Making Cents: Liam Croke answers your financial questions

Question
Hi Liam. I’ve a lot of questions for you. I’m 40 and have a very well paid job which is €165,000 per year and that comes with lots of other perks i.e. defined benefit pension, share purchase scheme etc. but my job and its demands have taken their toll on me physically and mentally and after working 15 years with the same company I need a change. I first need to take a break from work to recharge and then I’m considering doing consultancy work rather than returning to another company and getting sucked into what I have been doing. Before I make any decisions I need to know things like (a) how long can I take off from work (b) how much do I need to earn (c) how much more do I need to contribute to my pension and so on. Your help would be really appreciated as I don’t know how to make sense of any of this.

Answer
This was the initial email I received from this user and before I could reply in depth to him, I asked for further details about his monthly outgoings, his partners income, his pension details, his mortgage and so on, and once I knew those details I was able to reply and this is what I said to him.
Based on your current monthly outgoings and current income i.e. your wife’s, there is a monthly deficit that will require you earn an annual income of €95,000. So, you can earn €70,000 less each year and from a cash flow perspective you’ll see no change to your lifestyle.
And if you managed to spend €1,500 less each month than what you are currently spending and I certainly think with a bit of effort that you could, it reduces the amount you have to earn from €95,000 to €70,000.
If you go down the consultancy route and you need to earn €95,000 and let’s say that your daily charge out rate is €900, that means your deliverable number of days each year is 106 i.e. €95,000/€900.
If your spending was reduced by €1,500 per month and your chargeable daily rate was €900, then you’d need to work 78 days of the year.
So, a reduction in spending by €1,500 means you can work 28 days less each year.
Included in your outgoings is a monthly overpayment of €314 and you could stop paying that and it would reduce the amount you have to earn but I’d keep going with it because it reduces your mortgage term by five years and three months and saves you €24,360 in interest payments. And you’ll become mortgage free at age 54, which means you could then earn c. €29,500 less each year because you don’t have that mortgage payment.
In relation to how long you can take away from earning an income, based on what savings you have and what monthly deficit will exist, you have a runway of 31 months before you need to start earning an income again. And I know it won’t take you that long before you’re back working but know you’re under no financial pressure to start earning an income quickly. So, you can take the time off you need to recharge and reenergise yourself and figure out what you want to do.
And finally, I looked at what income you’re going to need when you retire. And if you choose the self-employed consultancy route you won’t have an employer that will make contributions on your behalf, so you’ll have to make them yourself.
I calculate that what you are likely to spend and what you have accumulated already with that defined benefit pension of yours, there will be a deficit that needs to be bridged which requires a monthly saving of €980 for the next 20 years.
That’s based on you 'retiring' full stop at 60 i.e. both you and your wife never having to work again. And it’s also based on your only sources of income in retirement come from pension funds. You may have other monies that you can use as well i.e. savings, shares, inheritances and so on.
When I ran the numbers to 65 the monthly contribution required would be €325 after tax relief.
So, if you want to retire at 60 on an income of €4,000 per month, that will require a monthly after tax relief contribution of €980 and if you choose to retire at 65, the net monthly contribution is €325.
Either of these numbers need to be added to what income is required now, so if you need to earn €95,000 right now for cashflow purposes, that needs to increase to €107,000 per year. The €95,000 only satisfies your 40 year old self but €107,000 satisfies both your 40 year old self and your future 60 year old one as well.
And if you want to retire at 65 we know you need to earn €95,000 right now but make that €99,000 to make provisions for when you’re 65.

Question
Liam, I managed to log on to the UK Gov. portal to check the status of my UK State Pension. I’m attaching the summary and the shortfall calculations for the past number of years where I have not been contributing. It would be great to get your perspective on whether or not I should start to contribute again and look at reimbursing the shortfall amounts so I get the maximum pension allowable which as you can see are quite a lot and I’m not sure I can afford them.

Answer
Okay the amount you have to contribute to make up the shortfall is £78.18 per week.
And the very basic and simple calculation with this amount is:
£78.18 x 884 (number of weeks from your age now until 65 (17 years x 52 (weeks) = 884) = £69,111.
So, that’s going to be the total cost to you.
Now how long you live is going to be a factor and obviously that’s an unknown. Your breakeven point i.e. the number of years it will take you to get back your contribution is years i.e. the maximum weekly pension is £221.20 which is €11,502 per year and when you divide this amount into £69,111 you get six.
So it’s a good investment because you’d have to only live six years beyond when you first start to receive this pension to get your money back.
And you do need to provide for yourself in retirement.
If you invested that same £74.18 into a personal pension over the next 17 years at an annual growth rate of 4%, it would amount to £90,908 and if you paid yourself that same £221.20 UK state pension amount it would last for 7.9 years but then it’s exhausted whereas the UK pension is paid until you’re alive. So, my advice is that if you can afford this £74.18 per week to make up the shortfall, I’d make it.

Question
One of my children is looking to build a new house on my land. My question is, can I give him a site free or does he have to pay me for it?

Answer
Ordinarily you are liable for capital gains tax if you sold or transferred a site to a child even if you received no payment in doing so.
The sale or transfer are deemed to be sold at market value and capital gains tax (CGT) which is charged at 33% is charged on that value.
However, you can escape having to pay CGT in this instance if certain conditions are met:
• The site you are transferring is being used by your son to build a house that is going to become his principal primary residence, where he will reside in it for a minimum period of three years, and
• The site does not exceed one acre in size, and
• The market value of the site is not >€500,000
If your son doesn’t build a house on the site you’ve gifted him or if he did but sold it 12 months later the CGT exemption you have availed of when gifting the site becomes liable, but it must be paid in this instance by your son and not you.
And one last point that’s important, the child receiving the site should generally not be liable to pay Capital Acquisition Tax (gift/inheritance tax) but this will depend on the value of the site at the date of the transfer. CAT may arise when a person receives a gift of a site that exceeds a given threshold. A threshold is the amount a child is allowed to receive as a gift from a parent without having to pay tax and that amount at the moment is €335,000. If the value of the site is above €335,000 the child would be liable to pay CAT at a rate of 33%.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie