want 2nd house for kids when they grow up

S

silvergrove

Registered User
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18
Age: 48
Spouse’s/Partner's age: 47

Annual gross income from employment or profession: 75,000
Annual gross income of spouse: 6,000 average (variable can be up to 10,000)

Monthly take-home pay: 4,000 approx

Type of employment: Public servant

Saving money every month

Rough estimate of value of home: 350k
Amount outstanding on your mortgage: 0


Other borrowings – no other borrowings

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


Savings and investments: 100k in prize bonds (recent inheritance)

Do you have a pension scheme? Yes: Public service pension ; post 1995 entrant ; planning to retire at around 60 with full pension (minus state pension until age 66). Am paying notional service but have not maxed out pension contributions (approx. 12k (gross) more can be invested each year).

Do you own any investment or other property? No

Ages of children: 8 and 6

Life insurance: Yes - through work


We are in a very lucky position. I would like pass some of this luck to our kids and invest now for 2nd house for children.

I have 100k to invest right now and i have scope to add an AVC to my pension (approx. 12k gross (7k net) per year up to revenue limits).
I don't think we need AVC for our day to day living post retirement (rather thinking to pass it as ARF to kids - please see below).
I understand my wife and kids are entitled to a fraction of my pension if i die (my wife entitled to half, my kids to 1/6 depending on ages) and that is a risk which can mitigated by AVC pension.

I was looking at these options (don't know which is best or if there are better ones)

1) max AVC pension contributions ( even though i will likely be on higher tax bracket when i retire at age 60 due to either supplementary pension from work/ jobseeker benefit/ staying on at work for 1 day a week) and transfer PRSA to ARF which can then be passed to my wife and ultimately my children (after 30% tax) when we both die. Invest 100k lumpsum in property/shares now.

2) forget about AVC and instead invest 7k per year (net) plus 100k lumpsum in shares/property to build nest egg for kids.

All advice appreciated.

thank you very much

silvergrove
 
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No one knows whether property or shares will do better over the next 20 years timeframe which you have.

You don't know where your children will want to live. So you might buy a house in your area and find that they will be working somewhere else.

You have two children. If you have only one house, what will you do?

Everything points to the flexibility and lower risk of buying a portfolio of shares. Then you can give half of it to the first child when they are ready to buy a house, and the other half to the second child.

The advantage of buying a house now instead of shares is that it acts as a hedge. If property rises by 200% over the next 20 years and shares rise by 100%, you will have lost purchasing value.

The disadvantage is the hassle of being a landlord, the lack of flexibility and the risk if you take out a mortgage to buy. And with the stupid anti-landlord laws in Ireland, you might have a house but have no right to remove the tenants to make way for your kids.

I would invest in the stock market, but keep it under review. After ten years, if you can buy a house without a mortgage, it might be worth considering. And then build up a separate fund in the stock market after buying the house.

Brendan
 
A very tax efficient use of your wealth is owning an apartment that your kids can live in rent free during college and even after.

It's a bit of a punt at your kids' age though. It might make sense of they are late teens and are clear on where and what they want to study. At that stage your borrowing capacity would be constrained due to age though.
 
Thanks very much Brendan and NoRegrets.
So, it seems like a ETF type fund now ( if i read other posts correctly about how to invest in shares) and look at property later when the kids are older.

Do you have an opinion on whether to start an PRSA AVC and maximise contributions or to just put all the cash into share portfolio?

It seems (but i am not sure) that there may be some tax advantage in starting PRSA AVC even if i am paying the top rate tax when retired and it will provide a better pension for my wife and kids if i die early. However, there is a lack of flexibility about when this nest egg gets passed to my kids.

I guess that, if i die early and i have not started an PRSA/ARF, my good wife can top up her income by dipping into the share portfolio - she may even be able to maximise the proportion of shares that pay dividends?

thanks again

Silvergrove
 
silvergrove said:
So, it seems like a ETF type fund now
Click to expand...

Equity returns are volatile.

Suppose you want to switch to property in ten years. Over that time span there's a very material risk of a negative return, while all the upside is taxed. Plus transactions costs on the way in and out, and then switching to property.
 
thanks noregrets.
hopefully, we have enough time to realise gains in equities (20 year time period) such that both kids can have a good deposit when they are out of college (26 and 28).
I am risk averse so i will keep some cash on deposit etc in case stock markets take a dive for the next 20 years.

I am still not sure whether to start an AVC though.

thanks again
silvergrove
 
silvergrove said:
hopefully, we have enough time to realise gains in equities (20 year time period) such that both kids can have a good deposit when they are out of college (26 and 28).
Click to expand...

Am not the expert but I think that this is not the best approach at your age for tax reasons.

Over 20 years if you want equity exposure you should simply go the pension fund route rather than an ETF. You get tax relief on contributions, gains attract no CGT, and you can withdraw 25% tax free on retirement.
 
Firstly, I know nothing about PS pension schemes, and if you putting money into an AVC will increase your tax free lump sum since you'll be retiring before you want the money for your children. It's worth exploring.

In terms of the mechanics of passing wealth to children for a long time in the future, what I've done is set up a bare trust over a life fund investment.
Although the fees are higher than with an ETF, there are a few reasons I went this route:
We can pass up to 6k per year to each child with zero tax consequences.
It's a monthly direct debit, so I don't have to think about it.
Yes,chains are taxed, but within the life wrapper they take care of all the tax at the end of 7 years, etc. It doesn't create any additional tax reporting for me.

I've a similar timeframe to you. It's currently invested in a global equity fund, but I've the option of investing in specific shares (e.g. IRES REIT if I wanted a proxy for buying property), or other funds.

I definitely don't want the hassle of being a landlord, or take on debt to do so.
 
Brendan Burgess said:
You don't know where your children will want to live. So you might buy a house in your area and find that they will be working somewhere else.
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100%. I always say this to clients who want to buy a property for their children. Let your kid's decide where they want to live. They may want to work somewhere else or meet someone and want to live near where they are from. Also, it is good for their own independence to have to save and pay for things themselves in life. Help them out financially, yes, but buying them a house is not a good idea.

Another thing that has struck me is that you mention dying early a few times but have little life cover. Under the public service pension, your wife will get 25% of salary and a lump sum of 1 times salary or the pension lump sum payable, whichever is higher. Given your wife doesn't earn much and your children are quite young, this isn't a lot of life cover. A lump sum of €75,000 wouldn't last long. You should be looking to taking out some additional life cover if dying early is of concern to you.


Steven
www.bluewaterfp.ie
 
Thank you all for the replies.

House vs shares/investment
I understand now that buying a house with mortgage/landlord etc is not a runner for lots of reasons.

Life cover
I am healthy (luckily so far) but i am concerned about income for family as my wife does not make much.
I have additional life cover at work that pays out 2x my salary (before i retire at age 60) for a total of 3x salary lump sum.
But this 3x is not payable when i retire at 60 so there is a gap that needs to be filled post-retirement as my wife will only get 25% of my salary as a pension (kids may each get 8.33% of my pensionable salary if they are minor).
It looks like i need to buy additional life assurance. Thanks for pointing this out Steven!

Investment
Did not know about bare trust or life fund investment. Thank you.
I would like to keep the fund flexible (in case of emergencies and also timing of when to give to kids) so i want prefer to retain control.
Reading posts on this site, some people recommended ETF as the fees are low and the risk is spread out so this seemed attractive to me.
I am unsure whether the AVC will benefit as i will have full pension when retiring at 60 and I will be forced to take 4% per year from ARF (taxable at high rate + PRSI + USC) and the ARF will have annual charges so not sure how i can grow this fund for my kids.

It may be that i should invest in an ETF type vehicle to retain control of when and how i take the money out (but i still have a question mark whether the AVC makes sense as i am loath to give up the opportunity to save the tax on the way in)

thanks very much
Silvergrove
 
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silvergrove said:
Investment
Did not know about bare trust or life fund investment. Thank you.
I would like to keep the fund flexible (in case of emergencies and also timing of when to give to kids) so i want prefer to retain control.
Reading posts on this site, some people recommended ETF as the fees are low and the risk is spread out so this seemed attractive to me.
I am unsure whether the AVC will benefit as i will have full pension when retiring at 60 and I will be forced to take 4% per year from ARF (taxable at high rate + PRSI + USC) and the ARF will have annual charges so not sure how i can grow this fund for my kids.

It may be that i should invest in an ETF type vehicle to retain control of when and how i take the money out (but i still have a question mark whether the AVC makes sense as i am loath to give up the opportunity to save the tax on the way in)

thanks very much
Silvergrove
Click to expand...

AVC's have annual charges too.

You also need to check whether there is any scope to make AVC payments. If you are the the maximum public service pension, you may then be overfunded if you put more in through AVC's.

Back to this thing about dying and leaving something for your kids. Even though healthy people can be in accidents and die, in all likelihood you will have close to another 40 years on this earth. That would have your kids at around your current age when they get their inheritance.

If I was you, I would concentrate on making sure that your kid's have the best educational opportunities so they can make their own way in the world.


Steven
www.bluewaterfp.ie
 
silvergrove said:
I am healthy (luckily so far) but i am concerned about income for family as my wife does not make much.
Click to expand...
You should think about income continuance as well.

You are far, far more likely to develop a disability that leaves you unfit for work than to drop dead.
 
Thanks again for your replies.
good point about ICP NoRegrets, I have income continuance with work.

Even though i am entitled to full pension at age 60, because it is minus the state pension ( i am Class A PRSI), i can setup an AVC to cover that shortfall.
However, my understanding is that my employer will pay supplementary pension from Age 60 to Age 66 anyway so, i will end up in the higher tax bracket from age 60 even with my normal pension.

Good point about education Steven: i have about 10 years to provide some help.
my understanding is that stocks need a longer timeframe (as long as possible to maximise returns) so perhaps i should be thinking of a different investment to cover their education.

I think housing is such an important thing and can cause so much stress if you don't have it and you need to rent but perhaps the rental situation will be much better in 10 years. That is why i have my main eye on this for the kids.

thanks very much
Silvergrove
 
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