# Planning to use Retirement Relief to clear €370k interest-only mortgage due in 8 years



## Everyday (18 Sep 2022)

Personal details

Age:53
Spouse’s/Partner's age:49

Number and age of children: Three ages 10, 12, 14


Income and expenditure 
Annual gross income from employment or profession:€70k
Annual gross income of spouse:€6k

Monthly take-home pay €5300

Type of employment: e.g. Civil Servant, self-employed:
self employed, director in a limited company with my wife

In general are you:
(a) spending more than you earn, or
(b) saving?
constantly in the red of at least €300-€500 per month in overdraft so spending more than we earn.


Summary of Assets and Liabilities 
Family home worth €380k mortgage of €370k interest only at 1% above Ecb rates. 8 years left on the mortgage.
Cash of €0
Combined pension fund: €480k
Company shares : none
Buy to Let Property: none

Family home mortgage information 
Lender Kbc now Boi
Interest rate 1% above Ecb , 8 years remaining
If fixed, what is the term remaining of the fixed rate?

(No need to tell us the monthly repayments or what term is left)

Other borrowings – car loans/personal loans etc 
Personal loan of €20,000 paying back €233 /month, loan taken out recently to pay back a family loan and dental expenses for 2 kids.

Do you pay off your full credit card balance each month? Yes ( try not to use it)
If not, what is the balance on your credit card? €0


Buy to let properties 
Value: none
Rental income per year: none
Rough annual expenses other than mortgage interest :
Lender
Interest rate
If fixed, what is the term remaining of the fixed rate?

Other savings and investments: only €12,000 in a savings certificate hoping to keep towards college fund for kids. Trying to save €300/month to add to this.

Do you have a pension scheme? Yes, private pensions both paid up pensions and current. Fund value is roughly €480k ( included in this is wife’s paid up pensions of €180k)

Do you own any investment or other property? None

Other information which might be relevant, budget every month to pay bills etc.

Life insurance: yes, full cover for mortgage amount costing €4300 annually 


What specific question do you have or what issues are of concern to you?

I work full time and wife works in the home. Currently have €300,000 sitting in company account, when mortgage is due hoping to avail of retirement relief to use this money to clear the mortgage. should have in excess of €450,000 in company in 8 years. We don’t want to use tax free lump sums from pension to try to clear the mortgage.
With three kids no opportunity to save regularity for college etc. In the red every month for day to day living and bills, can’t see any way out of this. Specific question is this plan feasible to clear the mortgage. 
Many thanks for any advice.


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## NoRegretsCoyote (18 Sep 2022)

A few questions and ideas on your situation.


Everyday said:


> Annual gross income from employment or profession:€70k
> Annual gross income of spouse:€6k



Elsewhere you say your wife is not working. Or is it the case that she is working in the business? In any case it makes sense for her to be earning at least the minimum to be paying PRSI to qualify for the state pension.



Everyday said:


> Life insurance: yes, full cover for mortgage amount costing €4300 annually


Is it joint cover? If seems  you are the main income earner and if your wife is not earning much I'm not sure her death needs to be insured very much if at all if there is money in the company to cover the mortgage when it falls due in 8 years.



Everyday said:


> n the red every month for day to day living and bills, can’t see any way out of this.


I'm not sure why you can't just pay yourself more from the company. If there is €300k in the company already and you are generating a surplus of €20k-ish a year then there is a buffer from to pay yourself a bit more in the meantime, no?



Everyday said:


> Other savings and investments: only €12,000 in a savings certificate hoping to keep towards college fund for kids. Trying to save €300/month to add to this.


It makes no sense to have €12k in a savings certificate and to be paying interest on a personal loan of €20k. Liquidate the savings certs and pay off the loan and you'll save a lot on interest.



Everyday said:


> Currently have €300,000 sitting in company account, when mortgage is due hoping to avail of retirement relief to use this money to clear the mortgage. should have in excess of €450,000 in company in 8 years. We don’t want to use tax free lump sums from pension to try to clear the mortgage.



I'm no expert on retirement relief. It looks like you want to let surplus income build up in the company and take it out tax free when older rather than pay tax at the higher rate on it along the way. This makes sense. You could also take the money out of the company tax free year by year by maxing tax-relieved pension contributions either. This would go into bonds or equities which of course is riskier than cash, but the cash accumulating in your company is being eaten away by inflation right now.

For me you should be taking a bit more risk in exchange for what is likely to be a better return so I would probably put €10k more into pension fund each year than you are currently doing. You are not so far away from retirement, but you will still need an income in 30 years and over that kind of timespan equities almost always is better than cash. 

The big anxiety I'm sure is not being able to make the full principal repayment on your mortgage when it falls due in eight years. But there might be some flexibility around this with your lender - if there is a shortfall in eight years they would probably allow a repayment schedule over four to five years. It wouldn't be a tracker rates anymore but you wouldn't be on the street either.

Don't worry too much about pre-funding kids' education. You will still have an income when they are in college and towards the end you won't have a mortgage payment either. You may be able to access tax-free lump sum as well.

Don't forget that you have an interest-only tracker mortgage which is basically the cheapest borrowing ever seen in Ireland. When you have very cheap finance like this it's okay to take risk with it because the return is almost certainly going to be better than the cost of ECB+1%. 

Otherwise I think your finances are pretty healthy and I wouldn't be so pessimistic short term. Pay yourself enough to live day to day. Your pension fund is reasonably healthy for your age. Pay off the high-interest, short-term loans. Think carefully (and take professional advice form someone not selling a product) about whether it makes more sense to leave money in the company or to put it into the pension fund. This last part could make or save you tens of thousands and depends on a lot of factors such as the business you are in, it if can be sold on, etc, and you need to plan this one very carefully. Good luck!


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## Everyday (18 Sep 2022)

Thanks for your response and thoughts you’ve given me a few things to think about alright. My wife is only on a reduced salary as her input into the company is minimal, she will have enough contributions to be entitled to a state pension.
We will definitely look at the life insurance as it’s due for review again soon which will either raise the payment or reduce the cover.
Going to look into paying a larger salary moving forward just to remove the overdraft.
it’s the money just sitting in the company account we will need to get advice on to try to get
 the maximum return on.
Thanks again, really appreciate it.


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## Brendan Burgess (18 Sep 2022)

Everyday said:


> mortgage of €370k interest only





Everyday said:


> Life insurance: yes, full cover for mortgage amount costing €4300 annually



First things first. This seems very expensive. 

Are you sure it's only mortgage protection? 

I got a quote for your age for 10 years from LA Brokers for €752. But that is presumably for reducing balance. 

You should shop around even at this late stage, although I guess you have been overpaying for years.

Brendan


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## Brendan Burgess (18 Sep 2022)

NoRegretsCoyote said:


> It makes no sense to have €12k in a savings certificate and to be paying interest on a personal loan of €20k. Liquidate the savings certs and pay off the loan and you'll save a lot on interest.



Absolutely. This is clear. 
It is also clear to take out enough extra gross pay from the company to clear the balance of €8k

Brendan


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## Brendan Burgess (18 Sep 2022)

Everyday said:


> Currently have €300,000 sitting in company account, when mortgage is due hoping to avail of retirement relief to use this money to clear the mortgage.





Everyday said:


> Age:53



I really do not think that this is a good idea.

1) You will have to retire at 61 to avail of this and I doubt you can afford to do so.  
            Correction: You don't have to retire. But you have to sell the business or wind it up. You could probably wind
             up Everyday Limited and set up a new business Everyday (2030) Limited. But not sure if that would qualify.
2) You will be paying mortgage interest at about 3% when the ECB rates increase to about 2%
3) Where is the money in the company account invested? It's probably earning very little.
4) The rules may well change by the time you want to retire.

I think you should take the hit now and take this money out of the company as salary, pay the tax, and pay it off your mortgage.

You do face a serious problem with a €370k mortgage repayment due in 8 years.

You have a serious problem with the mortgage coming due and the kids' education becoming expensive at the same time.  But I doubt that retirement is the way to fund it.

Has your wife got any earnings capacity?   I think you need a second salary and should use the proceeds to pay down the mortgage.

Brendan


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## Everyday (18 Sep 2022)

Thanks again, we must definitely look at the insurance cost , policy was taken out at the same time as the mortgage but did have some loading at the time. Also included in this is serious illness cover.
The plan is to avail of the early retirement relief but continue to work as an employee of the company with the maximum shares transferred to my wife a couple of years before.
Will definitely look to clear the loan asap.
Currently paying €20k into private pension, would it be a better option to increase the amount to be more tax efficient instead of drawing money out of the company and paying higher tax to clear the mortgage?
I suppose we just coasted along for a few years with a loose plan in place.
Once again, thanks for the advice given.


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## Brendan Burgess (18 Sep 2022)

Everyday said:


> The plan is to avail of the early retirement relief but continue to work as an employee of the company with the maximum shares transferred to my wife a couple of years before.



Have you figured out this plan yourself or has your tax advisor given it to you in writing with a list of all the possible things which might go wrong with it? 

I don't know what the conditions of Retirement Relief are.  

I thought that you had to stop taking a salary from the company to avail of Retirement Relief.  Can you "sell" your company to your wife and keep drawing a salary. It doesn't sound as if it should be allowed as you are not retiring, but maybe it is allowed.  And, even if it is allowed today, it might not be allowed when you need the money. 

And the limit may be reduced.  

I really would not be basing the plan to clear the mortgage on my family home on a plan such as this.  If anything goes wrong, you could well be snookered and find yourself facing a big payment and no means to pay it. 

Brendan


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## Everyday (18 Sep 2022)

Need to get advice alright, this was given to us by our accountant, thanks for the input. We have work to do to clarify our situation. Thanks for the replies and advice.


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## Brendan Burgess (18 Sep 2022)

Everyday said:


> this was given to us by our accountant,



For such a key life-changing plan like this, you need it in writing with the pros and cons spelled out.

Brendan


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## Brendan Burgess (19 Sep 2022)

Everyday said:


> Thanks again, we must definitely look at the insurance cost , policy was taken out at the same time as the mortgage but did have some loading at the time. Also included in this is serious illness cover.



I just checked. Level term assurance at your age should cost about €1,300 a year.  It would have been a lot cheaper when you took out the policy.

You definitely need to review it as you may well be paying for bells and whistles you don't need.

Brendan


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## LLB123 (19 Sep 2022)

Everyday said:


> The plan is to avail of the early retirement relief but continue to work as an employee of the company with the maximum shares transferred to my wife a couple of years before.


OP, I really would double-check this element if I were you. We have a similar plan in place, and our accountant was very clear that the company needs to be officially wound-up and liquidated in order to avail of retirement relief. 
It's my understanding that there is nothing to stop you continuing to work (in that you don't need to retire), but not in that same company. 
Like Brendan says, if this is the basis of your financial plan, at this stage you would need to be more certain about any unforeseen implications. Wishing you all the best.


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## NoRegretsCoyote (19 Sep 2022)

Everyday said:


> The plan is to avail of the early retirement relief but continue to work as an employee of the company with the maximum shares transferred to my wife a couple of years before.


The logic of retirement relief is for someone to sell up their business to retire and what you are proposing here looks pretty artificial. It could be perhaps within the letter of the law but not the spirit. I would get advice from more than one professional on this. And as @Brendan Burgess says - the rules could in any case change.


Everyday said:


> Currently paying €20k into private pension, would it be a better option to increase the amount to be more tax efficient instead of drawing money out of the company and paying higher tax to clear the mortgage


Irrespective of funding retirement you need to focus on the most tax-efficient way of taking €370k out of your company over the next seven years to pay off the lump sum. If retirement relief is not feasible you may need to draw heavily on a tax-free lump sum from a pension fund.

Pay for professional advice on this as there are potential tax costs of tens of thousands depending on how you structure it.


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## T McGibney (19 Sep 2022)

Excess Cash (ie any monetary sum over and above basic working capital requirements - the Revenue define this narrowly) sitting in a company bank account or other investment is not a qualifying asset for the purposes of Retirement Relief.

Otherwise, most of the "advice" given above about Retirement Relief is simply wrong.  It is available once one reaches 55 subject to terms and conditions, but there is no requirement that the claimant stops working or stops receiving a salary. The OP needs to be engaging decent professional advice on an ongoing basis if they're planning to utilise RR as a key part of their future plans.


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## Brendan Burgess (19 Sep 2022)

T McGibney said:


> Excess Cash (ie any monetary sum over and above basic working capital requirements - the Revenue define this narrowly) sitting in a company bank account or other investment is not a qualifying asset for the purposes of Retirement Relief.



So Tommy

This kills the above plan stone dead? 

There may be another plan which allows him to extricate the cash, but not Retirement Relief.

Brendan


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## T McGibney (19 Sep 2022)

Brendan Burgess said:


> So Tommy
> 
> This kills the above plan stone dead?
> 
> ...


In a nutshell, yes, Brendan.


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## Brendan Burgess (19 Sep 2022)

Here is my summary - but I am open to correction

1) The name"retirement relief" is misleading as there is no requirement to retire.
2) You must sell the shares in the company or the assets of the company but you can continue as a director and can continue working for the company. 
3) You can sell to one of your children - but not sure if you can sell to your wife? 
4) I presume that winding up a company also qualifies for it. 
5) Excess cash or other investments not required for working capital is not eligible


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## MelF (19 Sep 2022)

T McGibney said:


> Excess Cash (ie any monetary sum over and above basic working capital requirements - the Revenue define this narrowly) sitting in a company bank account or other investment is not a qualifying asset for the purposes of Retirement Relief.
> 
> Otherwise, most of the "advice" given above about Retirement Relief is simply wrong.  It is available once one reaches 55 subject to terms and conditions, but there is no requirement that the claimant stops working or stops receiving a salary. The OP needs to be engaging decent professional advice on an ongoing basis if they're planning to utilise RR as a key part of their future plans.


Why would company cash not qualify as an asset though?


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## T McGibney (19 Sep 2022)

MelF said:


> Why would company cash not qualify as an asset though?


You'll have to ask Revenue that. I wrote neither the legislation nor their interpretation of it.


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## NoRegretsCoyote (19 Sep 2022)

MelF said:


> Why would company cash not qualify as an asset though?


Presumably because everyone would hoard cash over and above the necessary rather than pay tax on it as salary.


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## JamesBM (19 Sep 2022)

A couple of related things/questions: 
1. If you keep the money in the company apart from the non-availability of a tax free lump sum, drawing it as dividends in the future is similar to taking income from a pension? So taking a lump sum from a pension to pay part of the mortgage might be reasonable and taking dividends  from the company over time to offset the pension income fall  might be a plan.
2. Do Irish Revenue have any way of stopping someone building up retained profits in a small company other than the application of the close company surcharge (the scope of which seems to have narrowed based on a recent appeals' decision)?
3. If you liquidate the company and retirement relief doesn't apply you are taxed at CGT rates which, currently at least, are lower that tax+USC+PRSI?


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## Everyday (19 Sep 2022)

Thanks, definitely an eye opener and going to get the advice we need, one more question should we going to a financial planner or a tax consultant.
All advice is greatly appreciated.


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## Brendan Burgess (19 Sep 2022)

JamesBM said:


> 3. If you liquidate the company and retirement relief doesn't apply you are taxed at CGT rates which, currently at least, are lower that tax+USC+PRSI?



Well you pay Corporation Tax on the profits at 12.5%. Then you pay CGT at 33% on the retained profits.  
So while that is a lower rate than the top rate of personal taxes, you are putting the money out of your personal use for a long time for a relatively small saving. 

Take profits out as salary or as pension.  
If you want to do something different, make sure to have a detailed written justification from a good tax advisor where the advantage is not just marginal, but overwhelming.   Don't leave money in the company based on a bit of DIY internet research. 

Brendan


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## Brendan Burgess (19 Sep 2022)

A tax consultant or an accountant in practice.  Not a financial planner - they are more for investment. 

Brendan


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## Everyday (19 Sep 2022)

Thanks


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## JamesBM (5 Oct 2022)

One other thought on this is whether you could avail of Entrepreneur's Relief if you liquidated the company. You appear to meet the conditions and your shares in the company would be the qualifying asset?






						Revised Entrepreneur Relief
					

A description as to what the Revised Entrepreneur Relief is




					www.revenue.ie


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