30yo... Looking for best way forward!

T

ThirstyLizard

Registered User
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Hi all,

I'm a long time lurker, 1st time poster. It's great to finally join the community.

We are relatively comfortable with our current financial position and would rate ourselves are good savers. Our business has been growing over the past 12 months and we now find ourselves projecting a healthy profit for the current financial year of circa ~ €130,000k (in addition to our salaries - see below). The business doesn't required these funds to grow or to for general day-to-day operations.
__________

Age: 30
Spouse’s/Partner's age: 30

Annual gross income from employment or profession: €33,800
Annual gross income of spouse: €33,800

Monthly take-home pay: €4,500

Type of employment: Self-Employed via Ltd Co.

In general are you:
(a) spending more than you earn, or
(b) saving? Saving €1,500 - 2,000 per month.

Rough estimate of value of home: €330,000.
Amount outstanding on your mortgage: €250,000.
What interest rate are you paying? 3.3% (AIB <80% LTV) - €1045 monthly repayment with 34 years remaining.

Other borrowings – car loans/personal loans etc. None.

Do you pay off your full credit card balance each month? N/A.
If not, what is the balance on your credit card? N/A.

Savings and investments: €20,000 in regular saver accounts.

Do you have a pension scheme? No.

Do you own any investment or other property? No.

Ages of children: None. Planning/hoping for a child within the next 12 months.

Life insurance: None.

What specific question do you have or what issues are of concern to you?

With the significant increase in our earnings this year, we have found ourselves not really knowing where to go, or look, next... Is it a good time to start a pension? Or Invest? Or start overpaying our mortgage? Should we take the profits out of the company additional salary, or leave them in the company, or... Agghhh!!!

Basically we feel there are a lot of options available, which is great, but we are unsure of what is the best way forward! I'm hoping this is where the AAM community can step in and provide us with some advice... :)

Thanks in advance!!
 
some basic things first
  • make a will if you haven't done so already
  • If you are planning a baby then ring-fence some funds to cover both the costs of the baby stuff (buggies and car seat are expensive for example) but also to cover any potential drop in income due to maternity/paternity leave.
  • What are your longer term child minding options?
  • Do you live close to family, if not, will one or both of you have a desire to do so (if only to have a granny available for baby-sitting and support). in my case we moved 60 miles after the birth of our first smallie when we realized we needed that extra support
  • Once you've had the baby and assuming you can afford to do so, consider putting something aside monthly for the child's education etc when they are older
 
You are only 30 so its always a great time to start a pension. Certainly you should consider that given the tax relief you can get.

Personally I would also pay down extra on the mortgage as well if you can from that 130k profit (whatever is left after pension contributions).

Is that 130k profit forecast a net figure? Fantastic, just clear off your mortgage over the next 2 years or so. No one complains about being debt free and you will be very wealthy in 10 years if you keep going the way you are.

Dare I ask what industry your business is in so I can go off and start a business in it?!
 
Why not look at doing a bit of everything.

You don't have to commit to a regular pension, you can make a lump sum payment.
Look at putting a lump sum to reduce your mortgage.
Have a chat about what your future plans are for the next few years. Besides starting a family (kids are VERY expensive!!), are there other things you want to do that will cost money?
Build up other medium term investments
With projected projected profits of €130k, do you reckon this is sustainable and something you can enjoy every year?

You should be looking at lifelong cashflows to ensure that you make good use of the money so you have access to capital when you need it and can carry on enjoying life.

Well done on the successful business!!

Steven
www.bluewaterfp.ie
 
Welcome to Askaboutmoney.

ThirstyLizard said:
Should we take the profits out of the company additional salary, or leave them in the company,
Click to expand...

OK, this one is absolutely clear. You must take out the all the profits either as salary or as pension contributions. Do not leave profits in the company. They will be subject to Corporation Tax and then income tax or CGT when you eventually take them out.

Does your company rent premises? It's probably a good medium term objective to buy a premises in your own names and rent it to the company. If this is an option, then it argues against tying up your money in a pension.

While it's good to get a balance between pensions and paying down your mortgage, in my view, at 30, you don't need to worry about pensions yet. Take the money out net and either keep it on hand to buy a property for the business or pay down your mortgage.

Taking the money out is a great protection against reduced profits in the future or increased family costs. Having cash in your own name or having a much smaller mortgage is much more flexible than having a fat pension.

With your mortgage paid off, you will have plenty of time to start a pension.

Brendan
 
Thanks to those who have helped thus far, it's very much appreciated!

aristotle said:
Is that 130k profit forecast a net figure? Fantastic, just clear off your mortgage over the next 2 years or so. No one complains about being debt free and you will be very wealthy in 10 years if you keep going the way you are.
Click to expand...

The 130k is gross, so if withdrawing it from the company as additional salary we're talking half that, ~65k in personal cash after taxes...

SBarrett said:
Build up other medium term investments
With projected projected profits of €130k, do you reckon this is sustainable and something you can enjoy every year?
Click to expand...

I would anticipate this is sustainable for the next 3 years at current levels, further out than that is too difficult to project at this point in time... Could be more, could be less!

SBarrett said:
You should be looking at lifelong cashflows to ensure that you make good use of the money so you have access to capital when you need it and can carry on enjoying life.
Click to expand...

Would you happen to have any recommendations/examples of lifelong cash-flowing investments?
 
Lifelong cashflows aren't investments. It is a plan for your future, adding in all the assumed income you will generate over your lifetime, then deducting all the potential expenditure you may have. It will identify gaps that you will have in your cashflow and what you need to do to plug those gaps. For some, the solution is to spend more money!


Steven
www.bluewaterfp.ie
 
Thirsty, you have received some fine views for your next moves. All I might add is weigh up your options, yourself. Be careful not to get thrashed by any Financial sales men and only take an opinion from an accredited company that have reputable sales persons. Take nothing for granted and get everything in writing in case of future dispute.
 
johnny1234 said:
Thirsty, you have received some fine views for your next moves. All I might add is weigh up your options, yourself. Be careful not to get thrashed by any Financial sales men and only take an opinion from an accredited company that have reputable sales persons. Take nothing for granted and get everything in writing in case of future dispute.
Click to expand...

Or get someone who will give you good advice rather than try to flog you something!!

Although, our regulator, the Central Bank thinks commission payments ie the selling of a product is a good way to pay for advice, so good advisors have a way to go to discard the "sales man" tag :(

Steven
www.bluewaterfp.ie
 
SBarrett said:
Or get someone who will give you good advice rather than try to flog you something!!
Click to expand...
I agree with this. We all want 'free' good advice and then complain that someone is trying to sell us something at the end of it. There is no such thing as a free lunch as we all know.

I am in a similar scenario personally and believe that I will have to pay to get the advice I am looking for ! If reasonable sums of money are involved, paying for advice should be strongly recommended !
 
@ThirstyLizard Firstly congrats on the successful business and your life situation at such an early age. If I was you, this is what I would do

1. Target paying down the mortgage to <50% in a given window (say 2 years) to avail of lower interest rates. If you done this tomorrow, you would be down to 3.1% with AIB. Either way, any increased competition is likely to target the lower LTV's first. Even set an interim target of <60% for the mortgage.

2. Agree with others here that if you are planning children think about putting some money away. Childcare is expensive, as is the initial costs of buggys and the likes. Not sure what your Health Insurance cover is like but you might want to consider this also. It would be nice to have a cushion for that, and can always be used to start your education fund for them :)

3. I think you should start a pension - how much is up to you. Given the nature of the business & levels of uncertainty, I would be tempted to put 25% of that profit into a pension fund. I know it may sound like a lot but:
- there is tax support of 40% on the money - no idea how long that will last
- there is a heavy profit there to support it. May not be as good in other years and can reduce accordingly
- you will benefit from compounding earlier, and makes a solid difference in the end
- if you have children, you may have to take out extra salary to cover the increased costs, reducing profits
- finally, its a good a time as any to do it :)

Final comment, to echo what I said above - don't be afraid to pay for good financial advice. It should pay itself back in a very short time frame.
 
Tax is a huge part of this. Your resources are within the company, and salary/bonus/dividend over and above what you're paying yourselves now are terrible from a tax perspective. You need to quantify the benefit of accelerating your mortgage repayments versus the downside of the extra tax which will arise on the extra income you draw from the company. My sense based on the limited information is that you would be better off aggressively funding pensions, allowing some profits to build up in the company with one eye on possible retirement relief claims, and taking modest bonuses (to perhaps chip away at the mortgage). Have a few horses in the race basically.
 
Don't expect any earth shattering advice from independent advisors. In my experience of two of them, two fairly well known ones in ireland, they don't know a lot more than someone who has an interest and reads about financial topics.

I have personally paid €750 to one advisor and €300 to the other and really came away with a sense of just being more sure on what I already knew.

If you are a novice I can see the benefit or if you have a complicated set up like limited companies perhaps then again I would say there would be benefit.

But for a regular PAYE person perhaps with other sources of income and wondering what to do with a pension or investments then I didnt get much value as I am reasonably up to speed with basic knowledge on those things plus I use an accountant for tax returns.

Or maybe I just had bad luck picking those two advisors.
 
Gordon Gekko said:
allowing some profits to build up in the company
Click to expand...

For the funds that build up in the company, in effect you pay:
- 12.5% Corporation Tax
- 33% Capital Gains Tax (if taken out as Capital), otherwise Marginal Income Tax rates (if taken out as Income)

There is also a potential 15% Close Company Surcharge on 'undistributed trading income' for certain "service" companies. I guess a lot will depend on whether the OP falls into this category or not. If they do, I would question the benefits of building up funds in the company.

That said, I don't know if an accountant can come up with other mechanisms to benefit them.


But agree, the elephant in the room is that it is company funds currently, so taxation implications in most scenarios.

@ThirstyLizard don't forget the 'holiday' bonus to pay for a nice break to remind you what all the effort is for ! No point having a stock-pile of funds in a company and not enjoying life ! When/if the kids come, it will seriously change your outlook !
 
Gordon Gekko said:
allowing some profits to build up in the company with one eye on possible retirement relief claims
Click to expand...

I am really surprised that anyone still recommends this. The guy is 30. How many years has he got to go to retirement? Is it likely that Retirement Relief will still be available? Is it likely that he will still be in this business?

This particular issue is discussed in detail here:
Tax planning - company profits or director's salary?
 
Hi Brendan

That's why I suggest not putting all one's eggs in one basket. Pensions might also be taxed in a horrendous manner on the way out. I'm not suggesting that someone go "all in" vis a vis retirement relief. Just have one eye on it.
 
Brendan Burgess said:
I am really surprised that anyone still recommends this. The guy is 30. How many years has he got to go to retirement? Is it likely that Retirement Relief will still be available? Is it likely that he will still be in this business?
Click to expand...

That's what I was thinking, plenty of water to go under the bridge between now and then. There will be lots of demands on that cash before it becomes time to hang up his boots.


Steven
www.bluewaterfp.ie
 
aristotle said:
Don't expect any earth shattering advice from independent advisors.
Click to expand...

It works both ways Aristotle. I meet people looking for advice on their money and you tell at the end that they are disappointed that you haven't shown them a magic way to get money out of their company and into their own pocket without paying any tax. Our job is to advise people on the best way to structure their finances so they can continue to live the life they want. Or if they want to change it, what they have to do. Those who have gone on to become Certified Financial Planners have the skill and expertise to construct lifelong cashflows to help you plan knowing what the big picture will be ie what are the long term effects of the financial decisions you make.

Some people are good at this anyway (plenty of them are on here) and don't need the help of a financial advisor.


Steven
www.bluewaterfp.ie
 
Brendan Burgess said:
I am really surprised that anyone still recommends this.
Click to expand...

There may be scenarios where this is valid. For example, if the company has a major capital programme to invest in, or are looking to liquidate/sell the company in the short/immediate term. It also may prove to be useful in cases of inheritance tax planning, as it would increase the value of the company being transferred.
The same may apply in cases where the company is looking to get increased funding from external sources (venture capitalists, banks etc) - a healthy balance sheet is always helpful there.
If the company is planning to expand, take on additional employees, cash flow would be important to ensure that wages etc are paid on time.

There is also the case where profits are irregular and fluctuate massively from year to year - in that case there is little benefit in taking out income at marginal rates in year 1 and not using the tax credits in year two etc.

In short, there are some reasons people would want to do that, but that cannot be determined based on the detail above - and needs full proper tax planning to 'justify' it.

Just one note from the link above re Close Company Surcharges - the Revenue have been running a National Contractors Project for a number of years now where they are in effect targeting personal service companies. I would be surprised if there was not a knock on effect on the definitions of this surcharge.
 
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