Financial Checkup

[mrgreen]

Age: 52
Spouse’s/Partner's age: 52

Annual gross income from employment or profession: 176k + approx. 50k bonus
Annual gross income of spouse: 28k (working 50%)

Monthly take-home pay: ~9k (excluding bonus income)

Type of employment: private sector and public servant

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving

Rough estimate of value of home: 900k
Amount outstanding on your mortgage: 290k
What interest rate are you paying? 2.6%, 3rd year of 5-year fixed rate with KBC, monthly cost €2,040, 13 years remaining

Other borrowings – car loans/personal loans etc. None

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Savings and investments: ~145k
25k An Post Childcare Plus
30k on deposit
90k Cantor Fitzgerald selection of investments

Do you have a pension scheme? Yes

• Me - 720k

Approx. 250k in Irish Life Lifestage work scheme, rest in retirement bonds all invested in world equity indexes)​

Employer contributing 15%​

Maximising personal contributions – employer+personal is ~65k per annum​

• Wife - 20 years public sector + AVC PRSA of approx. 30k, maximising contributions

Do you own any investment or other property? Yes

• Value approx. €350k (purchased for €260k, lived in as PPR for 8 years)
• Mortgage Balance approx. €93,000
• Tracker 0.85 over ECB / Term remaining approx. 8 years
• Monthly Cost €1,021
• Rental Income €1,500

Ages of children:

15 and 16


Life insurance:

• standard mortgage protection insurance
• x8 salary for death in service (me)
• x1 salary for death in service (wife)

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

My wife and I have worked hard to get to where we have ... my job in particular is pretty all-consuming and I do look forward to some balance coming into life as I make my way thru my 50's, I plan to retire at 60 but very likely move to a lower-pace role ahead of that

Questions include:

• Rental Property - it was a bit of a sacrifice to hold onto the property when we bought our current home, the thinking being this would be a good source of income in retirement. I still believe having property as part of our portfolio makes sense. The thing is this is an old property and it will require a significant investment if we wanted to hold onto it for the long term - don't know exact investment amount but it is a full re-wiring/re-plumbing, insulation, etc.. Rental potential is high, even in its current state its well below market rate. The question is should we sell this property in the next couple of years. If we do sell, given our pension portfolio, does it make sense for us to invest the proceeds in a newer investment property ?

• Pension equities exposure - a large proportion of our pension is 100% invested in world equity index trackers (I have just under 500k in, low mgt. charge, index trackers). Is this too much if I am retiring at 60 and also contemplating a lower-pace/paid job in the next 3-5 years.

• Wife's pension - my wife is part of a public sector Dept. of Education DB pension scheme. If she works until 60 she will have just over 30 years service - although allowing for her part-time work in recent times and some parental leave this will probably bring this figure down to 25 or so years. We started a scheme approved AVC PRSA a number of years ago, there's close to 30k saved at this point and contributing about 5k per year - at the time she was told this would help maximise her tax free gratuity (3/80ths of gross pay) at time of retirement - presumably enabling her to get the same gratuity she would be entitled to at 40 years service ? It strikes me there is probably a max amount needed for this PRSA AVC, how do I calculate this ? I haven't looked into buying years back but does this typically make sense - I expect to have disposable income over the next number of years, even accounting for the planned overpaying of the mortgage

• More generally do people consider me to be on track to step back in 3-5 years to a much lower paid job with a view to retiring (or at least not relying on employer income) from 60

 

[NoRegretsCoyote]

Rental potential is high, even in its current state its well below market rate.

I think you're out of luck. The new legislation limits rent increases to 2% or inflation, whichever is lower.

You can raise the rent if you carry out pretty substantial renovations, but it's a very high bar to clear and probably a lot more than your typical re-wiring, re-plumbing, new bathrooms and kitchen kind of thing.

Exemption 3: A 'substantial change' in the nature of the accommodation has been defined in the legislation and will only be deemed to have taken place where the below criteria is met:

“the works carried out to the dwelling concerned -

(i) consist of a permanent extension to the dwelling that increases the floor area (within the meaning of Article 6 of the Building Regulations 1997 (S.I. No. 497 of 1997)) of the dwelling by an amount equal to not less than 25% of the floor area (within such meaning) of the dwelling as it stood immediately before the commencement of those works,

or

(ii) in the case of a dwelling to which the European Union (Energy Performance of Buildings) Regulations 2012 (S.I. No. 243 of 2012) apply, result in the BER (within the meaning of those Regulations) being improved by not less than 7 building energy ratings,

or any 3 or more of the following:

1. the internal layout of the dwelling being permanently altered;
2. the dwelling being adapted to provide for access and use by a person with a disability, within the meaning of the Disability Act 2005;
3. a permanent increase in the number of rooms in a dwelling;
4. in the case of a dwelling to which the European Union (Energy Performance of Buildings) Regulations 2012 (S.I. No. 243 of 2012) apply and that has a BER of D1 or lower, the BER (within the meaning of those Regulations) being improved by not less than 3 building energy ratings; or
5. in the case of a dwelling to which the European Union (Energy Performance of Buildings) Regulations 2012 (S.I. No. 243 of 2012) apply and that has a BER of C3 of higher, the BER (within the meaning of those Regulations) being improved by not less than 2 building energy ratings.

 

[Brendan Burgess]

Do you own any investment or other property? Yes

• Value approx. €350k (purchased for €260k, lived in as PPR for 8 years)
• Mortgage Balance approx. €93,000
• Tracker 0.85 over ECB / Term remaining approx. 8 years
• Monthly Cost €1,021
• Rental Income €1,500

Your annual rent is €15k
The interest on your mortgage is less than €1k
So you are making €14k profit on €250k of equity. That is pretty good.

You have €250k equity which could save you 2.6% if you paid off the mortgage on your home, or €6k

So you are better off holding onto it.

But if the tenant leaves, you will have to invest a lot to bring it up to standard and you will be stuck with a rent-controlled property, so you should probably sell it at that stage.

Brendan

 

[Brendan Burgess]

Amount outstanding on your mortgage: 290k

Savings and investments: ~145k

Pay the Savings and Investments off your mortgage.

You get a guaranteed, risk-free, after tax return of 2.6%.

With a high salary and both of you working, you do not need an emergency fund of any sort.

Unless you choose to hold onto the investment property and need the money to do it up.

Brendan

 

[Sarenco]

After all taxes, it looks like your rental is producing an income of around €7,500pa. If you were to cash out the equity in the rental and apply it against the PPR mortgage, you would save around €6,600pa in interest payments.

I personally don’t think the differential of €900pa is sufficient reward for all the risk and hassle involved with running a residential letting business.

To be fair, it looks like you will have a relatively modest CGT bill if you sell the rental but this bill will only grow over time even if prices remain stable (as the relative shield of the PPR relief diminishes).

You already have ample exposure to property with your home making up a very significant element of your net worth - I don’t think you should be thinking of increasing this exposure.

So, in your shoes, I would sell the rental and liquidate sufficient investments to pay off the PPR mortgage.

Given your very generous death in service benefits, I would be inclined to cancel your mortgage protection policy once the mortgage is paid off.

As you expect to start drawing down your pension in 8 years time, I think it makes sense to start allocating a portion of your pension to a Eurozone government bond fund (assuming you have paid off your mortgage, which is effectively a “negative bond”) and to keep your remaining after-tax savings in cash.

Having said that, your wife’s accrued public sector pension entitlements could be considered somewhat “bond like” so I wouldn’t overdo the bond allocation. Maybe allocate something like 10 years of projected expenses to cash/bonds and leave the balance in a global equity fund.

I’m afraid I can’t offer any advice on your queries around public sector AVCs or purchasing notional service but it might make sense to start a separate thread for these queries.

It’s difficult to know whether you are on track to retire at 60 without having a sense of your projected expenses in retirement.

 

[mrgreen]

thanks all, really good feedback ...

You can raise the rent if you carry out pretty substantial renovations, but it's a very high bar to clear and probably a lot more than your typical re-wiring, re-plumbing, new bathrooms and kitchen kind of thing.

I don't believe the work required would qualify as a 'substantial change' .. so although I may invest upwards of 100k to bring it to sustainable standard, the rent would have to remain the same - (which is 18k p.a. as opposed to 15k - it's 1,500 per month).

what was prompting the question though was the longer-term view of having rental income to support retirement. I didn't see this as being possible with the current rental property, initially because of the investment required to bring it up to standard but now also because of the rent controls.

if it is a good idea for me to have rental income as part of a longer term retirement income it seems to make sense to sell the current property and re-invest in a new property. I would lose the tracker mortgage but could take advantage of market rents and could maximise the CGT reduction based on having lived in the property for a number of years. Of course the real question is whether a buy-to-let is makes sense here at all, everyone has said sell the rental and use proceeds to reduce PPR mortgage as opposed to get another property investment ..

Am not sure I agree that I'm already over-exposed to property based on the equity in my PPR ... I don't consider my PPR as part of net worth or at least as a source of income ... that said I also understand the Irish pre-occupation with buy-to-lets is probably not the best option in terms of getting property exposure

Pay the Savings and Investments off your mortgage.

make sense - am not sure I agree I don't need any emergency fund, that said the balance is not right as it is ..

... I would be inclined to cancel your mortgage protection policy once the mortgage is paid off.

this is a little confusing to me, why would you have a mortgage protection policy if the mortgage is paid off ?

As you expect to start drawing down your pension in 8 years time, I think it makes sense to start allocating a portion of your pension to a Eurozone government bond fund (assuming you have paid off your mortgage, which is effectively a “negative bond”) and to keep your remaining after-tax savings in cash.

Having said that, your wife’s accrued public sector pension entitlements could be considered somewhat “bond like” so I wouldn’t overdo the bond allocation. Maybe allocate something like 10 years of projected expenses to cash/bonds and leave the balance in a global equity fund.

this makes sense ... so are we talking about trying to build up a cash/bonds reserve of 10-year of projected expenses between now and 60 or actually changing asset allocations to achieve this balance earlier

It’s difficult to know whether you are on track to retire at 60 without having a sense of your projected expenses in retirement.

you're absolutely right of course ... somewhat of a perennial question .. I have seen guidelines of two thirds of salary etc. but I really don't expect to have expenses at that level, especially given a good % of current salary is actually going into building up a pension fund plus I hope to have the mortgage and expensive children years out of the way by then

 

[Baby boomer]

Normally I would advocate keeping a rental property with a low tracker rate. However, the principal is relatively low and the loan is close to maturity so it's not a huge factor.

The two main issues I would see with the rental are the relatively low rent (which can't be increased to market rates) and the likelihood of significant maintenance or refurbishment expenses to be incurred. €1500 is not great for a 350k property; you would easily get a Dublin apartment yielding that for a cost of €200k to €250k. So why not sell your existing rental, pay off the mortgage, take the benefit of partual CGT exemption while it lasts and purchase a new BTL with the proceeds.

Plus, you can put it in your wife's name and it'll help make sure her standard rate tax band is fully utilised, even in retirement.

 

[NoRegretsCoyote]

The two main issues I would see with the rental are the relatively low rent (which can't be increased to market rates) and the likelihood of significant maintenance or refurbishment expenses to be incurred. €1500 is not great for a 350k property; you would easily get a Dublin apartment yielding that for a cost of €200k to €250k.

This cannot be stressed enough. If you are happy to be a landlord, holding on to your starter home is usually not the best way to do it.

Apartments almost always have better yields than houses, expenditure is generally more predictable, and they are usually easier to let.

 

[Marsupial]

this is a little confusing to me, why would you have a mortgage protection policy if the mortgage is paid off ?

In most cases you shouldn't! That's the point.

But if you were in poor health or hadn't any other life assurance then it could be worth your while keeping the policy as a cheap form of life assurance. (I have a terminally ill friend who has paid off his mortgage early, but is continuing to pay mortgage protection insurance for this reason.)

 

[mrgreen]

thanks, hadn't realised this was an option ... presumably works for the original term of the paid-off mortgage and you just need to change the beneficiary of the policy from the Bank to yourself

 

[mrgreen]

The two main issues I would see with the rental are the relatively low rent (which can't be increased to market rates) and the likelihood of significant maintenance or refurbishment expenses to be incurred. €1500 is not great for a 350k property; you would easily get a Dublin apartment yielding that for a cost of €200k to €250k. So why not sell your existing rental, pay off the mortgage, take the benefit of partial CGT exemption while it lasts and purchase a new BTL with the proceeds.

it's now clear to me that it doesn't make sense to hang onto this property ... its great to see the rationale so clearly laid out - the subsequent point re: apartments vs houses makes so much sense as well ...

Plus, you can put it in your wife's name and it'll help make sure her standard rate tax band is fully utilised, even in retirement.

hadn't thought of that, does this have any implications if you are jointly taxed ?

to this with a partial mortgage though my wife would have to qualify by herself ? or can she be down as the owner with a joint mortgage ?

 

[Sarenco]

the rent is 18k p.a. as opposed to 15k - it's 1,500 per month).

Understood but you have certain expenses (interest payments, insurance premiums, maintenance, etc). The net rental profit is then taxed at your marginal rate of 52%, with LPT coming off the bottom line. So, €7,500pa was my rough estimate of the after-tax income that your rental is currently generating.

In any event, I think we are all agreed that it doesn't make sense for you to hang on to your previous PPR as a rental.

In your shoes, I would liquidate sufficient investments (including the rental) to pay off your PPR mortgage and start to gradually de-risk your remaining (and hopefully growing) portfolio as you approach retirement.

Keep it simple!

You should also start thinking about your projected expenditure in retirement and then you can plan accordingly.