Tuesday 27 September 2016

Your Questions: Should we use windfall from property sale to reduce our mortgage debt?

Ross Curran

Published 20/03/2016 | 02:30

'You would need to generate upwards of 7pc per annum in investment returns to make more than you will save by reducing the debt, which is not possible without significant risk'. Stock picture
'You would need to generate upwards of 7pc per annum in investment returns to make more than you will save by reducing the debt, which is not possible without significant risk'. Stock picture

My husband has recently sold a property and made a profit of €80,000. We wish to put this money to the best use possible. We have a mortgage on our own home of €170,000. The interest charged is a variable rate of 4pc. We have savings of €15,000 - which we save our child benefit into. We have two children who have not started school yet. Is paying this €80,000 lump sum off our mortgage on our own home the best use of this money? Catherine, Adare, Co Limerick

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On the basis that you are able to save your children's allowance (hopefully in a fund that generates decent returns), I assume this €80,000 profit is surplus to your day-to-day needs.

Therefore, I would certainly recommend that you use some or all of it to repay your mortgage debt. You would need to generate upwards of 7pc per annum in investment returns to make more than you will save by reducing the debt, which is not possible without significant risk.

I would advise you to set aside between three and six months net income in an accessible account for a 'rainy day' scenario, see if there is scope to make a pension contribution if you can avail of the higher rate of tax relief (perhaps in an Additional Voluntary Contribution if you have a company scheme already), and use the rest to pay down the mortgage debt.

Make sure and tell the bank explicitly that you want to use the funds to pay off the capital.

I was paying into a pension through my job for about 10 years. When the recession started, my employer ceased contributing to the company pension and informed us to seek advice as to where the funds should be invested. I chose to invest in an Irish Life (no risk) fund which could be accessed at the age of 50. I am currently 40 years of age.

Unfortunately I have been on sick leave without pay for the last seven months and will be for the foreseeable future. I need to get my hands on some money quickly as I am running into arrears on all financial and household commitments.

Is there any way that the money in this fund can be accessed now and if so, in what way would it be taxed - and are there any other fees I should be aware of if I cash it in early? I have about €30,000 in this fund.

John, Westport, Co Mayo

Firstly, you need to contact a qualified advisor, preferably fee based, who can look at your pension plan to see what early retirement options are available. Assuming you can take it early due to ill health, you need to discuss your illness with your doctor to see whether he believes it will qualify you for an early retirement claim.

This opinion can be sent to your advisor who will liaise with Irish Life and ask what additional proof or documentation is required. If medical opinion doesn't support your claim, you won't be able to access the pension until the age of 60.

One additional option is if the plan is an Additional Voluntary Contribution (AVC), you can make a once-off withdrawal of up to 30pc of the value of the AVC - as long as you withdraw the money before March 26 of this year. This is because of a measure introduced under Budget 2013. You must pay income tax on any money you draw down.

In September 2014, I put money into an AIB Portfolio Investment Maps Fund 3.

I understand it to be a low-to-medium risk investment but it seems to be performing poorly.

Should I leave it for the five years advised at the start - or take my losses and move my money? I would not like to lose a lot of this money.

Mary, Raheny, Dublin 5

Watching an investment fall in value puts people in a difficult position. Rationally we know that the best thing to do is to hold on and wait for value to come back up (which it usually does), but fear is a strong driver and can force us to make decisions not always in our best interest.

Your AIB 'Multi-Asset-Portfolio' Fund invests, as the name implies, in a broad range of assets such as equities, government bonds and property. Diversifying your money in this manner is usually very prudent. The declared management fee is 1.15pc, which is average for a fund of this type, though we don't know what other fees and costs, such as trading charges, are being levied in addition.

My guess is that you invested in this fund without really understanding the underlying investment strategy, or what potential risk there was for your money.

Some of the strategies employed by the investment managers in this product are quite complex, with 20pc passed over to international fund managers to actively manage.

The fund shows positive returns overall since it started in 2013, but is negative for most time periods since. While I might be tempted to recommend you move into something easier to follow, you face an early encashment penalty of 5pc if you do. Many investors aren't aware of these exit fees, which essentially tie you to the fund for five years in order to cover the cost of selling it to you (through commissions). Always ask if you can get out of a fund at any time without penalty and if the answer is no, walk away. But in your case, you need to wait another few years to get out without significant loss.

I am due to retire from public service in May on my 65th birthday. The pension, based on almost 16 years service, is small. It works out at roughly €79 per week - with a lump sum of about €29,000. I'm entitled to the State contributory pension at age 66. However, I have been given to understand that I will not qualify for the full contributory pension.

In the interim, until I'm 66, I will be signing on for Jobseeker's Allowance.

I also have a small English pension which pays out four times per year and based on exchange rates, the value of same in 2015 was €21 per week.

So in all, I expect to have an income of about €291 per week when I retire. I have an AVC which should pay out approximately €33,000 on retirement.

Am I entitled to draw down my lump sum and AVC on retirement, or am I obliged to purchase an annuity or Approved Minimum Retirement Fund (AMRF)?

Jay, Birr, Co Offaly

Firstly, yes, the fund of €33,000 will also come into payment upon your upcoming retirement, as AVCs are linked to your employment. Also, this AVC fund can be used to increase your tax-free lump sum (TFLS) by increasing the maximum permitted under Revenue limits.

Your maximum TFLS could be as high as 81/80ths of your final public service salary after 16 years of service and if your gratuity of €29,000 is based on the standard public service accrual rate (3/80ths per year of service) then it may represent 48/80ths of your final earnings.

In this case, your AVC could be used to top up your gratuity by a further 33/80ths of final salary. As a tax-free payment, this is a very attractive use of your AVC and could be as much as €20,000. The balance of AVC may be invested in an AMRF, which are not usually accessible until the age 75.

Based on your expected future combined pension of €291 per week (€15,131 per annum), from age 66, you will be in a position to transfer from the AMRF to an approved retirement fund (ARF) after the income test is passed and so you will be able to draw on the funds then.

 

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

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