Q&A: Getting additional retirement income out of my home

I am a single man in my late 50s and would like to ask about using equity in my home to make retirement more comfortable. I joined the civil service late in the day, five years ago. While I will get a pension, obviously this will be much less than if I had spent my career in this area. I am in the Single Public Service Pension Scheme, which I find totally incomprehensible.

I worked for almost 20 years in the UK, where I was born, as a teacher, then relocated to Ireland in my late 30s. I will get a state pension from the UK and I opted to take my teaching pension at 55 — yes, I have declared this — because my starting salary in the civil service was not great.

I have worked in Ireland since leaving university here 19 years ago. Before the civil service, this was in the private sector, where I just paid the standard PRSI.

I aim to pay off my mortgage in a couple of years; the house is probably worth about €300,000. I have no dependants and have no intention of leaving the property to my two ghastly siblings to whom I do not speak, or their children.

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How can I release equity in the property to make my retirement more comfortable without leaving myself at the mercy of predatory investment companies?

I would also be grateful if you could explain how getting a UK state pension impacts upon my State pension here?

– Mr PJ, email

Employment is more mobile all the time — both between private and public sectors and between different countries. As a result, there are many people who will find themselves in much the same position as you.

First, the good news. It appears you have managed to build up some retirement benefits consistently along the way in your career. Unfortunately for you, in your 19 years working in the private sector here in Ireland, those amounted only to the basic State pension as you made no private sector pension provision.

In addition, your UK teacher’s pension, already well short of the maximum available by virtue of your truncated career in the sector, will have been adversely affected by your decision to start drawing it down at 55.

These are personal decisions that everyone has to make based on their circumstances at the time. There is little point living in penury in order to maintain a pension payout that you may or may not live to enjoy later in life, or may not need as much at that point. In your case, given your low starting salary in the civil service, you opted to tap the teacher’s pension earlier than you might have.

In retirement then, you will currently have four difference strands of retirement income. First there will be this, albeit lowered, teacher’s pension, then the pension from your current civil service employment.

You joined the civil service at 53, so you will have just 12 years to build up a pension entitlement if you decide to retire at the minimum pensionable age. However, while Irish civil servants can retire at 65, there is nothing to oblige them to do so. They are able to continue working until they are 70 which, in your case, would certainly help in boosting your retirement income — and the retirement lump sum you would also be due.

Those who do keep working past 65 are not allowed to draw down their Irish State pension until they retire, I gather, but then you will have the benefit of your salary. You will also have the benefit of the UK state pension which kicks in at the UK state pension age — currently 67.

Up to 2016, the UK had both a basic state pension and an additional state pensions, or Serps. This has now been replaced by a new state pension scheme. My understanding is that, as a teacher and a member of the teacher’s pension scheme, you will have contracted out of the additional state pension and this will be reflected in your entitlement under the new state pension.

At today’s rate, you would get £141.85 a week if you were entitled to a full state pension but as you worked in the UK for only 20 years, you would get only a proportion of that. As I understand it, you need 35 years’ contributions for a full pension — it used to be 30 — so you will get 20/35ths of the rate, or about £81 a week, or €94.50.

Of course, by the time you retire, those numbers will have risen.

There is nothing to stop you receiving your UK state pension directly into an Irish bank, despite Brexit. You will need to contact authorities in the UK’s international pension centre four months before your 67th birthday. Getting your UK pensions paid to you here has no impact on the Irish State pension as they can both be assessed separately.

Then there’s the Irish State pension. Again, this can get complicated. Under existing rules, the pension is calculated on the basis of your PRSI payments over your working life in Ireland. This penalises people who took career breaks but works in favour of those, like you, arrived here mid-career and worked from then to retirement. On that basis you would be entitled to a full State pension of €253.30 a week at current rates.

However, we are transitioning to a new total contributions approach that requires 40 years of contributions for a full pension — or 2,080 weekly contributions. On that basis, you will get a pro-rata pension as your PRSI contributions will stop once you reach the age of 66 (though that may change). That would give you 27 years of contributions and a State pension of about €171 at current rates.

As of now, you are entitled to whichever calculation is more favourable. The intention is to move fully towards the total contributions approach but the understanding was that this would have happened before now. You’d assume it will close the door to you before you hit 66 but this is Ireland, so nothing is certain.

So you may have more income that you think by that stage.

You rightly stress that you have declared your teacher’s pension in Ireland. This is relevant because state pensions are taxable where, when aggregated or with other income, they exceed any local tax-free threshold.

Releasing equity

When it comes to releasing home equity in retirement, or close to it, there are limited options. You either sell all or part of the property to a specialist finance house. Neither is particularly good value but, given your interest in maximising your potential income during your life without any intention to leave assets behind you in death, they might appeal. You refer to “predatory investment companies” but the fact is that no one is lending to someone who has no ability to make repayments except under a lopsided arrangement that favours the investor.

Seniors Money, trading as Spry Finance, lends money against the market value of the home. You can borrow a maximum of 15 per cent of that market value at the age of 60, rising by one percentage point for every additional year to a maximum of 45 per cent at the age of 99. So, on the current market value of your home, you could borrow about €66,000 at the age of 67, or €75,000 at age 70.

Clearly the actual figure will be determined by your home’s market value at the time you go to borrow.

You can take an initial loan and return at a later age to borrow more, based on any increase in the property value and your increased years.

Interest is added to the loan which, if not repaid earlier, is payable from the sale of the property when you die or vacate it. Though interest can accrue alarmingly, the company says your total liability will never exceed the value of the home.

As it appears you’re not particularly taken with your close family, using all the equity in the property to improve your standard of living seems an option that would be worth considering.

The other option is residential reversion. Where you continue to own the property with a loan, under residential reversion, you are effectively selling a stake in the property.

In Ireland, the one company offering this service is called Home Plus. And, as it is not going to get access to the property for a while, you will get only a fraction of the true value of the stake you sell. Home Plus’s chief executive Ian Higgins transparently noted, as an example, that a couple aged 67 and 70 looking to release 25 per cent of the value of their home would have to sell 72 per cent of the property to his firm.

In your case, on today’s values, that would give you an additional €75,000 at a cost of 70 per cent of your home.

The final option would be to find someone outside either of those two formal structures willing to purchase your home while granting you an exclusive right of residence in it until you die. As this would inevitably be a property investor, I expect that even if you could find such a person, the value they would pay would reflect the fact that they would not get access to the property until you die. You would also want to make sure that any contract of sale was very carefully drawn up to ensure your right to live in the property was legally fully protected before signing anything.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice