willingness on the part of employers to let valued staff take a career break.
“A lot of people in their late twenties and early thirties are taking a year out to travel before they have children.”
Yet career breaks are not just limited to the young, as older people — so-called “grey gappers” — are increasingly taking a year out. Research shows almost one in five British people taking a gap year plans to do so between the ages of 41 and 59.
However, experts say there are a host of financial implications to consider before embarking on a career break.
Rachael Murphy, director of Irish company Agapé Adventures, which organises career break expeditions to Kenya and Bolivia, said: “It can be tempting when sitting at your desk on a Monday morning to say you’re going to jack it all in and travel the world, but it requires careful financial planning.
“You need to think about how you’re going to pay your mortgage, what insurance to buy, and protecting your finances as much as possible.”
Here’s our checklist.
TAX AND PRSI
Taking a career break could mean you qualify for a tax refund under “split year relief”. Barry Flanagan, senior tax manager at taxback.com, a tax refund company, said: “Split year relief is a major tax advantage to taking time out. If you leave in September and don’t return until the end of next year, you can claim a refund for unused tax credits and bands for the year you left.”
Flanagan said those leaving the country for an extended period needed to be mindful of the impact on their social insurance (PRSI) contributions, which entitle you to certain benefits such as the state pension and jobseeker’s benefit.
“Taking one or two years won’t have an impact on long-term benefits such as the state pension, but entitlement to short-term benefits such as jobseeker’s benefit may be affected,” said Flanagan.
Murphy said those taking a year off to work in a developing country could protect their entitlements using “volunteer development worker credits”.
These are paid on your behalf by the Department of Social Protection and maintain your social insurance record in respect of periods spent working in a developing country.
Leaving your house empty for an extended period will invalidate your home insurance, warn experts.
Most policies remain in force if you leave your house unoccupied for periods of up to 30 days.
If you go away for longer than this, you need to inform your insurer, who may refuse to cover you.
Jonathan Hehir, managing director of the broker insuremyhouse.ie, said: “If you’re going off travelling for the year and you leave your house empty, the majority of mainstream insurers won’t cover you because there’s no one living in the house.”
Hehir said you would need to contact a specialist insurance company through a broker to access a tailored unoccupied house insurance policy.
You will also need to change your home insurance cover if you rent out your house while abroad.
“If renting the property, you need to change your cover from a main residence policy to a rental property, which gives you additional landlords’ liability cover,” said Hehir.
“They are two separate policies so it’s very important that you do that.”
If renting out your home to cover the mortgage during a gap year, you are liable for tax on the rental income at up to 52%.
You can reduce the amount by writing off 75% of your mortgage interest against the tax.
For shorter career breaks, meanwhile, your mortgage provider may allow you to take a payment holiday.
For example, customers of Permanent TSB’s 3in1 mortgage can skip up to two months of mortgage payments each year. However, those taking up the offer will see their monthly mortgage payments increase during the rest of the year.
You could lose your no-claims bonus on your car insurance if you leave the country for longer than a year. Insurers give generous discounts depending on your record of claims-free driving, with maximum premium discounts of 50% to 75% depending on the insurer.
These discounts have become a valuable commodity given the high cost of car insurance premiums, which have soared by 60% in the past two years.
“If you’re only going away for one year you should still get the benefit of your no-claims bonus when you return,” said Hehir. “But if you’re going for any longer there could be complications.”
According to Hehir, some insurers may take into account periods of claims-free driving experience while abroad.
“Some specialist insurers will recognise your foreign driving history. Just make sure you bring back proof of your claims-free driving record from the insurer,” he said.
A cheap travel insurance policy will not cover you for a long-term stint abroad.
“It’s vital that you get a comprehensive long-stay travel insurance policy,” said Murphy. “Something that only covers you for a two-week holiday in Spain won’t be enough.”
The Agapé Adventures director also advised taking out a specialist policy designed for gap year travellers which includes adequate “medevac” coverage. This is more expensive than short-stay travel insurance but the policy covers you in the event of a medical emergency when you are abroad.
A global backpacker policy from AA Travel Insurance provides up to €5m of medical cover and costs €227 for a 30-year-old going on a 12-month career break.
Experts advise keeping some level of health insurance in place if spending a year abroad so as not to fall foul of health insurance rules when you return
Dermot Goode of the adviser totalhealthcover.ie said: “If you cancel your health insurance when you’re gone, when you come back you will rejoin as a new member and be subject to new customers’ waiting periods.”
New health insurance customers have to wait 26 weeks before they can claim on their policy.
You could find yourself subject to a waiting period of up to five years for treatment of an illness or injury you suffered while away, warned Goode.
“If you come back with a knee injury, you could come back and find that health insurers won’t cover it for five years because they’ll deem it a pre-existing condition,” he said.
Goode said another option was to take out a policy with VHI International which is designed for Irish people moving abroad for more than six months.
These policies are expensive, however.
For example, a VHI International Level 1 plan which covers you for living in Europe costs €1,286 a year. For worldwide cover excluding the US and the Caribbean, the cost is €1,368. The annual cost of a worldwide policy which includes cover for the US and the Caribbean is €4,015.