Spare mortgage cash can boost pension

QWE have been paying our mortgage for the past 20 years or so. The term is due to end in a few months and, as a result, we will have an additional €800 of disposable income every month. What do you suggest we do with this? We worry that it will be frittered away if we don’t do something meaningful with it. We are both in our early 50s. I have my own business and my wife works with me. Mick, Co Kerry FIRST, congratulations on getting to this point. Financial security is of the utmost importance, and owning your home outright is a significant milestone in this regard. The options available to you are wide and varied, but in keeping with the financial security agenda, I am going to focus on another significant milestone; your retirement.

Very few of us have comprehensively planned for our retirement. My definition of retirement is where you have sufficient assets accumulated to provide an adequate income for the remainder of your life. This is the point of financial independence. The big unknown in retirement is how long you will live. I suggest you assume a long life!

In your early 50s you can contribute up to 30pc of your gross pensionable earnings into a Revenue-approved pension scheme. Your company can make substantial contributions in addition to this.

For every euro invested in a personal capacity, tax relief is available. The company contributions will reduce the exposure to corporate tax — while invested, any growth in the fund is tax exempt. On retirement, up to 25pc of the fund is available as tax-free cash.

Contributing €800 per month with the upside of tax relief over 10 years, assuming a 5pc growth rate, will boost your pension fund by €200,000. That’s what I suggest you do.

Making provision for death

QMY wife and I recently had our second child. We are both in our late 30s and are concerned that we haven’t made sufficient provisions if either one of us were to die. What level of life assurance do we need and how many years should we keep this in place? My own parents have a whole-of-life policy. Should we opt for something like this? We both work full-time. Daniel, Cabinteely, Dublin THERE are numerous people in your situation. Due to the many competing demands on your incomes, it can be hard to accumulate significant wealth at your stage in life. As a result, should one of you die in the short term, there is a risk that the surviving person won’t be able to meet the family’s financial obligations. Putting a life assurance policy in place reduces or eliminates that risk.

As your children get older, they become less dependent on you — at least that is the theory. The cost of looking after your family should you die therefore reduces as their dependency reduces.

Whole-of-life policies are ideal for rock stars who might have children right the way through life from the age of 20 to 70, but for the rest of us, a policy that lasts for the duration of your children’s financial dependency is sufficient.

At your stage, start with a term of up to 25 years, unless you anticipate having more children in the future.

As for how much to insure yourself for, look at the impact of your death both now and in the future.

What net income will the family have to do without? What impact will your death have on household expenses? Let’s face it, there will be one less mouth to feed. What assets and incomes are accessible to your spouse and children on your death? Pension funds may be paid out. Your better half may qualify for the widow’s pension, for example. Perhaps your employer offers the benefit of death-in-service?

The headline figure you need today will reduce significantly as the years roll by because you will be growing your net worth.

Banks and many brokers will try to trick you into believing you need inflated cover, the indexation option, the conversion option, bells and whistles, and a high level of critical illness cover and so forth.

Those advising you are compromised by hefty commissions or salaries that are linked to performance targets.

Go in there equipped with a figure and challenge the nice man in the suit when he insists you need a level of cover which is more aligned with his own monthly performance target than your best interests.

Should I become a landlord?

QI am thinking about buying an investment property with an inheritance I received from my parents. I am looking at places around Athy. Houses are pretty cheap and the rent should provide a consistent income long term. However, I don’t like the idea of having to deal with tenants. Should I buy to let in this instance? Alison, Kilcock, Co Kildare

THERE is a place to start when setting up a coherent investment strategy, and it does not start with an investment property in Athy!

Start with subtracting your liabilities from your assets to understand your net worth. That should clearly demonstrate the lump sum you have to invest.

What I’m saying is that just because you inherited €150,000 doesn’t mean you have €150,000 to invest.

Then you have to make a decision about whether to invest in something that is liquid or illiquid.

Property is not liquid. If you need access to the capital invested, you are in trouble. Got children going to college? Is your daughter getting married next year? Then investing in property is not recommended.

You also need to assess what proportion of your assets is invested in the various asset classes.

Without complicating matters they are real estate, bonds, and equities or shares. Overexposure to one is opening you up to financial Armageddon should things go wrong.

If you only have real estate, for example, what happens if the next property bubble bursts? You should be aiming for diversification across the asset classes or at the very least within an asset class.

A single investment such as this property is high-risk and lacks diversification. There are various ways to invest in globally diverse real estate funds, which would spread your exposure across many countries and property types.

Finally, you should understand the true cost of your investment. In this instance, it’s filing an annual tax return, paying USC on gross rent, you are also liable for registering your tenants with the Residential Tenancies Board. On buying the house, you are subject to stamp duty, conveyancing and legal fees.

Now ask yourself the question: what return do I require and how much hassle am I willing to entertain for that return?

Individual properties as an investment proposition would not feature for many investors if we looked at it in the cold light of day.