BO’B from Tipperary writes: I retired at 61 and have an approved retirement fund (ARF) and approved minimum retirement fund, plus a small investment fund. I have two buy-to-let houses which I bought to boost my retirement income. Both have mortgages. The first house has an outstanding mortgage of about €10,000 and I am told if I paid it off, I would save about €400 in annual interest. My rental income is about €5,000 a year. About €90,000 is outstanding on the second house and interest payments are about €3,000. Rental income is about €7,500.
I have about €100,000 coming to me and wonder if I should pay off both mortgages and pay the rental income into my ARF or investment fund (if that is possible), or boost my monthly income. I believe the rental income would be subject to tax at 42%.
Before you do anything you need to establish exactly what your ARF and other investments are worth, and what their annual return is, as opposed to what you are drawing down in income. The markets have taken a serious battering in recent years and are still struggling. The average Irish managed fund returned a paltry 0.9% over the past five years, according to half-year figures released by Mercer.
The rental return and annual capital growth you have been getting from your two properties may be much higher and it might make more sense to use your €100,000 to pay off your mortgages.
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This is especially the case if you cannot secure more than 3.5% (your mortgage interest cost) on your €100,000.
Finally, your last sentence is puzzling: rental income attracts very attractive tax relief. You can claim relief at your highest rate against such expenses as mortgage interest, rates, insurance premiums (including mortgage protection), maintenance contracts, repairs, goods and services you provide as well as a capital allowance of 12.5% on the value of fixtures and fittings. A tax adviser should make sure you claim all your tax relief.
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Investment choice for SSIAs
DA writes from Dublin: My building society (EBS), which holds my special savings investment account (SSIA), offers investment products that are managed exclusively by EBS Asset Managers (EBSAM). EBSAM charged holders of Summit Mutual Funds a total ¤1.192m in fees on assets of ¤111.63m. The best-performing Summit fund is Growth, which returned 6.7% (1.34% annualised) in the past five years. The expenses for the Summit Growth fund were 1.2% in 2003 (EBSAM levies a 1.5% management charge). Where can my SSIA breathe the sweet freedom of investment choices?
If you had wanted a wider choice of fund managers when you opened your SSIA, you could have chosen the likes of Hibernian or Eagle Star, which offer a selection of fund managers to SSIA account holders and charge up to 2% per year. This option is still open to you if you wish to switch and there are no exit penalties for EBS account holders. However, the average Irish managed fund performance over the past five years (to this past June) is just 0.9% per year, so the EBS return of 1.34% doesn’t look too bad by comparison.
As for expenses, the EBS annual management charge of 1.5% with no other fees or charges was good enough to see the company awarded the Consumer Association Savermark, the only company other than Quinn Life to achieve this distinction.
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All the other providers, to varying degrees, offer products that include initial bid offer spreads of up to 5%, higher annual management fees, monthly policy fees and or commissions and exit fees. The scheme doesn’t end until 2006-2007, so you can still shop around.
Sale of house that is loan security
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JF writes from Dublin: We are selling an old house which we have used as security for a business loan.
Do we need the original land certificate folio? How do we find out what capital gains tax (CGT) we need to pay? Is it payable immediately or on our tax bill at the end of the year? Are there any websites that I could look up for information?
If you sell this property, the bank may require that you replace the security it has provided, or repay the loan with the proceeds. In effect it has first call on the proceeds, so in order to avoid a delay I suggest you speak to the bank immediately about its preferred option.
Your solicitor (and the buyers’) will require all the proper deeds and certificates for the house and will do a search for copies if you do not have them handy. As for the CGT, a preliminary payment must be made by October 31 if you sell the property on or before September 30 in the tax year.
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If the house is sold between October 1 and December 31, payment will be due by January 31, 2005. The Revenue website (www.revenue.ie) is very comprehensive but you should also check www.oasis.gov.ie, the government consumer information site.
Jill Kerby is co-author of the 2004 TAB Guide on Money, Pensions and Tax. E-mail her at money.ireland@sunday-times.ie or write c/o Money Matters, The Sunday Times, Fourth Floor, Bishop’s Square, Redmond’s Hill, Dublin 2, giving a daytime telephone number. We cannot send personal replies or deal with every letter. Please do not send original documents or SAEs. Information and advice is offered without legal responsibility.