Sunday 24 March 2019

Should I hold on to investment property?

Your questions answered

businessman sitting at the table with charts and a house and sign a contract
businessman sitting at the table with charts and a house and sign a contract

Patrick McGettigan Principal McGettigan Financial Planning (mcgettiganfp.ie)

Query: I have a two-bed investment property which I rent out for €19,200 a year. My tax returns cost €7,200 a year, management fees are €2,000, property tax is €800, the cost of the mortgage repayments on the investment mortgage is €13,200 a year, mortgage protection insurance is €800 a year, and the term left on the investment mortgage is 151 months. I have paid €157,000 off my own mortgage on my own house. I am a PAYE worker with income of about €60,000. Should I pay extra off the investment mortgage and keep the investment property - or should I sell the investment property? I've worked out that this investment property is costing me €24,000 a year - and I only get €19.200 rent so I'm making an annual loss of €4,800. David, Dublin

Answer: While you have given concise details in your question here, it is noticeable that you have given the information only through the prism of immediate cash flow. There are many possible reasons for this - the most obvious one being a negative equity position, but it is important to get a wider picture than just the current position.

A clear picture has been shown of your current costings with the net effect being that your investment property is costing you €4,800 each year after all bills have been paid.

You reference this as a 'loss', but it must be examined further to understand defining this as a loss.

The cost of running your investment each year is €16,800 - made up of the mortgage payment of €13,200, mortgage protection of €800, management fees of €2,000 and the property tax of €800.

Rental income after tax is covering €12,000 of this €16,800 for you. This €4,800 cost to you is effectively your annualised investment cost of holding this asset. Judging by the figures that you provide of €1,600 rent per month, rent on a two-bedroom property and a €2,000 management fee, the likelihood is that this investment property is in a reasonably affluent area in the greater Dublin region. Property prices in Dublin have risen by up to 6.8pc in the last 12 months (depending on the exact location in Dublin), according to the latest figures from the Central Statistics Office.

As an example, if you had a value on your property at the beginning of the year of €300,000, and the value of that property rose by 6.8pc a year, that is a rise of more than €20,000 for an investment which is costing you €4,800 a year.

I can see how cash flow is your immediate concern, but you must also consider the value of the asset and how the asset fits into your long-term financial planning.

These factors must be taken into consideration in ascertaining if holding onto the property or selling it is the best decision - cashflow alone shouldn't be the only reason.

As an aside, you should spend time shopping around on the mortgage interest rate and mortgage protection rate you are paying to ensure best value.

You also reference that you have paid €157,000 towards the mortgage on your own house. When comparing the debt on your investment property against the debt on your principal residence, you should simply put any excess funds towards clearing the more expensive loan first.

 

Early retirement options

Query: I am in my mid-50s and have a company defined benefit (DB) pension which I will receive when I am 65. I also have additional voluntary contributions (AVCs) of approximately €90,000. I would like to retire early, and have a few questions around this. Can I take my AVCs as my lump sum - thereby not reducing my pension? (I'm entitled to a lump sum of one-and-a-half times my final salary). As my company can refuse to pay me my pension if I retire early, does this also apply to my AVCs - in other words, can I take the AVCs for my pension when I retire early or do I have to wait until my company allows me to take my pension from the DB scheme? Finally, was it a good idea to also build up AVCs when I have a DB pension? Some say I will be taxed heavily on the AVCs. John, Co Meath

Answer: Company pensions can be categorised as being either defined benefit (DB) or defined contribution (DC).

A DB pension plan sets out the specific benefit that will be paid to the retiring employee. The value of this benefit considers factors such as the employee's salary and the number of years the employee has worked, which then dictates the pension and/or lump sum which will be paid on retirement.

A DC pension is an accumulation of funds that makes up a person's pension pot.

The main difference between a DB pension and a DC pension is that the defined benefit promises a specific income while the defined contribution depends on the amount you pay into the pension, the fund's investment performance and charges.

Additional voluntary contributions (AVCs) are contributions you make to your employer pension scheme to build up an additional retirement fund. When you retire, this AVC fund can be used to top up your employer pension benefits, within Revenue Commissioner limits.

As mentioned by you, €90,000 has been built up in AVCs.

To answer your first question: yes, typically private sector DB schemes allow members to take the lump sum from the AVC fund (within Revenue Commissioner limits). However, this is not possible with public sector defined benefit schemes which always pay the gratuity (lump sum) from the main scheme only.

You have mentioned that you can take one-and-a-half times your final salary as a lump sum.

If your final salary is €60,000 or less, your AVC fund of €90,000 can be used to maximise this tax-free payment to you and not impact on your pension payments - assuming the totality of your benefits from all sources is within Revenue Commissioner limits.

To answer your second question: the AVC benefit must be taken at the same time as the benefits from the main scheme.

At the moment this means that your benefits will not be available to you until you reach the age of 65.

Subject to agreement from your employer and the trustees, however, it may be possible for you to retire earlier - as you have stated you would like to do.

This will obviously mean that your pension in retirement would be lower, but you should certainly begin consulting with your employer about the options available to you.

Finally, you query the validity of your investment in AVCs. You mentioned already the benefit of using the AVCs to maximise your tax-free lump sum. Further to this, it is worth noting that any investment towards your retirement planning that is within Revenue Commissioner limits and affordable for you is always a good idea for financial planning and tax efficiency reasons.

  • Patrick McGettigan is principal of McGettigan Financial Planning (mcgettiganfp.ie)
  • Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’.
  • While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice.

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