More into pension fund or over pay mortgage

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PaddyW

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Hi mods, not sure which forum to put it in, so please move if necessary.

I'm in a position where I will be able to put an extra €200.00 (possibly up to €400.00) a month against mortgage or pension. Mortgage rate is currently 1.4%, so I'm guessing extra pension payments would make more sense, but would value all opinions.

Thanks
 
Pension gives tax relief + tax free growth, so versus 1.4% mortgage = makes sense.

A lot depends on your age/family other debt etc, but good pension provision is never ever bad.
 
That's what I had in my mind Gerry. I'm 34 and have no family at the moment. I would still be keeping within tax relief limits also for my age. Just wanted to make sure there wasn't anything I was missing out!
 
PaddyW,

The beauty of adding 400 extra means that if times get hard you can stop that 400 for awhile and since you had got used to spending 400 less ,your living standard takes less of a hit.(not wishing hard times!)
 
How many years will you knock off your mortgage by increasing the repayments?

How much extra will you have in your pension fund if you make the extra contributions?

Under both scenarios, once the money is paid, you no longer have access to it, so have you an adequate emergency fund and short term savings?

It doesn't have to be one or the other, you can always split the extra cash.

Do the sums first though.


Steven
www.bluewaterfp.ie
 
Hi Steven,

My mortgage is relatively small, at €82,000 euro with approximately 27 years remaining. If I was to pay an extra €200.00 per month, it would take 11 years and 11 months off it, according to the drcalculator.com mortgage calculator. Upping it to €400.00 per month would knock 16 years and 6 months off of it.

I have savings of roughly €20,000 euro put aside, which will not be touched as part of this as they will be my rainy day funds!

I think my ultimate goal is to have a good income in retirement. I've seen too many people surviving just on state pension and that is something I do not want to do!
 
Thanks Gordon, just wanted to make sure I was covering all my bases and making the most of my money!
 
Hi Paddy

Pension is clear assuming you are top rate tax payer.

If not, I think it's clear that you should not contribute, but it's not as clear.

Brendan
 
A lot of people are now looking at paying off trackers early ( myself included ) with deposit rates slashed .

It's worth remembering that other threads here suggest there will not be enough money in future to pay for pensions , if that's even close to been the case I'd imagine it's not beyond the realms of possibility that the government at the time won't raid pension funds again , for this reason I won't put anything into a pension fund .

The road I went down is investing in equities , if the risk of equities is too much I'd over pay mortgage or take advantage of the very useful "deposit best buys thread".
 
Fella said:
A lot of people are now looking at paying off trackers early ( myself included ) with deposit rates slashed .

It's worth remembering that other threads here suggest there will not be enough money in future to pay for pensions , if that's even close to been the case I'd imagine it's not beyond the realms of possibility that the government at the time won't raid pension funds again , for this reason I won't put anything into a pension fund .

The road I went down is investing in equities , if the risk of equities is too much I'd over pay mortgage or take advantage of the very useful "deposit best buys thread".
Click to expand...

It seems rather extreme to completely eschew the most efficient investment platform around purely on the basis of what's "not beyond the realms of possibility".

I'd be more concerned about the State Pension being means tested down the line, and people with non-pension assets but no pension income being left in a no-mans land with literally no income in retirement.

Investing personal monies before maximising one's pension funding options is crazy in my view.
 
I'm 34 now I by the time I'm due my pension I'd be very surprised if there haven't been levies added again, once one government does it once it's on the table now it's been done it will be done again.

Means tested is also possible but at least if I get an idea of anything like this happening I can make plans to avoid it , your money is locked away in a pension fund and governments can nibble away at it , at least with money in the bank or shares I can get too it when I want.

Just to add I pay little to no tax so it's not as big as a decision as it would be if I was a high tax payer but I still wouldn't put money in a pension after the levy.
 
Brendan Burgess said:
If not, I think it's clear that you should not contribute, but it's not as clear.
Click to expand...

So, it's clear but not as clear...:p

The OP has a modest mortgage balance, on a cheap tracker, and has an ample cash reserve to address almost any conceivable uninsured emergency that might arise.

In these circumstances, I would have thought it was pretty obvious that increasing pension contributions, rather than paying down the tracker mortgage or investing outside a tax advantaged wrapper, was easily the better option regardless of whether or not the OP pays income tax at the higher rate.

Based on everything we know today, all the pension contributions have to do is produce an average net annualised return of at least 1.35% over the ECB refi rate over the next 27 years to come out ahead. To put that modest level of return into context, Zurich's Balanced Fund has produced an annualised reaturn of 10.5% (before deduction of AMC) since 1989.

Also bear in mind that the pension contributions will have a 20% head start over paying down the mortgage if the contributions are relieved at the standard rate and a 40% head start if the contributions are relieved at the higher rate of income tax.

Yes, any pension drawdowns will be subject to income tax at some unknown rate in the future. But on the basis of today's tax rules, the accumulated pension pot would have to be pretty substantial (over €1million) before any income tax actually bites (although USC may take a nibble), assuming the OP retires at 65 or older.

I also suspect the OP is still entitled to MIR for the next couple of years, which skews the decision even further in favour of contributing to a pension before paying down the mortgage.
 
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Brendan and Sarenco, thanks for the views. Yes, I am on top rate of tax and also still receive MIR. I've decided to add more to my pension, as our company has now told us that they are switching us to the Zurich Dynamic Fund, which seems to perform pretty well (or have I talked too soon!)

I will also keep adding to my cash reserve so that in the event that interest rates were to rise sharply at any time in the future I will be able to knock a decent lump off of the balance to negate the interest rises.

I should also add that I am 34 now as I omitted that in the OP
 
PaddyW said:
Brendan and Sarenco, thanks for the views. Yes, I am on top rate of tax and also still receive MIR. I've decided to add more to my pension, as our company has now told us that they are switching us to the Zurich Dynamic Fund, which seems to perform pretty well (or have I talked too soon!)
Click to expand...

It is one of Zurich Life's older funds, being created in November 1989. The average annualised return since then to date is 11.45%. Remember though, that is is a 100% equity fund, so you will get plenty of ups and downs. In 2008, the fund fell -37.83%.

I'm surprised trustees have decided that a 100% equity fund is the fund of choice for a pension scheme. They are leaving themselves open to litigation when there is a stock market crash and the fund value falls dramatically.


Steven
www.bluewaterfp.ie
 
Hi Steven,

Yes, I see from the fact sheet they gave us that 93% is invested in equities, with about 4% in cash and 3% in bonds. 2008 was a bad year alright, but they seem to have recovered quite well in following years, apart from a 3.4% fall in 2011.

We are currently in the Irish Life Consensus fund, which has performed pretty well to be fair, but in relation to the Dynamic Fund, I personally would have been about €20k better off in my fund amount if I had been invested in Zurich rather than Irish Life since 2005.
Perhaps the figures are skewing my views on it, do you think this is a bad idea yourself?
 
Hi Paddy

Just to clarify, are you saying that you have no choice of funds or are you saying that within a fund range you have elected the Dynamic Fund?
 
Hi Dan,

The one they recommended to us was the Dynamic Fund as it's the one most of the employees in a sister company are invested in and has performed well. I do see there is a different range of funds that are available though, but I haven't been able to discuss the various options with an adviser yet
 
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