pension mortgage

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Reuben321

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Are pension mortgages advisable for someone with very small pension fund?
I have a retirement bond with New Ireland which is worth €200k approx. It has grown very little since it was started around twenty years ago (though it did grow 18k last year) and I have been advised by a broker that I cannot make any contributions to it. I have 12 years to retirement age at 60 years.

I am considering a pension mortgage. This would enable me increase the fund to 300k approx immediately and the rental amount after payment of expenses and mortgage could be invested in the fund.

I am concerned that the set up costs (up to 10k to include stamp duty, legal fees, broker and pension operator fees) and the ongoing fees thereafter (broker and pension operator fees of 1% total of fund and property manager fee of €1200 yearly with any maintenance, expenses and mortgage costs on loan of about €100k ) would mean none of the rent would be invested in the pension and the main benefit to the pension fund would be the initial 100k increase in the pension to 300k and any small capital appreciation in the property value as well as ease of transfer/tax benefits available for my family if I died.


Should I just leave the money where it is now in the retirement bond (fees 0.75%of fund) or is the pension mortgage the best option? I would appreciate any advice.
 
You'd be taking on a 12 year loan of €100,000 and if the rental income covers this along with all other expenses, then you'll have increased the value of your current fund by 50% or €100,000 in 12 years, plus any appreciation in the value of the property. That's the selling point.

The downside is that borrowing to invest amplifies both the reward and the risk.

If your fund has grown by very little since it was started 20 years ago, then it's either in a low-risk fund choice or the charges are high, or both. I'd find out why it has grown by very little before doing anything else.

Borrowing to invest in property is very high risk. Aside from the extra risk generated by the borrowing, you're going from a fund which may well have hundreds of diverse assets in it around the world to investing everything in a single property in a single small country. If you were in a low-risk fund, then this would be a huge jump from a low-risk fund to a high-risk strategy with borrowing. Has your appetite for risk changed in the past 20 years? Are you now comfortable with taking on a high-risk strategy? Maybe you are, if you have significant other pension funds accumulated elsewhere. If not, then you should be asking your broker why s/he is recommending this high-risk proposition.
 
cremeegg said:
Appreciation starting from a base of €300,000 (rather than €200,000) that's a substantial selling point.
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Yes, as long as the customer is fully aware that a 10% drop in the value of the property results in a 15% drop in the value of their original €200,000 investment.
 
Thank you everyone for your replies, much appreciated.
The pension was attached to my work and it was put into a retirement bond eventually ,after I left the firm, so it was no longer linked to the firm. I understood at the time I could contact New Ireland about any changes and make contributions but it sees that is not the case . I have no contact whatsoever with the broker though there does seem to be one linked with the pension and I just get yearly statements from New Ireland. The pension dropped 12k one year and I contacted New Ireland and got a vague reply about the reason for this. Their fee is 0.75% of the fund and the pension is in some sort of managed funds.

If I should continue with the bond, should I ask for it to me moved into other funds?
On the pension mortgage, I realise there are risks with property but was hoping to buy a one bedroom apartment in a very good location in Dublin that could minimise that risk also allow for a good rental yield. There may be very little capital appreciation though if the price is fairly high at the time of purchase. If there is no capital appreciation and the only real gain is the increase of the fund to 300k , it might be very similiar to the gain that will be achieved with the retirement bond unless you think I am missing something? There does , however, appear to be risk with the bond too given the 12k drop in value a few years ago.
 
Doing it through a pension bond, there is no scope to make any additional contributions if there is a shortfall.

If you are worried about the fees, don't do it. Buying a property through a pension is a niche investment and requires a lot of work, so you have to pay for it. Each transaction is a once off purchase, so while costs may come down due to the process being refined, all involved parties have to go through the same process for you as they did the previous case they did it for.
Reuben321 said:
If I should continue with the bond, should I ask for it to me moved into other funds?
On the pension mortgage, I realise there are risks with property but was hoping to buy a one bedroom apartment in a very good location in Dublin that could minimise that risk also allow for a good rental yield. There may be very little capital appreciation though if the price is fairly high at the time of purchase. If there is no capital appreciation and the only real gain is the increase of the fund to 300k , it might be very similiar to the gain that will be achieved with the retirement bond unless you think I am missing something? There does , however, appear to be risk with the bond too given the 12k drop in value a few years ago.
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There would have been 12 years of rental contributions added into the bond to pay off the mortgage. If you left the money in an ordinary bond and it returned 4% per annum, you get €320K. If it returned 5%, it returns €360k.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
So it seems that the pension property may not be worth much more than the bond on retirement. Does the rental income continue to go into the pension after retirement age, when the mortgage would be paid off? Would this mean the pension property fund would continue to increase in value after retirement age because the mortgage costs would no longer apply (though the broker/ pension provider and management costs would still be there presumably)?
 
Reuben321 said:
So it seems that the pension property may not be worth much more than the bond on retirement. Does the rental income continue to go into the pension after retirement age, when the mortgage would be paid off? Would this mean the pension property fund would continue to increase in value after retirement age because the mortgage costs would no longer apply (though the broker/ pension provider and management costs would still be there presumably)?
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Yes once the mortgage has been repaid, any rental income (after charges) goes into your pension fund, tax free. The ideal scenario is that after you retire, the property continues to generate more rental income than you are withdrawing in income, thus creating a perpetual income stream for you - you receive your pension but your pension fund continues to own the apartment. That's an ideal; not a guarantee.

I'd recommend that you get a lot more detail on how exactly your €200,000 has been invested for the past 20 years - at a minimum a fact-sheet on the investment fund(s) in which it invests and full details of all charges (both to New Ireland and the broker) that apply. You can't really compare it to an alternative unless you know the full detail of both sides of the comparison.
 
Reuben321 said:
If I should continue with the bond, should I ask for it to me moved into other funds?
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Nobody can answer this without knowing what fund(s) it's in at the moment and an awful lot more detail about your financial circumstances, risk appetite and profile etc. I could recommend a particular fund to one client because it's suited to his particular financial circumstances and personality. The exact same fund might be utterly unsuitable for another client.
 
hi all,
So, I actually have a pension property, I bought it during the 2008 downturn. no borrowings. Cash figure from the rent on account. property worth 460K. I'm 50 soon and I set this particular pension up so that I could retire at 50. what happens next?? Can the property be used for personal use after I retire? Is there aw ay to take the property into personal use / ownership??
 
50thbirthday said:
I'm 50 soon and I set this particular pension up so that I could retire at 50.
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If it's a Buy-Out Bond / Personal Retirement Bond then you can retire at 50. If it's an Occupational Pension Scheme (Executive Pension) then you must sever all ties with the employer before you can retire it early, i.e. you cannot still be working for the same employer, be a director of the company etc.

50thbirthday said:
what happens next??
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The overall value of the pension is €460,000 + whatever cash is in the account. You can withdraw 25% of the overall value as a lump sum, tax-free up to €200,000. Hopefully there's enough cash to pay out this 25% sum to you. You can sell the property to liquidate the €460,000. Then you can reinvest the proceeds in an Approved Retirement Fund (ARF) or an annuity. Or if the property is renting well and you're happy to hold on to it you can transfer the property as an asset into the ARF instead, without selling it. Rental income would continue to be paid into the ARF.

50thbirthday said:
Can the property be used for personal use after I retire? Is there aw ay to take the property into personal use / ownership??
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No and no.

Regards,

Liam
www.FergA.com
 
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