Will the next generation be able to afford to retire?

Q: ‘The rent from a flat I let no longer covers my mortgage. Must I sell?’  I have a two-bed apartment in Dublin that I bought during the Celtic Tiger with a tracker mortgage that’s 1pc over the ECB rate. The property is in a Rent Pressure Zone and the monthly rental income is €1,500. With rising interest rates, this rental income barely covers my monthly mortgage repayments and my management fees. I had always planned to use this property as a pension but I’m now considering selling altogether. What should I do?
Fintan, Co Wicklow

A: There are many people like you who became accidental landlords. During the boom, getting on the property ladder was perceived as the correct thing to do, especially when lending for the purchase of property was so accessible. Obviously, things worked out differently and many people, as they moved on in life, carried these legacy investments with them due to negative equity.

It’s not a popular sentiment, but most small landlords are not making a profit. To take your example, your rental income is taxed in the same way as earned income. Once management fees, other expenses and the mortgage are paid, it’s not uncommon for nothing to be left over.

Landlords are being taxed heavily and this is one of the main reasons for small landlords exiting the market. They pay income tax at the marginal rate, USC and PRSI on the rental income they receive. There is discussion at government level about providing tax relief for landlords, but as it stands renting isn’t favourable to landlords.

In addition, the European Central Bank has been hiking interest rates and there is a lot of debate over whether holders of tracker mortgages should move to fixed rates. There is speculation that tracker mortgage rates will settle at 4pc, so you should keep this in mind when you are doing your financial planning.

It’s clear that your rental property isn’t an attractive investment at the moment, but you must balance this with your overall financial planning. Can you continue to finance this property from your current cashflow? Currently, the rental income is paying down your mortgage debt, but when the mortgage is cleared, you will have an asset and that rental income could be an alternative income stream for you when you stop working in later life.

Do you have dependents? If so, might they be living in the property in the future? Or do you plan on downsizing to the property yourself at some stage? It’s important to look beyond the current downsides and weigh up the bigger picture before deciding to sell.

Q: ‘I’ve become self-employed after being made redundant from my tech job. What do I need to look out for?’

I was recently made redundant after 15 years working in the tech sector and I have a young family to provide for. Fortunately, I am now getting regular contract work and have set myself up as a limited company to invoice for that work. I have some savings and a pension from previous employment. Is there anything else that I need to be doing now that I am self-employed?
Seamus, Co Kildare.

A: Incomes in the tech sector are among the highest in the country. What’s often overlooked, though, is that significant benefit packages are also provided in parallel. You now have to provide these benefits yourself, via your own company.

The first move I’d recommend is protecting your income. You can cover as much as 75pc of your income through an income protection policy. This can be paid tax efficiently through your company and the policy would ensure that most of your income would be maintained in the event that you could not work. The State would also provide an additional benefit until you could return to work.

As you mention that you have dependents, I would suggest you buy a death-in-service policy to provide for your family in case you die while you’re still working. This policy can be organised tax efficiently.

Cashflow is hugely important for a start-up business like yours and you are likely only getting to grips now with the concept of earnings and expenses. I’d recommend you build up working capital to enable you to expand on your own terms and to allow you take on staff and office space as required.

Once these key steps are in place, you can maximise tax efficiency – if cashflow allows – around your first year-end accounts by investing a lump sum into your pension. At this point, you will have an idea of your cashflow requirements and you can plan to invest in your pension monthly in your second year, which is a more efficient way to invest in a pension than a lump sum once a year.

In relation to your legacy pension, I would expect that economies of scale would mean that the costs around your tech company pension are lower than a private plan. This doesn’t necessarily mean that it is the correct decision to leave your pension invested as it is. I’d advise engaging with an adviser to look at the different options available and to fit this within your overall financial planning.

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