Friday 21 October 2016

It pays to be shrewd when downsizing in retirement

Published 19/04/2015 | 02:30

The prospect of the State pension being cut - along with the black holes in many company pension schemes - could force many elderly people to downsize to smaller properties so they can lead a comfortable retirement (Tom Halliday cartoon)
The prospect of the State pension being cut - along with the black holes in many company pension schemes - could force many elderly people to downsize to smaller properties so they can lead a comfortable retirement (Tom Halliday cartoon)

The prospect of the State pension being cut - along with the black holes in many company pension schemes - could force many elderly people to downsize to smaller properties so they can lead a comfortable retirement.

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Although Tanaiste Joan Burton has insisted there are no plans to cut the old age pension, a few months ago, officials at the Department of Public Expenditure and Reform have argued that cuts to the State pension must be considered. Should these officials get their way, those relying on the State pension because they either don't have a private pension - or because their company pension let them down - could struggle to get by when they retire.

For those who own their own homes, trading down could therefore be their only way to raise the money they need for their retirement. There are other reasons it can make financial sense - a smaller home is cheaper to run and maintain and the property tax shouldn't be as onerous.

It is important however to manage any money you make from downsizing wisely. Your financial priorities in retirement are clearly very different to those of your younger self. You've most likely paid off your mortgage and any children of yours should have long flown the nest.

Being mortgage-free, no longer in the day job, and with your family fully reared means you should have a lot more freedom to do what you want with any money you have left over after paying the bills. Now might be the ideal time to buy that holiday home in Spain or to spend the darkest Irish months of the year backpacking around sunny Australia. But don't blow all your money living it up.

What to do with €1m

Let's say you're an elderly couple who has been lucky enough to make €1m after downsizing - and who recently retired on an annual pension of €100,000.

Although this is a very comfortable position for any couple to be in, you still need a financial plan.

You should keep a certain amount of money aside for disposable income - and the younger you are, the more you should set aside, according to Liam Ferguson, principal of the financial brokers, Ferguson & Associates.

"A couple in their 60s who have only recently retired may have some plans to do some of the things they never got around to while working - the round-the-world cruise, building the conservatory and so on," said Ferguson. "If so, more of the €1m lump sum should be allocated to cash to cover these short-term needs."

A couple in their 70s should be more prudent with their money as inheritance planning and the cost of nursing home care are more likely to be immediate concerns.

Whether you're in early or late retirement, as well as keeping enough disposable income to fund your lifestyle, you should have other financial priorities in mind. These usually include ensuring that you have adequate private health insurance, keeping enough money to pay for nursing home care, and providing some financial help for children or grandchildren, according to Trevor Booth, head of individual financial planning with Mercer.

Private health cover

Hospital trips are likely to become more frequent as you get older, and the type of healthcare treatment you need more specialised. You could therefore decide to upgrade to a better private health insurance plan.

Gold-plated health cover can cost as much as €6,000 a year per person - six times what you might currently be paying for private health insurance. Furthermore, if you don't already have insurance, and you don't take it out before the end of this month, the bill for that gold-plated cover could jump to more than €10,000 a year. (This is because of health insurance changes which kick in on May 1).

Nursing home bills

It could cost as much as €2,500 a month - that's €30,000 a year - for a bed in a nursing home.

You should qualify for financial support from the State through Fair Deal. However, getting a nursing home bed through Fair Deal could be the last thing you want given the waiting list and the amount you might have to pay for care out of your own pocket anyway.

Under Fair Deal, you pay a contribution towards the cost of your nursing home care and the State pays the balance. You currently contribute up to four-fifths of your income and 7.5pc of the value of your assets a year - with the HSE paying the rest of the tab.

So for wealthy people or people on comfortable pensions, Fair Deal may not be a runner - given the stake the State could have in their estate when they die. Furthermore, as Fair Deal is being reviewed, you could have to contribute more towards the cost of nursing home care in the future.


At this stage in your life, you should plan how you wish to pass on your assets and wealth to your loved ones when you die.

By drip-feeding your inheritance while you are still alive, you can limit or eliminate the tax bill which your loved ones might otherwise face when you pass away. One way to do so is to use the small gift exemption, where relatives and friends can get gifts worth up to €3,000 a year from you without paying tax. You could use up some of your €1m lump sum each year to drip-feed your inheritance in this way.

You could also give larger cash gifts to relatives - but be careful to keep within the tax-free inheritance thresholds. A son or daughter can receive a gift of up to €225,000 from a parent tax-free but this limit applies over their entire lifetime. Anything they inherit outside the small gift exemption and in addition to a €225,000 cash gift before or after you die may be liable for tax.

Investing it

Once you have nailed down your financial priorities, you should decide how to invest your €1m lump sum.

"If the plan is to use the money to supplement income now, then a secure and liquid investment (an investment which can be cashed in easily), such as a deposit account, would be preferred," said Mr Booth.

"If the plan is to use the lump sum to supplement the costs of elderly care, then the money is not likely to be used for a number of years and a major concern would be the impact of inflation on the buying power of the lump sum."

The typical goal of a couple that has just retired is to protect their lump sum, according to Eugene Kiernan, head of investments at Appian Asset Management. "This means avoiding too much exposure to stock market volatility and making sure that the lump sum won't be eroded by inflation," said Kiernan.

It's also important that you put your lump sum into a range of investments rather than having all your eggs in the one basket.

"Your investments should be diversified and include things like equities, property, bonds, alternatives, deposits and State savings," said Booth. "The investments chosen should reflect your appetite for investment risk."

Don't take risks when investing late in life - even if you are loaded. Many elderly people have seen their life savings destroyed after pouring their money into unwise investments. Tread carefully.

Where to invest your golden years' property windfall

Whether you have €100,000 or €1m to invest after downsizing, deposit accounts that pay better-than-average interest rates are usually your only option if you have no appetite for risk. "However, as deposit rates are very low, the return will be very small and will almost certainly not keep pace with inflation over the long term," said Liam Ferguson of Ferguson & Associates.

You can earn 2.26pc interest a year on the State Savings' 10-year National Solidarity Bond - but the maximum that can be saved in a bond is €120,000 per individual or €240,000 for a couple. KBC Bank's Interest Upfront Savings Account pays 1.55pc interest on lump sums of between €3,000 and €1.5m. Nationwide UK pays 1.55pc interest on its two-year fixed term account. These are low but some of the best rates out there.

For those looking for an investment fund, Zurich Life's SuperCapp fund could be worth considering if you are cautious and can invest your money for 10 or more years, while those who want a fund likely to beat inflation could consider Aviva's Cautious Multi-Asset fund according to one investment adviser we spoke to.

The Appian Value Fund, a fund put together by Appian Asset Management, could also suit elderly investors, according to Eugene Kiernan of Appian. " Stocks owned by this fund and which are worthy of consideration include Nestle, Microsoft, Stryker (a leading US medical devices firm) and Legal & General," said Mr Kiernan.

For a couple willing to take some risk, Friends First's Magnet Stable and Standard Life's MyFolio I or II funds could be worth investing in, according to Mr Ferguson. "There are a few other multi-asset funds that are worth considering including Irish Life's Multi-Asset Portfolio 2, New Ireland iFunds 3 and Zurich Life's Pathway 2 but these funds have only been launched in the last few years and so have no track record. Friends First and Standard Life have a longer track record for this type of fund."

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