Finance Tidy Up

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Obairchrua

Registered User
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11
Hi all - regular reader of Askaboutmoney but first time poster. I never really thought much about where to invest or save sensibly but now that inflation is running high I need to get some strategy in place. I'd appreciate any feedback any of you might provide. Thank you.

Age:
55

Spouse’s / Partner's age:
50

Annual gross income from employment or profession:
€110,000 + ~€15k bonus. (Most of bonus, €12.7k, goes to employer approved profit share scheme so comes out tax free after 3 years)

Annual gross income spouse:
€42,000 + ~€4k bonus. (Bonus goes to employer approved profit share scheme so comes out tax free after 3 years)

Monthly take home pay:
Me €3,950

Spouse €1,850

Both after max DC pension contributions

Type of employment:
Both full time - private sector – same employer

In general are you:
Saving passively. We’re both very easy going and not big spenders day to day.

Rough estimate of value of home
€600k

Mortgage on home
€35k – 12 yrs remaining (ECB + 0.8%). €260/mth

Mortgage provider:
PTSB

Type of mortgage: Tracker, interest only, fixed rate?
Tracker

Interest rate
ECB + 0.8%

Other borrowings – car loans/personal loans etc
Nil

Do you pay off your full credit card balance each month?
Yes

Savings and investments:
€250k cash

€200k prize bonds

€500k shares in employers company (tech multinational). Cost to me was approx. €100k therefore some CGT liability here if sold

Do you have a pension scheme? Yes, both
Me:

DB scheme from previous employment - €27k pa payable from age 65

DC scheme 1 - €70k (previous employment)

DC scheme 2 - €100k (previous employment)

Have recently started new employment contributing 35%. Employer contributing 8%

Spouse:

DB scheme from previous employment - €6k pa payable from age 65

DC scheme 1 - €70k (previous employment)

DC scheme 2 - €25k. (previous employment)
Has recently started new employment contributing 30%. Employer contributing 8%



Do you own any investment or other property?
No.

Ages of children:
19 – working full time. No plans to go to college.

16 – at school. Plans on going to college in local Dublin area, so probably no additional accommodation costs.

Life insurance:
Have double life cover taken out at time of mortgage 18 years ago. Pays out €150k for each of us. Costs approx. €80/mth.

Both have life cover through employer which pays out 3 x salary.


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

  • I thought about paying off the mortgage a few years ago (costs ~ €280/yr interest) but at the time was thinking of borrowing to invest in residential property so thought I’d hold onto the low tracker rate loan! I guess I should pay it off now?
  • Am I wasting money on Life Ins cover taken out with mortgage? Probably don’t need it really but just kept it up without question over the years. If I dropped the Mortgage & Life Ins we’d reduce expenditure of approx. €4k/yr.
  • My plan was to continue paying max into DC scheme for another couple of years and spouse to continue paying max until retirement to achieve total pensions inc. state pensions of €73.6k (today’s rates) so that’ll we’ll only pay tax at lower rate after gaining the higher rate tax exemption on paying in. Should I just keep making the max contributions myself even though I’ll jump into the higher tax bracket on retirement (at current rates)?
  • I know it’s been said on Askaboutmoney several times about not holding significant value of shares in your employers company but I’m guilty here purely through inertia and hoping that one day the market will turn around and I’ll be rich! In reality I accept this is probably nonsense but I wouldn’t know where to put the money if I sold up. Assuming I sold up and paid the CGT due, where should I invest the share proceeds, say €380k total? I’d also wish to sell the PBs and invest the proceeds along with some cash, say additional €400k?
  • Lately we’ve been taking stock of what’s important and how we want to spend the rest of our days. We’d like to stop the normal full time work routine in, say, 5 years and spend more time on ourselves. Any inputs about when we could reasonably stop working full time and coast along maybe doing some volunteer work etc with no reliance on an employment income before drawing our pensions?
 
Keep your life cover. You still have a mortgage and a child still in school. It is just in case and probably won't be used but what if it was? You family will benefit hugely financially and the money can be used to help your kids set up a new home for themselves when they are old enough.

The company shares is a common issue. People accumulate them over the years and then tax becomes the main reason why they won't sell. You don't want to create a tax liability by selling and diversifying. The golden rule is don't rely on the same company for your salary and your savings. There are lots of examples of people who lost their savings as their company shares became worthless. We don't know what company you work for but you are taking a risk with keeping so much in company shares.

You have too much in cash/ prize bonds. It is doing nothing for you and will be worth less than you put in in the long term. You need to invest this money.

With the company shares and the cash you have, you have enough money to use a discretionary fund manager who will build an investment portfolio for you that won't be liable to deemed disposal (although most DFM's use funds for elements of their portfolios, so you won't be completely immune).

You have a good base in your DB pension too. Will you be able to access it from age 60? Otherwise, you can use the other retained benefits and cash to live off until you can.

You have lots of options available to you and are obviously saving hard at the moment. Being able to live on the lower income will benefit you in the future.

On the mortgage, the argument of not paying off a tracker early is that you put the money to other use and earn a return higher than the cost of the mortgage. Keeping so much money in cash/ prize bonds means you are getting a lower return than the cost of the mortgage. So either get the money working for you or pay off the debt. Either way, pay it off when you retire. Carry debt into retirement isn't a good thing as it takes up a larger % of your now lower income.


Steven
www.bluewaterfp.ie
 
Thanks for the quick reply and advice Steven.
I had only intended cancelling the Life policy seeing the mortgage was now significantly smaller than it had been initially and also that we both had life cover through work but I take your point about keeping it up.
Yes, I think I will engage with a DFM as you suggest. I need to do a bit of research into deemed disposal - I hadn't heard of this before!
 
I'd pay off the mortgage as the balance is fairly small. The phycological effect of being mortgage free is a bonus. Yep, its a tracker, but balance is only 35k, and as you say you also get savings on the life insurance aspect of the mortgage.

I'm of same opinion that semi-retirement at 60 to enjoy fruits of savings is something that should be considered whenever possible as there is so much to do - even "overwinter" in sunnier climes like one poster does

On other aspects - as above, a fund manager / independent advisor will be best placed to advise
 
So, in summary

Home: €600k
Net cash after clearing mortgage: €215k
Prize bonds:€200k
Shares: €500k
DC Scheme: €170k
DC Scheme spouse: €95k
Total : €1.8m + two DB schemes

The life insurance seems immaterial to me. You are paying €1k a year for €150k cover. I have no idea if that is good value or not.

Do you not also have mortgage protection - or was your original mortgage for €150k ?

The most important decision is the shares in your own company
You must sell them as tax efficiently as possible. There is absolutely no harm in holding 10% of your wealth in your employer. So sell off €300k immediately.

The next most important decision is the pension
Continue to maximise that. You are going to be in top rate of tax when you retire anyway. Don't worry too much about it. Just max the contributions.

I would invest the balance directly in a portfolio of shares
I would advise against a discretionary fund manager. You will pay a lot in annual fees and transaction fees. You will get very little in return - a simplified tax return is about it.

Buy and hold a diverse portfolio of about 10 different shares. That will be about 5% of your wealth in each one. That is plenty of diversification. If one goes bust, it's only 5% of your wealth. You have 25% of your wealth in one company as it is.

Brendan
 
Obairchrua said:
What specific question do you have or what issues are of concern to you?

  • I thought about paying off the mortgage a few years ago (costs ~ €280/yr interest) but at the time was thinking of borrowing to invest in residential property so thought I’d hold onto the low tracker rate loan! I guess I should pay it off now?
Click to expand...
Very small beer in your overall context but paying it off out of your cash will save you €280 p.a. so why not?
Obairchrua said:
  • Am I wasting money on Life Ins cover taken out with mortgage? Probably don’t need it really but just kept it up without question over the years. If I dropped the Mortgage & Life Ins we’d reduce expenditure of approx. €4k/yr.
Click to expand...
€4k/yr is a confusing number for expenditure. The accountants will tell you that expenditure on these items is €280 + €960. The €280 has been dealt with above.
Is the €960 p.a. for life assurance good value?
You need to give more clarity on the life assurance.
If you have €35k left on a 30 year mortgage with 12 years to go it suggests an original mortgage less than €70k. (Current value of house €600K which doesn't add up without some additional info). So the €150k life assurance taken out at the time of the mortgage seems to have been for more than just the mortgage.
So is it a mortgage protection policy or a level term assurance or something else?
You have limited life assurance needs which would seem adequately covered by your current employment scheme.
Obairchrua said:
  • My plan was to continue paying max into DC scheme for another couple of years and spouse to continue paying max until retirement to achieve total pensions inc. state pensions of €73.6k (today’s rates) so that’ll we’ll only pay tax at lower rate after gaining the higher rate tax exemption on paying in. Should I just keep making the max contributions myself even though I’ll jump into the higher tax bracket on retirement (at current rates)?
Click to expand...
Interesting point on the higher tax bracket. Note that you will be paying USC as well, which you are not relieved of on your contributions so a bit of asymmetry here. Furthermore you will be forced to keep your funds in an ARF and these are not cheap - maybe costing 1.5% p.a. for admin. On the positive side you would get 25% of your fund tax free at retirement and funds enjoy gross roll up in a pension fund. I'd say this is a finely balanced decision and personally I would be inclined to stop contributing to a pension fund once I foresee that at the margin I will be in the 40% tax bracket and the benefits of "gross roll up" diminish as retirement age approaches.
Obairchrua said:
  • I know it’s been said on Askaboutmoney several times about not holding significant value of shares in your employers company but I’m guilty here purely through inertia and hoping that one day the market will turn around and I’ll be rich! In reality I accept this is probably nonsense but I wouldn’t know where to put the money if I sold up. Assuming I sold up and paid the CGT due, where should I invest the share proceeds, say €380k total? I’d also wish to sell the PBs and invest the proceeds along with some cash, say additional €400k?
Click to expand...
Tell the Facebook millionaires they should have diversified :confused: I think you are well equipped to make your own call on that one.
Obairchrua said:
  • Lately we’ve been taking stock of what’s important and how we want to spend the rest of our days. We’d like to stop the normal full time work routine in, say, 5 years and spend more time on ourselves. Any inputs about when we could reasonably stop working full time and coast along maybe doing some volunteer work etc with no reliance on an employment income before drawing our pensions?
Click to expand...
That's a very personal call. Warren Buffet is near 90 I think and one of the richest guys on the planet, no intention of retiring! The Duke of Edinburgh retired at 96. I suppose the big imponderable these days for us plebs is inflation but we have only one life and working on when you would prefer to be enjoying your leisure, just to build up a safety net against inflation, might not be everyone's life choice.
 
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Some great replies and questions which I’ll try and clarify.

We traded up 18 yrs ago and new mortgage was for €150k over 30 yrs. Having made extra payments over the years we stopped this practice once the cheap tracker mortgages disappeared. Current balance is approx. €35k.

I’m a total novice on life insurance / assurance but the cover was taken out at PTSB’s insistence to cover the initial mortgage in the event of the death of one of us during its lifetime. I have no idea if it is good value or not or if we even need it given the employer cover. My / their need at the time was for it to cover the mortgage but since mortgage has reduced I then felt that level of cover wasn’t required. It’s still great to have it if one of us passes unexpectedly soon but I wonder about the balance between needing it and wanting it. Can one be ‘over insured’?

I realise I need to diversify and, as Brendan said, to “Buy and hold a diverse portfolio of about 10 different shares”. I guess this is the million dollar question but who is best to advise on what to buy? Would the DFM do that?
 
Obairchrua said:
“Buy and hold a diverse portfolio of about 10 different shares”. I guess this is the million dollar question but who is best to advise on what to buy? Would the DFM do that?
Click to expand...

No. A DFM will put you in funds.

Pick 10 shares in large companies in diverse industries. Don't pick 10 airline shares for example.

I initially picked 10 shares in large Irish companies but everyone said that this was too narrow, even though most of these companies such as CRH and DCC got most of their earnings overseas.

So I purchased shares in other countries. Not sure if it was the right idea as it has been very difficult to get refunds of tax paid in Germany for example. https://www.askaboutmoney.com/threads/the-taxation-of-dividends-from-german-companies.202071/

Brendan
 
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Steven Barrett said:
The golden rule is don't rely on the same company for your salary and your savings.
Click to expand...
Additional risk here is that both husband and wife work for same employer. So approx a third of net wealth and all of income reliant on the performance of one enterprise. That's a concentrated risk.
 
There were people sitting on those sort of windfall profits from profit sharing schemes in the Irish banks during the Celtic Tiger. Many would sell none of these partly because they thought the party would last for ever and partly for the tax considerations you mention. In the end they were wiped out. So I agree with Brendan that you should offload a lot of those shares. The hit from immediately paying CGT is slightly illusory for even if you don't sell the CGT is still there. Admittedly it remains invested rather than paid over, also there is an exemption on death but your lifestyle plans seem to involve enjoying your money in your lifetime. And will 33% still be the CGT rate when Fierce Doherty is Minister of Finance?

That will leave you with c. €700k investible cash. How to invest this depends a lot on your attitude to risk - both in the short term and over the longer term.
Most would agree that your best prospects of beating inflation in the longer term are with a diversified fund of equities and maybe property.
But such a strategy runs a reasonable chance that you will have a short term hit of let‘s say 20%. How would you feel about that? Would you panic and cash in?
On the 10 shares are enough for diversification, not sure. I think it has been shown that the top 10 Irish shares of say 20 years ago have been a disaster. Also DIY is a bit of a pain in the neck. Low cost global ETFs or similar seem best to me but ideally in a vehicle subject to income tax and CGT (see separate thread on this).
 
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I realise now the question of paying the mortgage down along with it’s associated life cover policy is kind of irrelevant in the grand scheme of things. The actual costs are small but I am getting benefits whether I really need them or not but since it’s such a fine line it’s just purely academic.

As regards the company shares I accept it’s a no brainer to offload and diversify as you have all said. If I do, I’ll pay CGT. Just say I don’t, although my estate is not liable to CGT on those shares, isn’t there some similar US tax liability on profit from the sale (after I’m gone!)?

I’ll keep up the max DC contributions as long as the lifestyle doesn’t take a hit. We’ve only been max’ing out recently after the DB scheme was axed! The DC & DB schemes will bring in a nice lump sum in a few years so I am not too worried about the risk on investing the current available cash inc PBs. I am open to high-ish risk when it comes to investing this purely since we are thankfully both working and have no big expenditure at the moment or in the foreseeable future. On your point Duke, I would not panic and cash in if I suffered a 20% hit – I’d probably see this as a buying opportunity! I need to do some research on ‘Low cost global ETFs’.

Thank you all for the advice.
 
Obairchrua said:
although my estate is not liable to CGT on those shares
Click to expand...
That's correct, but you have a life expectancy of nearly 30.

Over that horizon plenty of stocks collapse in value. Some, like Enron or Anglo Irish Bank, collapse to zero.

So for sure holding stocks until you die saves your heirs a CGT bill on top of a CAT one, but at risk that there is not very much there to tax at all!

Maybe you can try this for a small value of your current holdings. But in general you are way overexposed to the fortunes of one company and need to reduce by a lot under any circumstances.
 
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