Sunday 21 January 2018

Will husband's pension provide for family?

 

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

Gerry Stewart Partner, Fagan & Partners (www.f-p.ie)

Q: My husband, who is in the civil service, pays into a spouse and children's pension scheme. I don't have a work pension myself as I have looked after our children full-time for the past 20 years. What am I and my children entitled to under this scheme? Would we be entitled to a pension once my husband retires - or is that pension only payable if my husband predeceases me? Gemma, Leixlip, Co Kildare

The spouse and children's pension scheme provides a pension for the spouse and/or dependent children of a member who dies in service or after qualifying for a pension or preserved pension.

So, you and your children are protected in the event of your husband's death before and after retirement. The children's pension is for the joint benefit of all your children and is divided equally among all eligible children. A child is a person under 16 years of age or, if receiving full-time education or training, under 22 years of age.

Rental properties dilemma

Q: I'm 57 and hope to retire at 60. I have three properties in Dublin - two are rented and one is my main residence. I have three tracker mortgages - the cheapest of which is on my main residence. One of the mortgages is an interest-only mortgage, with €230,000 to be repaid on it. I have these mortgages until I'm 70. I will also have a semi-state pension which is due when I retire. I will get a six-figure lump sum payment at retirement. Can you advise what the best course of action is to prepare for retirement? I don't particularly want the job of managing property for too long after retirement. Would it be a good idea to pay off some of the mortgages now, as I would have the money to clear at least one of them? All three mortgages (including the one for my main residence) are covered by the rental income earned on the two rented properties. Marie, Dublin 3

Should you hope to retire at the age of 60 and will do so on a semi-state pension, you should ensure you get the biggest six-figure lump sum possible. You can do this by making an additional voluntary contribution (AVC) to your pension in a way which would increase your tax-free lump sum to one-and-a-half times your dynamised pensionable salary. A dynamised pensionable salary is where you add inflation to your best three or more consecutive years' salary from the past 10 years.

It is really a personal choice whether or not you pay off your tracker mortgage early.

You need to compare the return you are getting on the money you would use to pay it off versus the interest cost of the tracker mortgage. On the rental properties, your rental income exceeds the mortgages on the two rental properties - so you are being taxed on any rental profit. Assuming you have registered the properties with the Residential Tenancies Board, you can claim mortgage interest relief (which is currently granted at a rate of 80pc) to reduce the taxable profit. If you clear either mortgage, your taxable income will increase, as you will no longer be able to claim this mortgage interest relief. If you clear either of the mortgages, check that the mortgages are not cross-charged - that is, where one property acts as security for another.

If you did decide to sell the rental properties, you may have to pay capital gains tax if the properties have increased in value since you bought them.

You explained that you will have to repay the full €230,000 interest-only mortgage at the age of 70. So at that stage, you may have to consider selling an asset to repay the mortgage, if you have not already sold the properties by then.

You say you may not want to be managing property for too long after retirement, so you could consider using a professional estate agent to do this for you. The estate agent's fee would be deemed a rental expense, which you can write off your rental income tax bill, and the agent should be able to take over a lot of the hard work, such as letting the property, vetting tenants, organising repairs and collecting rent.

Retirement fund tax options

Q: I AM due to retire shortly and I have over €360,000 in a Complete Solutions Personal Plan with Irish Life. My wife and I will have a combined income of over €1,000 per week from other pensions. My concern is, what I should do with the money left in that €360,000 pension fund after I take the tax-free lump sum? If I agree to have any balance left in the pension fund (after the tax-free lump sum is drawn down) paid as an annual pension over the coming years, I assume that I will be taxed at the top rate of tax on that pension, as it would be in addition to other pension income which I have? So I am considering drawing down the full €360,000 as a lump sum instead, as I figure that I would face a less onerous tax bill by doing so - am I correct in thinking this? If the tax bill would be lower than the one I would face if I used the money in the fund to pay me an annual pension, I see a certain merit in withdrawing all the funds now, as I will have the freedom to do whatever I want with it. What would your advice be here? James, Rathfarnham, Dublin 16

When you retire and withdraw your tax-free lump sum, you will normally be offered a wide range of options in writing by your provider, Irish Life. Typically, these options are to buy a guaranteed pension annuity (which pays you a guaranteed income in retirement for a certain amount of time) or an impaired annuity (an annuity which is available if you have health problems or where your lifestyle is likely to reduce your life expectancy); to invest in a non-guaranteed Approved (Minimum) Retirement Fund (which is a post-retirement investment policy); to cash in the balance left in your pension fund (this would be subject to income tax) - or a combination of the above. You should seek independent advice and a comparison of each option.

As you explained, you are already in receipt of joint pension income in excess of €52,000 per year. If you withdrew the full balance from the €360,000 (after drawing down your tax-free lump sum), you will lose over half of it to income tax, Universal Social Charge (USC) and PRSI (if you are liable for PRSI). Any interest or gains you generate on the after-tax proceeds may also be taxed each year. For example, Dirt on deposits is currently 39pc, exit tax on life assurance investments is 41pc, and Capital Gains Tax is 33pc.

Let's assume you choose an Approved Retirement Fund (ARF) as your post-retirement pension option. You own the funds and can withdraw them as you wish, subject to a minimum withdrawal of 4pc annually from the age of 61 and 5pc annually from the age of 71.

This gives you the freedom you mention. Also, any interest you earn within the ARF is tax-free - unlike the 33pc, 39pc and 41pc tax rates mentioned above - so it should grow at a faster rate than a similar taxed investment.

You would also own and control your ARF for your lifetime. This means that on death it can pass to your estate to your spouse tax-free as an ARF - or you can pass it to children. Your ARF can be passed to children who are under 21 as a taxable inheritance - or to children who are older than 21 with a 30pc income tax charge.

The other benefit of the ARF is that you can move it to an annuity at any time, or encash it wholly or partly at any stage.

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