Moneymakeover Future trade-down PPR as part of retirement plan?

A

Aladdin

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Age: 52
Spouse’s/Partner's age: 52
Number and age of children: 1 @ 14yrs - with disability so long-term dependent

Income and expenditure: Both self-employed
Varies, but average combined net drawings typically 10/12k pm combined.

Type of employment: Self-employed limited company directors
Pension fund: €75k x 2. PRSAs started 3 years ago - didn't prioritise before then because of erratic business earnings and aggressive saving for family home. Now contributing 2k per month and adding occasional lump sums depending on business cashflow and salary restrictions.

Family home: €1.75m with a €400k mortgage - repayments €2.5k pm
Lender: AIB Interest rate: 3.4%
If fixed, what is the term remaining of the fixed rate? 2 yrs - fully repayable in 18 years.

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? Nil
Do you have a pension scheme? Small, as above

Savings:

30k current account (emergency fund)
Etoro 10k - a few mixed stocks.
Revolut 45k - 5 major tech stocks
Bitcoin 2k
150k VWCE ETF
Physical gold 60k - (bought a long time ago)
120k cash in company.

Do you own any investment or other property? 350k equity from imminent sale of investment property. Plan to set aside 100k of this to for more investment.

Other information which might be relevant:
Life Assurance - €250k
Mortgage protection insurance €420k decreasing term

Capital Loss carried forward - 200k, to be utilised to reduce CGT on above investment property sale.


As you can see, we started our pensions very late while building up our business and acquiring our dream home - and until we were confident enough to set aside some lump sums without affecting our business cashflow (force of habit and a hard one to break!)
But we're now deeply cognisant we that we've started far too late and don't have enough invested to keep us going for retirement or if in the meantime our business goes south (it's in a creative field that already looks to be heavily affected by AI which wasn't a consideration a few short years ago).

This is an ongoing shoulda/woulda/coulda worry that I really need to set to rest in order to feel better about our finances and enjoy life without penny-pinching, so I wondered if the idea of trading down our PPR in the future and releasing that tax free equity is a valid retirement strategy at this point given our lean pensions situation. I'd imagine in our advancing years the house will be much harder to maintain, plus I don't want to leave our son who will still be dependent on us, with a major inheritance tax bill or a house he needs to sell in order to pay it.

So taking our circumstances into account as above, would trading down in the future be a solid idea, or are there any glaring pitfalls I should be aware of? Or indeed other options that I haven't thought of that might help put my mind at ease.
Thank you.
 
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Are you looking to retire now or in the near future? Otherwise I’d say you’ve plenty of time to build up a better pension pot on those salaries - unless care expenses for your son are significant?
 
Yes, nothing wrong with the plan, plenty of people have done it and I personally know of a few who have but with mixed results

If I was in your shoes though I'd be running the numbers now to see if you can make them work
Lets just say your mortgage free and the house is worth €1.75m, If you were to trade down today what are you looking at
As in what area do you want to retire in, what type of house will you settle for, is it a new build or one that requires work etc etc
all the answers to the above will have a cost bearing on how much is left from the €1.75m and how it will work for your retirement plan

The other question to ask yourselves is when is the optimum time to do this, now when your young and healthy and can afford it financially
or in 15 years time when you might not be so young and.....
 
certainly trading down could be a part of your long-term planning. But why are you worrying about it now?

Your reasons for not maxing your pensions make no sense. They might make no sense if you had a mortgage but no other assets.

You have a highly profitable company. You are taking out big salaries and paying tax at the top rate.

So worry about what you should be doing today.

You have about €600k cash outside the company.
You should be maxing your pension contributions today and every year while the company is profitable.
You should clear your mortgage with your savings. If you don't do that, you are borrowing money at 3.4% on which you get no tax relief to invest in gold and crypto and ETFs all of which are subject to tax on income or gains. This makes no sense
 
Why have you got cash in the company? It looks as if you made profits subject to Corporation Tax. How are you going to get the cash out tax efficiently? If you have a written plan on how you are going to do this, fair enough.

If you do not have a written plan, then read the following and discuss with you accountant or tax advisor.

Key Post - Should I leave profits in the company and pay Corporation Tax?

The big mistake a lot of company owners make is the very simple statement "Corporation Tax is 12.5% while total taxes on income are 50%, so I will leave the profits in the company and pay less tax." The problem with this is that they will have to pay tax on the profits when they extract them...
www.askaboutmoney.com
 
But don't do tax planning for something that is probably 20 years away where the tax treatment could well be completely different from what it is now.

the best way to plan for your son's future is to maximise your long-term wealth in general along the lines I have suggested.
 
Brendan Burgess said:
Your reasons for not maxing your pensions make no sense. They might make no sense if you had a mortgage but no other assets.
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Yes, 100% realising that now and it’s a bitter pill, but we were primarily focused on saving and securing our forever home, while also loathe to lock up company funds (curse of irregular earnings).

The extra bits you mentioned; gold & bitcoin etc were picked up here and there over the years, and the ETF was a lump sum left over after the house purchase that we wanted to protect from inflation, yet also not lock in as such.

I believe we’re restricted as to what yearly lump sums we can put in to our pensions now though, and also from a cash flow point of view I’m still so wary of locking up a lot of working capital at such a precarious time for our industry.
But realising belatedly that we’ve being locking up cash anyway with property since so much of our wealth is now in the house, in which case paying off the mortgage basically feels like all of it would be?

Food for thought all round, thank you, and the focus now would be to shore up the pension as much as poss while the business going’s still good.
 
Aladdin said:
I believe we’re restricted as to what yearly lump sums we can put in to our pensions now though
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You can each put 30% of your relevant annual gross earnings (or 30% of €115K if your income exceeds that) in and get full tax relief. You can also do that for 2025 if you do it before the 2026 self assessment deadline.
 
Aladdin said:
I’m still so wary of locking up a lot of working capital at such a precarious time for our industry.
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There'll never be a good time, something else will appear on the horizon to give you pause.

My experience is money set aside is never missed. Planning is not always straightforward sometimes sacrifices come into play.

Either sacrifice now or when you're past 65 and no real ability to correct.
 
There's a couple of things here.

The sale of the investment property has some of the profits disappearing. Have you accounted for something not shown on you post?

You're ignoring a pension which will provide tax relief, a tax efficient way of extracting funds from your company and diversified investment. And your plan is to use a single asset (a highly concentrated investment both in asset type and geographic location) that you live inside and will be emotionally attached to and that is also quite illiquid and non-divisible.
 
ClubMan said:
You can each put 30% of your relevant annual gross earnings (or 30% of €115K if your income exceeds that) in and get full tax relief. You can also do that for 2025 if you do it before the 2026 self assessment deadline.
Click to expand...
This may also be relevant.
www.zurich.ie

PRSA and personal pensions 2025: The impact on the pensions landscape

In the last Budget and Finance Bill changes were introduced to the current pension landscape including changes in relation to Personal Retirement Savings Accounts (PRSAs). In this article, Gerard Tyrrell, Pension Consultant, Technical Services at Zurich explains what has changed, and how you...
www.zurich.ie www.zurich.ie
From 1st January 2025: An employer can contribute to a PRSA up to 100% of the employee or director’s salary. If this limit is exceeded the excess is treaded as Benefit In Kind (BIK) and so taxed as income.
Click to expand...
 
Fortune said:
You're ignoring a pension which will provide tax relief, a tax efficient way of extracting funds from your company and diversified investment
Click to expand...
I've ignored it up to now for reasons outlined (and to my regret!) and also because I had no reason to believe that the company would not continue to support us well into retirement and beyond, or that there was any major threat to the industry we're in. But AI is at risk of changing all that, which is why I'm trying to correct or redirect the pensions and investments element now without the benefit orf hindsight or a crystal ball.
 
Aladdin said:
and also because I had no reason to believe that the company would not continue to support us well into retirement and beyond,
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I don't really understand how that might render redundant the opportunity of making tax efficient contributions to a pension and then drawing a tax free lump sum and an income in retirement.
 
ClubMan said:
I don't really understand how that might render redundant the opportunity of making tax efficient contributions to a pension and then drawing a tax free lump sum and an income in retirement.
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Because I was an idiot and not concerned enough about the future, just the now. :)
 
Fair enough. Didn't mean to rub it in, I just thought that you had some pragmatic alternative to a pension in mind. ;)
 
The issue of irregular earnings is worth teasing out.

You have €100k in the company and €600k cash outside the company.

Some people make the mistake that they must take their salary from the company every year. This is not the case. If you have a bad year, use your money outside the company to fund your living expenses. As a general rule, I would take out the profits every year and if we had a bad year, I would lend the company money. And repay it when things got better. (Try to have enough cash in the company to pay yourselves enough to use up your tax credits, so you pay no tax and ideally , the 20% tax band )

Your company can contribute the amount of your salary to a pension fund and you should do this, whatever else you do.
 
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