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Ensure you make the right call about your biggest asset

Do your sums before you move, warns financial expert Sinead Ryan


Sinead Ryan

Sinead Ryan

Sinead Ryan

Seventy new pensioners join the population every single day. If that sounds astonishing, then consider that average life expectancy in Ireland has risen from 76.6 to 82.4 in just two decades and in less than a century, doubled.

With the good news inevitably comes the realisation that there is a massive cost attached to both pensions and elder care, so it behoves individuals to make as much provision for their later years as they can.

One way they do this is to realise the one major asset they have acquired during their working life and downsize their home, or 'right size' as it is more properly termed.

According to the ESRI, seven in 10 homes are under-occupied, rising to 95pc for the over 65s. We don't 'do' inter-generational living like the Italians, Greeks or Japanese. We have massively high levels of home ownership in the older generation but fixed incomes, putting a strain on finances.

Of course, finding the right size home in the right place is challenging (most older people want to stay in the same location and still favour houses over apartments), but their cash-buyer, mortgage-free status can give them a head start if they do find somewhere.

Having a much sought-after four- or five-bed house to sell puts them in pole position not just to buy their 'forever' home, but release equity to supplement pensions, invest or, as David Browne of Savills says, buy to rent.

"You do see more people buying duplexes for retirement now. The BER rating is superb, they can't believe how warm it is, it's larger than an apartment and cheaper than a house to run.

"Others will buy a penthouse and perhaps another unit or two with cash from selling the family home in their fifties, with the intention of renting it out and moving into it in 10 years. We still love bricks and mortar and if you have cash, there's that dilemma of leaving it in a bank or buying something with it."

The yield sum is often useful to help decision making. Interest rates are at rock bottom, with any decent return necessitating what older people may consider unreasonable risk.

To find the comparative yield against deposit rates, divide the annual net rent (less fees/tax) and divide it into the value of the property and multiply by 100.

So, for a house worth €300,000, yielding €12,000 a year that would be 4pc. For higher rate taxpayers, the net income may only be €650, creating a yield of just 2.6pc; not so attractive but still ahead of deposits.

Other savings from right-sizing are the Local Property Tax (due to be increased in 2021) and utility and insurance bills.

"Cash buyers are favoured by sellers," adds Browne, "especially in the second hand market."

There is another tax implication for pensioners who sell up. While over-65s are allowed tax-free income of €18,000 a year (€36,000 for a couple) - far more generous than for workers - the rental income can cause them to enter the tax net, or go from standard to marginal rate, so it's important to do the sums before committing.

Although some write-offs are allowed on an investment property, there typically won't be a mortgage, so the vast bulk of the income is taxable. This could also compromise their medical card (given free to over-70s earning less than around €550 a week).

Some pensioners believe they can reduce their tax bill by holding property through a limited company.

"This is not the case," says John Lowe of MoneyDoctors.ie. "The rate of corporation tax on rental income is 25pc, but undistributed investment and rental income in a close company [families, few shareholders] is liable to a further tax charge of 20pc, which means the effective corporation tax rate can be as high as 40pc."

Confusion over tax and inheritance can delay decision making. Although Capital Gains Tax (33pc) is normally charged on asset disposal, there is no CGT liability attaching to the family home (plus one acre of land).

Inheritances occupy a disproportionate amount of head space among the older generation. Many believe that their home is really for their children and are desperate to hang onto it - to the detriment of a comfortable lifestyle - to bequeath when they pass away.

In the UK, there tends to be far less emotional attachment and pensioners believe if they have educated their self-supporting adult children, there's no guilt in selling up and freeing cash.

Inheritance tax (33pc) is payable on any assets left to adult children over €335,000. Nieces, nephews and grandchildren can receive up to €32,500 tax free, and these are all cumulative amounts over a lifetime.

Another worry is long-term care. Shouldn't you keep your house in case you need to sell it to pay for a nursing home?

Not really.

While the Fair Deal scheme does apply a hefty contribution (80pc of income and 7.5pc of assets), the family home value is capped after three years, and the average stay in a nursing home is 2.8 years, according to Nursing Homes Ireland.

There are many people who have substantial assets and income who would be far better off avoiding Fair Deal altogether and paying privately for care, enjoying full, marginal rate (40pc) tax relief on the payments. In any event the first €36,000 of savings (€72,000 for couples) is disregarded.

For those entering Fair Deal, Revenue do a 'look back' over five years to satisfy themselves that a resident hasn't deliberately removed assets to escape the contribution.

So, for instance, if you sold up and distributed the cash from your family home, knowing you were likely to need nursing home care, it could seek to claw this back.

Sunday Independent