Tuesday 16 October 2018

Your questions answered: Should children get share of family home?


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Declan Hanley - Actuary and head of lifestyle solutions with Davy Private Clients (davy.ie/private-clients)

Q - We are a retired couple living in a house worth between €250,000 to €300,000. We are looking at the implications of handing over our home in equal shares to our children now. If we need nursing home care in the future, a percentage of our residence will go on our demise to the Fair Deal scheme. However, if our home is handed over to our children more than five years before we enter nursing home care, we understand that under Fair Deal, there will be no deductions from our home for our nursing home care. I would like to know the tax and legal implications of this idea for all parties. We will continue to live in our home. Seamus, Dublin 15

A - You are correct: the measurement date for financial assessment is five years before you apply to enter nursing home care. If you retain your family home, a percentage of the value of your home will go to the Fair Deal scheme - if you enter the scheme. That said, the amount is capped under the 'three year' rule at either 11.25pc or 22.5pc - depending on whether one, or both of you, enter the scheme.

If you wanted to go ahead with the transfer now, the transfer should not trigger a tax liability for your children, assuming you have not gifted anything to your children before. The current threshold for gifts or inheritance is €310,000 for a child and these gifts would be comfortably under this level. As this is your family home, there would not be any Capital Gains Tax (CGT) payable even if the house has risen in value since your purchase. There is a complication in that you would now be living in your children's house, but presumably not paying rent. This is actually deemed a gift from your children to you. Based on the value of your home, the level of rent would probably be under the annual gift exemption.

However, what would concern me about this solution is that you are handing over control of what appears to be your main asset and literally the roof over your head. There are too many cases where families get into disputes over material financial matters. I'm sure you trust your children completely or you would not be considering the option - but problems can arise over time as circumstances change. This could happen if one of your children got into financial difficulty and was forced by a bank or court to sell their interest in the home. There could also be complications on divorce or death where a spouse or third party takes ownership of their share in the house. I would urge caution.

Is leaving scheme worth it?

Q - I am in my mid-50s and have a defined benefit pension scheme through work. My employer is offering me the chance to get a top-up to our pension, in addition to a standard transfer value - but only if I leave the scheme permanently. Would it be a good idea to take the transfer value and top-up? The defined benefit scheme has been struggling financially for some time. John, Co Meath

A - Defined benefit pension schemes are incredibly expensive for companies to maintain, particularly with interest rates at near record lows at the moment. Many schemes have already closed down and increasingly others, like your own employer's, have offered members enhancements to leave the scheme. This is a very complex decision for you to make but as this could well be the biggest asset you own, you should take your time and consider the option being put in front of you.

If you take the transfer value, you will break any link to a regular income promise from the scheme. Instead you will invest your transfer value and then at retirement, you will take withdrawals from the pension pot to meet your income needs. The starting point for most people is to get an understanding of the level of return that would be required to match the expected existing pension promise. This is often referred to as the 'hurdle rate' but when advising clients, I would always provide analysis using a number of investment scenarios - including a simulated market correction. Getting an enhancement clearly means you start at a higher level so the hurdle rate is reduced somewhat and it can act as a buffer in the event of a market correction. You will not be able to predict future investment performance but you can get comfortable with the impact of various investment scenarios on your future lifestyle.

The numbers will not be the only factor in your decision though. Many people simply like the relative certainty which a regular income can provide for them and their family. This is particularly the case for individuals who are not familiar with investment markets or do not have any other sources of income.

Those who opt for the transfer value often are focused on succession planning. A defined benefit pension often halves in payment on the death of the member and ends completely with the current generation. If you take a transfer value, any remaining assets in your pension pot form part of your estate on death. For many people, particularly those with other sources of income, this can become very attractive. There are a number of other factors people consider including access to a higher tax-free lump sum, early access to income, and greater flexibility around the level of income.

Some people, like yourself, have expressed concern over the financial health of the scheme and would rather transfer out now and take control of their pension themselves. In truth, trustees and the vast majority of employers are working hard to protect pension benefits for members but market and regulatory conditions make it very difficult for defined benefit schemes to exist - now and in future.

This will be a complex decision for you and your family to make. Take the advice you are being offered and keep asking questions until you get comfortable with your decision. If you are still uncertain, seek further financial advice.

Should I transfer pension?

Q - I worked full-time with a company for many years but have since left to become self-employed. I had a defined contribution pension with that company - but I am no longer allowed to contribute to it. I recently opened a PRSA. Would it be a good idea to transfer my old work pension into my PRSA now - or should I just leave that pension where it is? Christine, Co Dublin

A - A quick technical point is that if you were in the employer scheme for more than 15 years, you actually cannot transfer it to a PRSA. Assuming that's not the case, it is easier to manage your pension and your longer term retirement plan when it's all in one pot - this is probably what is attracting you to transfer to the PRSA.

Before doing so, there are a few things to compare. In terms of investment choice, both schemes will probably offer a standard investment range which meets the needs of most pension investors. If, however, you are unhappy with the performance or choice of your employer scheme, you should consider transferring. Secondly, employer schemes can often have lower fees - so compare the fees of both pensions for similar investment choices. A material difference will add up over time but make sure you ask the providers to outline all fees!

You also need to consider your overall retirement and financial plan. The decision is around the level of investment risk you must take to help meet your future lifestyle goals. Get someone you trust to help with that and to give you sound advice about this decision as well - that is, whether that's to stick for now or move.

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