Pension or Property Investments or both?

Familyman

Familyman

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16
Age: 41
Spouse’s/Partner's age: 39

Annual gross income from employment or profession:
€110,000 - €120,000 average over last few years

Annual gross income of spouse: €48,000 when not on maternity leave
€28,000 - €38,000 when on maternity leave (depends on period taken as unpaid after the 6 months paid at 80%.)

Monthly take-home pay: Me – €5,500
Spouse - €2,000 at moment, then 0 for a few months (returning to €3,000 once she returns to work from maternity leave)

Type of employment: Me: Self-employed
Spouse: full time employment, private sector

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving.

Rough estimate of value of home: €620,000
Amount outstanding on your mortgage: €435,000
What interest rate are you paying? 2.6% fixed for next 3 years - €2,060 a month

Other borrowings – Mortgages on investment properties – see below

Do you pay off your full credit card balance each month? Yes

Savings and investments: All joint savings went on deposit for house. Just have approximately €15,000 saved as 4 or 5 month cushion for mortgage and creche fees in case of drop in my income while spouse takes unpaid maternity leave.

Do you have a pension scheme?
Me: No
Spouse: Employer’s scheme 7.5% contribution matched by employer, 4 years of contributions to date.

Do you own any investment or other property?
Me: No
Spouse: 2 investment properties, residential, in Ireland (all figures for two properties combined):
Value: €340,000 - €360,000 (based on review of recent sales in area)
Mortgage: One consolidated tracker mortgage for both properties, €220,000 outstanding, tracker rate, currently just over 1%, 13.5 years left to run, monthly repayments of €1,500 (€18k per annum)
Gross annual rent: €18,000
Maintenance costs: Approx €2,000 per annum
Currently have very good tenants, rent is below market rate to keep them sweet
Running cost of investment currently works out at approx subsidy of €7,000 per annum (for tax and for maintenance bill)

Ages of children: 2 under 2
Creche fees: €1,100 per month at moment. Will rise next year to €2,200.

Life insurance: None, just mortgage protection of around €40 per month

Overall, childcare will rise next year by €1,100 but spouse will be back at full time work when full childcare costs hit in. To make things simpler I have set out our expected income and expenditure for 2021, as that is when we will be back to full income but also higher childcare:
Expected monthly income in 2021 of €8,500
Expected monthly costs in 2021:
Mortgage €2,100
Childcare: €2,200
Living: €1,500 (including food, electricity, car, health insurance, etc, estimating for higher spending than current lifestyle)
Investment properties: €600 subsidy
Total Costs: €6,400

What specific question do you have or what issues are of concern to you?
I was wiped out by recession, then changed career, went self-employed, and built up a business. Wife managed to keep 2 investment properties on a tracker. Over the last 4 or 5 years, we jointly saved approximately €150,000 towards family home deposit, (plus spouse had a small investment we cashed in, giving us approx €185,000 deposit). Lived thrifty lives to do that – Shop in Lidl or Aldi, went public for birth of kids, no foreign holidays, one family car (paid less than €12k), but still have happy and comfortable lifestyle with occasional treats. We set a goal, and got there. Now that we have the home and the kids, we are wondering what we should be thinking about next. I'd like to have a five year plan, then in 5 years' time consider an extension on the house, a change of strategy etc, depending on income and circumstances


Two issues.

1. My next steps
For the last 5 years I built up my self-employed trade and saved aggressively to save deposit for home - no pension, no life insurance, no income protection, and all savings towards deposit. I am guessing I should now do the following:
Save a cash cushion (€30k – already half way there)
Start a pension
Consider life insurance?
Consider income protection?
I suppose I am wondering if the above order is right, whether people really get life insurance and income protection, and how much I should be putting aside as pension or as savings.


2. The investment properties
My wife wants to sell the properties. We are really not sure about our appetite for risk anymore, plus the hassle of dealing with tenants etc.
I am not a fan of investment in individual properties to let, but at this stage this seems more like an “investment in the mortgage” (or in the bad decision by the bank to give a tracker mortgage) than an investment in property. Even if the value fluctuates, even if the rents fluctuate, even if we had a void for a while, this is a 1% tracker mortgage, we have good equity, and due to the age of the mortgage the repayments now go mostly to capital rather than interest, so it seems to me that if I was a dispassionate investor with a choice of paying into a pension pot (at a time when a global recession is probably about to begin) or paying the same cash as a subsidy on my wife’s investment properties, it makes way more sense to use my spare cash to subsidise the properties.
Normally I'd compromise, and just sell one, but it is all or nothing, I think - It doesn’t make sense to sell one, since all the money would have to go to the bank, and then we would still have the hassle of being landlords, but without the advantage of the bank's money at 1%.
But are we over-leveraged?
And are my maths right, that the return on investment (of the €7,000 subsidy I will give my wife to pay her tax on the rental income and pay maintenance) is far better than what I would get from pension payments. I guess it is more complicated because of tax relief on pension contributions, but I should also note that her Capital Gains, if the houses retained current values and were eventually sold, would be minimal.
 
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@Familyman

Your wife has around €125k of capital tied up in the rentals. If she realised that amount and paid it off your PPR mortgage, you would save around €3,250pa in interest payments.

Are the rentals showing a profit, after all costs and taxes, of more than €3,250pa? If they are, does the difference justify the hassle/worry of running a rental business on top of your other jobs, familly commitments, etc?

I'm ignoring the fact that you have a fixed rate mortgage - this is just a framework for thinking about this question.

Separately, yes, you should consider taking out income protection insurance and life assurance (over and above your mortgage protection policy). And you should definitely look at starting making tax-relieved contributions to a pension product.

Incidentally, congratulations on turning your finances around so quickly - very impressive.
 
Consider income protection?

As someone who found out the hard way the value of this. For someone in your family situation I would consider it a necessity.
and top of your priority list
 
Diversity is key isn't it.

Yes you should start a pension, yes to a large cash cushion, yes to life insurance, but no to income protection as they are notoriously difficult to get paid out on. (poster Gimp has had a good experience though) I agree with Cream Egg that you should concentrate on your business now while you are still relatively young.

I wouldn't sell the investment properties though. They are very cheap, you're getting to own them with payments of mostly capital now and you will be very glad one day that you either own them to sell or are receiving the rental income. It can be difficult to leverage if you are self employed. (as a landlord I totally get how you and your wife are sick of managing them, but that's the price you pay).

Would a recession affect your business, you need to think about that. Same thing as regards your wife's job.
 
How did you get a mortgage without Life assurance ? Did you stop paying it after a few months ? That would be my first priority.
 
Bronte said:
Diversity is key isn't it.

Yes you should start a pension, yes to a large cash cushion, yes to life insurance, but no to income protection as they are notoriously difficult to get paid out on. (poster Gimp has had a good experience though)
Click to expand...
I had thought that income protection insurance was a lot easier to get a payout from than mortgage protection insurance with sickness cover?
 
You're massively reliant on your business, without knowing the detail it's very hard to assess how recession-proof your company is. Only you can answer that so I would consider building up your cash reserves until the fixed period of your main mortgage is finished then over-paying that mortgage with any surplus income you have. You could fix again while keeping a proportion of your mortgage on variable rate so you can overpay.

Are you named on your investment property mortgages? If you were to die, would only the main mortgage be paid off? How would your wife then manage? If this doesn't look feasible, then yes you should get life insurance. Investigate income protection also, I'm not sure whether being self-employed has any bearing on this.

If you're going to be spending €2,200 per month on childcare and your wife earns €3,000 per month, examine the logic of her working at all. The net gain from all her effort is minimal.

I would keep the investment properties, realistically they are your pension!
 
Alkers86 said:
If you're going to be spending €2,200 per month on childcare and your wife earns €3,000 per month, examine the logic of her working at all. The net gain from all her effort is minimal.
Click to expand...
This is key also if you're wife is assessed separately. I know the money will not actually bring in income straightaway but it will save money on tax at circa 50%. Of course your wife may want to work to avoid cabin fever so I'd approach this with caution.
 
elcato said:
This is key also if you're wife is assessed separately. I know the money will not actually bring in income straightaway but it will save money on tax at circa 50%. Of course your wife may want to work to avoid cabin fever so I'd approach this with caution.
Click to expand...
There is also the possibility of employing your wife to undertake some of the duties associates with your business should she wish to spend a bit more time at home. This would enable you to make the most of the lower 20% tax band
 
Don't assume that net salary - childcare costs is the sum to look at. Your wife might be getting valuable health insurance, life assurance, pension contributions etc. Childcare costs reduce over time and parental leave might be a possibility. Having your entire family income coming from a business is risky for the few years that childcare is eye wateringly expensive.
 
Alkers86 said:
If you're going to be spending €2,200 per month on childcare and your wife earns €3,000 per month, examine the logic of her working at all. The net gain from all her effort is minimal.
Click to expand...

This is not true because it keeps her in the job market, has a whole host of social welfare benefits, makes her more likely to get promotions and it can be very difficult to get back in the jobs market if you take 5 or 10 years off. Also there's a tax disadvantage if there's only one tax earning spouse. And her job might be crucial if the OP's business runs into trouble.
 
Your kids are both <2. Once they reach ECCE age, there is a 200 EUR a month subsidy for 12 months on full day care. Once they reach school age, the childcare fees drop - with some careful planning of annual leave and utilising some parental leave, we will drop ours for 2 kids down to 800 a month when both are at school (Dublin). I'm not sure what type of business you have, but if you have the ability to work around your family timetable, when they are in school, it becomes much easier to manage childcare with afterschool activities etc.
 
Sarenco said:
@Familyman

Your wife has around €125k of capital tied up in the rentals. If she realised that amount and paid it off your PPR mortgage, you would save around €3,250pa in interest payments.

Are the rentals showing a profit, after all costs and taxes, of more than €3,250pa? If they are, does the difference justify the hassle/worry of running a rental business on top of your other jobs, familly commitments, etc?

I'm ignoring the fact that you have a fixed rate mortgage - this is just a framework for thinking about this question.
Click to expand...

This is exactly the framework I need. I had originally done the maths as being whether €7k per annum into the properties was better than €7k into pension. As you point out, I should also factor in the equity in the properties, which in theory could pay down the home mortgage, saving 2.6% per annum. So the calculation is a choice of a near-untaxed 7k pension payment plus an interest saving of 3k, versus the amount of equity gained per annum in the properties - approx €16k. Still leaning towards the properties, but they are looking less attractive than when I thought it was 7k v 16k.

Sarenco said:
@Familyman
Incidentally, congratulations on turning your finances around so quickly - very impressive.
Click to expand...
Thanks. Without going into detail, it was a mixture of luck, long hours, and thriftyness. I studied part time while working full time, then worked PAYE part time while I worked full time getting business going. Luckily got going around time kids were born so have been able to quit the PAYE after 8 years or so of 60+hour weeks.

Alkers86 said:
If you're going to be spending €2,200 per month on childcare and your wife earns €3,000 per month, examine the logic of her working at all. The net gain from all her effort is minimal.

I would keep the investment properties, realistically they are your pension!
Click to expand...
Bronte said:
This is not true because it keeps her in the job market, has a whole host of social welfare benefits, makes her more likely to get promotions and it can be very difficult to get back in the jobs market if you take 5 or 10 years off. Also there's a tax disadvantage if there's only one tax earning spouse. And her job might be crucial if the OP's business runs into trouble.
Click to expand...

Thanks for comments on this, but that is not a decision for debate today! Wife has already decided that she is happier working, and makes sense for the long term career. (I'd actually be happier than her to stay at home, but with the income difference it is not an option).

Alkers86 said:
Are you named on your investment property mortgages? If you were to die, would only the main mortgage be paid off? How would your wife then manage? If this doesn't look feasible, then yes you should get life insurance. Investigate income protection also, I'm not sure whether being self-employed has any bearing on this.

I would keep the investment properties, realistically they are your pension!
Click to expand...

I hadn't really thought about that - I am not on her mortgages, and if I did pass away she would be left with an unaffordable subsidy to make, or else sell the properties. Can you get mortgage protection on the life of someone who is not on the deeds? So that if I died she would own them outright? If not, I suppose I really need to get normal life insurance. Because the loans are in her name only and with a "vulture fund" there is not much hope of them adding me to the deeds, I'd say.

Not great at quoting, so thanks to everyone else who commented too. Varying messages on the income protection, strong support for life insurance. I am still conflicted about the income protection, but am leaning towards proper life assurance, at a level that would pay off the investment properties.

So for last 3 years my accountant has tried to get me to start a pension, and each year my mantra has been "deposit first, then pension". Here is what I am thinking now that the house is bought:

This year:
Pay investment property subsidy
Make first pension payment with any further savings
Forgo further cash cushion

Next year:
Pay investment property subsidy
Save for better cash cushion
Pension payment
Get life insurance

2021
Pay investment property subsidy
Make pension payment
Maybe income protection, depending on savings and business etc

Then in 2022 do a review of income, life costs including insurance etc and see if the properties can be comfortably retained or not.

Thanks again for all comments. Very insightful and all food for thought.
 
I would sell both investment properties while you have good equity and de-risk. Your children are very young and the mortgages are relatively large. The only way investment properties are a good “pension” is if there is no mortgage on them.
You should look into term life insurance (the term being the length of time your kids will be dependent on you so 18 more years approx) and also income protection seeing as you are self employed.

Ratios aside when you add up all of your debt it’s a large amount if you had no income for any reason.
 
Familyman said:

Two issues.

1. My next steps
For the last 5 years I built up my self-employed trade and saved aggressively to save deposit for home - no pension, no life insurance, no income protection, and all savings towards deposit. I am guessing I should now do the following:
Save a cash cushion (€30k – already half way there)
Start a pension
Consider life insurance?
Consider income protection?
I suppose I am wondering if the above order is right, whether people really get life insurance and income protection, and how much I should be putting aside as pension or as savings.


2. The investment properties
My wife wants to sell the properties. We are really not sure about our appetite for risk anymore, plus the hassle of dealing with tenants etc.
I am not a fan of investment in individual properties to let, but at this stage this seems more like an “investment in the mortgage” (or in the bad decision by the bank to give a tracker mortgage) than an investment in property. Even if the value fluctuates, even if the rents fluctuate, even if we had a void for a while, this is a 1% tracker mortgage, we have good equity, and due to the age of the mortgage the repayments now go mostly to capital rather than interest, so it seems to me that if I was a dispassionate investor with a choice of paying into a pension pot (at a time when a global recession is probably about to begin) or paying the same cash as a subsidy on my wife’s investment properties, it makes way more sense to use my spare cash to subsidise the properties.
Normally I'd compromise, and just sell one, but it is all or nothing, I think - It doesn’t make sense to sell one, since all the money would have to go to the bank, and then we would still have the hassle of being landlords, but without the advantage of the bank's money at 1%.
But are we over-leveraged?
And are my maths right, that the return on investment (of the €7,000 subsidy I will give my wife to pay her tax on the rental income and pay maintenance) is far better than what I would get from pension payments. I guess it is more complicated because of tax relief on pension contributions, but I should also note that her Capital Gains, if the houses retained current values and were eventually sold, would be minimal.
Click to expand...

Quick update, just to keep track.
So far, we have weathered covid. I worked half-days for a lot of March to July to mind the kids other half of the day, with my wife doing vice versa. My income levelled off a bit - meaning that if it wasn't for covid it would have increased a fair bit. So I was hit, but only in the sense that growth did not occur. As advised/decided, I pretty much maxed out pension payments in Nov 2019 and Nov/Dec 2020, €25,000 each year, so have now got a pension pot of €50,000. Savings cushion is only around the €20,000 mark. Going to reduce pension payments and save a bit in cash instead for next few years.
Have kept the investment properties, but keeping an eye on sales in the area in case we do want to offload one of them. Tracker down to €200,000.
 
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