Advice on (i) Unlocking Pension to Repay debt and (ii) whether to keep RIP

J

jim masters

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Personal details

Age: 51
Spouse’s/Partner's age: 46

Number and age of children: 6, 11, 13,


Income and expenditure
Annual gross income from employment or profession: 130k
Annual gross income of spouse: 80k

Monthly take-home pay 10,352

In general are you:
(a) spending more than you earn, or
(b) saving?
debt servicing is the issue

Summary of Assets and Liabilities
Family home worth €1.2m and mortgage of €257k
Defined Contribution pension fund: €520k
Buy to Let Property worth €725k with mortgage of €377k

Family home mortgage information
Lender PTSB
Interest rate fixed until August 2026 at 2.05%
Type of interest rate: tracker, variable, fixed.
If fixed, what is the term remaining of the fixed rate?
If tracker, what is the margin e.g. ECB + 1%

Remaining term: 18 years
Monthly repayment: 1,385

Other borrowings – car loans/personal loans etc

Repaying loan on someone else’s behalf

€42k balance – €572 per month – BOI - ECB + 95 bps Maturing February 2031






Credit card - €6,800

Personal Loan €8,748 (280 per month – overpaying at 500 per month)


Buy to let properties
Value: €725k

Debt €377k
Rental income per year: €31,140

Monthly repayment c2,850
Rough annual expenses other than mortgage interest : 3,000
Lender BOI
Interest rate Tracker plus 89 basis points
If fixed, what is the term remaining of the fixed rate?

Other savings and investments:

Do you have a pension scheme?

  • Yes 4 DC schemes total value c.Eur 500k
  • 2 DB scheme
  • one which is 13k p.a. on retirement (indexing)
  • one which will be 19/80 x final average salary over employment

  • Do you own any investment or other property?
2 investments

1 – share in illiquid property investment worth c €100 - €150k when matures

2. With profits Policy maturing in 4 years c 90k

Other information which might be relevant

Life insurance:

  • Just life cover on mortgages
  • What specific question do you have or what issues are of concern to you?
  • Want to hold on to RIP to be able to pass to kids in due course.
  • Need to paydown debt to free up cash as being stifled by repayments on trackers and on loan I am paying for 3rd party.
  • Planning to unlock one of the 4 pensions and take 25% to repay most of the 42k loan and hold the RIP for kids long term
 
jim masters said:
Buy to let properties
Value: €725k

Debt €377k
Rental income per year: €31,140

Monthly repayment c2,850
Rough annual expenses other than mortgage interest : 3,000
Lender BOI
Interest rate Tracker plus 89 basis points
Click to expand...



Let's first look at the standalone profitability of the BTL.

Rent: €31k
Interest €377k @ 4% : €16k (the rate is higher now, but it will probably average around 4%)
Expenses : €3k
Profit before tax : €12k
Profit after tax: €6k

Equity: €350k

If you sell the property and pay off your home loan of €257k @ say 3% , you will save €7k
And you will have another €100k to play with.

This seems very clear to me: Sell your investment property and repay the most expensive loans.
 
On a back of an envelope basis, your rental property is giving you an after-tax income of around €3,750 per annum.

On the other hand you are currently paying €5,270 interest on your PPR mortgage plus whatever interest you are paying on your other debts/obligations.

It would seem to make more sense to sell the rental and to clear all your debts from the net proceeds.

I would be inclined to leave your pensions alone until you are ready to retire.
 
jim masters said:
Want to hold on to RIP to be able to pass to kids in due course.
Click to expand...

jim masters said:
Number and age of children: 6, 11, 13,
Click to expand...

I am all for helping kids to get on the housing ladder but which one are you going to give a €750k house to? And what about the other two?

By selling the property, you will be in a position, in time to help each of them buy a suitable property which they choose - not an unsuitable one chosen by you.
 
jim masters said:
€42k balance – €572 per month – BOI - ECB + 95 bps Maturing February 2031

Credit card - €6,800

Personal Loan €8,748 (280 per month – overpaying at 500 per month)
Click to expand...

jim masters said:
Value: €725k

Debt €377k
Click to expand...

If I might anticipate another of Sarenco's post, if you had €348k cash and all those debts, would you pay off the debts or would you take out a €377k mortgage to buy an investment property? :)
 
Thanks very much for all the advice - it is much appreciated !!

The RIP is in an area near us and would be suitable for the kids to share when in college.

If i sell the RIP and repay my homeloan and forsake the 6k profit on rent, the saving on homeloan interest virtually cancels this so no better off other than less exposed to market risk on cap value of RIP. anmd 100k sitting in the bank. It's a conservative play for sure, but not income positive today.

Unlcoking 40k from pension gives an immediate 600 pm cash boost but loses 15 years CGT free growth on the 40k. It does howvere save the interest on the equivalent borrowings and improve life today considerably.
It's 40k (8%) from a 520K pension pot (just checked) with 2 other DBs in background.

I'm probably missing a lot of points here, so please pile in. Many thanks for your advice so far.
 
jim masters said:
If i sell the RIP and repay my homeloan and forsake the 6k profit on rent, the saving on homeloan interest virtually cancels this so no better off other than less exposed to market risk on cap value of RIP. anmd 100k sitting in the bank.
Click to expand...
Don’t forget tax.

At your income level, you only get to hang onto 48% of that rental profit after the taxman gets his share (45% if you’re self employed).

And LPT is on top of that again and not deductible in calculating your taxable rental profit.

Whereas the return (ie the interest saved) on paying down debt is completely tax-free.

And I’ll bet the interest rate on your credit card debt, personal loan and third party loan are a lot higher than your PPR mortgage rate.

I still think you would be far better off selling the rental and using the net proceeds to pay down debt (starting with the most expensive loans).

Don’t forget that returns on a pension pot compound in a tax-free environment. All things being equal, you are better off leaving them well alone until you are no longer earning an income.

And when you do get your debts down to a manageable level, make sure you are both maximising your tax-relieved pension contributions.

You might also want to think about starting bare trusts for your kids, making full use of the small gift exemption (x2).

Finally, you might want to review your life assurance and income protection situation.
 
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The 6k profit rent is post tax and roughly equates to the saving on the homeloan so is neutral apart from LPT and risk of capital value collapse and hassle of management.
Unlocking 40 - 45k from the pension takes care of the other debts.
So on the negative side i lose the compound tax free growth on the 40k (ends up worth c.90k in 15 years at 5%). But on the plus i save the interest ont the credit card and the 3rd party debt.
 
A BTL worth over 700k is a lot of equity tied up in one rental. It might be preferable to have 2 units to reduce the risk of non paying problem tenants and / or a property crash etc. As posters suggest it might be better to give the kids each a deposit towards a property rather than a single large value tenanted property.
 
Cavanbhoy said:
Why overpay personal loan by 500 a month when you have credit card debt.
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normally repay credit card debt with bonus and overpay of loan is 220 (500 total repayment) and structured to be able to forget about it and repay early, but yes take general point, would be better to reallocate even short term
Mamamia22 said:
A BTL worth over 700k is a lot of equity tied up in one rental. It might be preferable to have 2 units to reduce the risk of non paying problem tenants and / or a property crash etc. As posters suggest it might be better to give the kids each a deposit towards a property rather than a single large value tenanted property.
Click to expand...
yes but ignores value of possible cap appreciation on geared value rather than investing the post sale net cash. A debt free property worth 700K + appreciation over next 15 years vs 100k invested today for them in 15 years ?
 
jim masters said:
The RIP is in an area near us and would be suitable for the kids to share when in college.


It's 40k (8%) from a 520K pension pot (just checked) with 2 other DBs in background.
Click to expand...
If the RIP is near you, why would all your kids move there for college? Also, it assumes they will want to go to college somewhere near you.

On the pension side, have you checked that you can draw down from that pension? If it's linked to your current employment, you won't be able to. If it's linked to a DB pension, the trustees will have to allow early retirement which they don't always do for DB schemes. If they do, it will massively reduce the pension payable, and it will begin to be paid out.
 
jim masters said:
The 6k profit rent is post tax
Click to expand...
€31,140 (gross rent), less €20,320 (interest), less €3,000 (expenses) = €7,820.

After tax, that’s only €3,753 - not €6k.

Take LPT off that figure and you’re at around €3k.

That’s a lot less than the interest you are paying on your PPR mortgage, never mind the interest you are paying on your other debts/obligations.
 
Hi Jim

I presume the buy to let is your former home and you have a huge emotional attachment to it.

Because it makes absolutely no sense to hold onto it.

And holding onto it for the kids makes no sense either. Most people's first home is not a €750k home. And you have three kids.

So if you want to give property to the kids, and I don't think you should, then sell it and buy two properties so at least two of your kids are sorted.

But it would be much better to give/lend them money to help them get on the property ladder with a house that they choose and not one that you choose for them.

Brendan
 
Mamamia22 said:
A BTL worth over 700k is a lot of equity tied up in one rental. It might be preferable to have 2 units to reduce the risk of non paying problem tenants and / or a property crash etc. As posters suggest it might be better to give the kids each a deposit towards a property rather than a single large value tenanted property.
Click to expand...

Brendan Burgess said:
Hi Jim

I presume the buy to let is your former home and you have a huge emotional attachment to it.

Because it makes absolutely no sense to hold onto it.

And holding onto it for the kids makes no sense either. Most people's first home is not a €750k home. And you have three kids.

So if you want to give property to the kids, and I don't think you should, then sell it and buy two properties so at least two of your kids are sorted.

But it would be much better to give/lend them money to help them get on the property ladder with a house that they choose and not one that you choose for them.

Brendan
Click to expand...
Hi Brendan, yes you're right it was our first home. Not sure I'll just give it to them and may sell it down the line and give them the proceeds but to sell now and buying 2 RIPs would mean
- losing the tracker which may become valuable again
- incurring all the transaction costs of sale
- transaction costs and finding 2 new RIPs both of which are going to be harder to sell in a bad market than the current house
- double ongoing managemnt costs and fitout
- yes 2 tenants so a partial hedge or double the chence of a bad tenant depending on how you view it !

Sarenco said:
€31,140 (gross rent), less €20,320 (interest), less €3,000 (expenses) = €7,820.

After tax, that’s only €3,753 - not €6k.

Take LPT off that figure and you’re at around €3k.

That’s a lot less than the interest you are paying on your PPR mortgage, never mind the interest you are paying on your other debts/obligations.
Click to expand...
31,140 - 18,850 (tracker) - 3000 -= 9,290 less LPt = c 8,500
profit rent 4,250.

Current interest on homeloan @2.05% = 5,268 - so c 1k gap but you're right would be a gap of 5,387 if it were it to go to 3.75% when the fixed rate expires in 2 years.

All other debts to be dealt with by pension unlock (which has minimal disruption to the overall).
 
jim masters said:
to sell now and buying 2 RIPs would mean
Click to expand...

Just in case there is any doubt.

I think it's clear that you should sell now and pay down your debts and not buy 2 RIPs. Nor should you cash your pension either.

But if you want to be a property investor with a view to giving them to your kids, 2 smaller RIPs would be better.

Brendan
 
I do think you have some bigger short term issues to consider here. For example, if I understand you're details correctly, you are a millionaire with annual income of almost €200k a year before tax, yet you have €15k in personal debt (CC and loan), no life cover (bar mortgage) and unless you didn't include it, no cash savings or rainy day fund. Even if you had no income from the rental property, you still have more then €5k a month left over after all mortgage and loan repayments so I'd have to ask, what is the money being spent on and how are the loan repayments killing you? Perhaps I've missed something here and hope I'm not being rude but you do also need to consider some more basic things. You're a classic example of someone who is asset rich and cash poor.

  • Firstly, ensure you have an up to date will etc in place.
  • Full end to end tax review, are you claiming for everything you can. Are you entitled to any refunds?
  • Stop overpaying the mortgages and tackle the high interest debt first and clear those. CC first, then whatever loan is the highest rate etc.
  • Sort out life and critical illness cover if not done so already.
  • Why do you think you need a house close by for when the kids go to college? they may want to go to the other end of the country or overseas and could you afford that?
  • Open a savings account and still €500 a month into it and build up that rainy day fund if not done already
Sort out the basics first and have a plan for the next 6 months to have done so.

As for the RIP, ask yourself a simple question, would life be better and easier if you were not a landlord. ? If so, sell and reinvest the profits to funds your kids education. If they go to college close by, they can live at home, if not then you'll need cash.
 
Get the strategy right first, which is to sell the RIP.

Then look at the basics.

You won't need a rainyday fund with such a high income.

And you should be paying down debt rather than building up savings especially when you have savings products which mature in a few years.
 
jim masters said:
31,140 - 18,850 (tracker) - 3000 -= 9,290 less LPt = c 8,500
profit rent 4,250.
Click to expand...
€377k x 5.39% (4.5 + 0.89) = €20,320.

So, €31,140 - €20,320 - €3,000 = €7,820.

Less income tax, prsi and usc @52% = €3,753.

Less €750 LPT = €3k.

That’s a lot less than the amount you are paying in interest on your PPR mortgage (which is highly likely to rise when you come off your current fixed rate).

And a heck of a lot less than the rate you are paying on unsecured debt.

You asked for views and I think it’s fair to say that we’re all saying the same thing - sell the rental, pay down your debts and leave your pensions alone.

But, look, it’s your money and your decision.

Best of luck whatever you decide.
 
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