Prepay mortgage or Start pension

G

geecee

Registered User
Messages
51
Hi All
I am in a quandry and have received lost of varying advice on this.

me- 33, single, no pension, Income 53K per year,
Mortgage - 210K, 32 years left to run on a property worth approx 350K

I am now thinking of what to do with the €250 PM that I previously put into my SSIA.

All along i was considering putting it into a PRSA and saving for my retirement (in 32 years time)

However somebody else suggested i should look at paying it as a monthly prepayment on my mortgage.

I have used the jeacle calculator and can see that the €250 PM would shorten my mortgage by 10 years.

So my question is which is better?
Shorten Mortgage term (and possibly use equity in property to fund investment properties) or to shove it all into A PRSA?

I know with the PRSA that i can claim tax relief at 41% - but is the compound interest i would pay on the mortgage higher or lower than the money i would save into the PRSA?

Any advice is much appreciated!
 
geecee said:
I have used the jeacle calculator and can see that the €250 PM would shorten my mortgage by 10 years.
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And save you a bunch in interest I presume?
(and possibly use equity in property to fund investment properties)
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Where did this suggestion come from!?
or to shove it all into A PRSA?
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Why not a bit of both? Accelerate your mortgage repayments and put some money in a pension?
I know with the PRSA that i can claim tax relief at 41%
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And PRSI/health levy relief of up to 6%. And you can take up to 25% of your pension lump sum tax free at retirement. And your pension grows on a gross roll up basis (no tax along the way)...
but is the compound interest i would pay on the mortgage higher or lower than the money i would save into the PRSA?
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Impossible to say since nobody can predict the future performance of pension investments.
 
HI Clubman
Thanks for your reply...
Question: if it was you... what would you do?
 
It was me a few years back and I did both - accelerated repayment of the mortgage and made pension contributions because I could afford it.
 
I have a similar decision to make... approx 20k to either reduce a mortgage or add to pension fund. Can anyone advise how to calculate the benefits from the pension option (I am not looking for a crystal ball... I can vary the expected annual returns and take an educated decision based on what-ifs). The mortgage option is, as geecee explained, easy to work out.

I suppose what would be nice is a pension calculator..input your age, income, current pension value and expected annual return (could be varied), and see the value of a prepayment.

Anyone know if one of these exists?

Thanks, Sparko
 
I cannot claim to be a subject matter expect on this this. But in my opinion I think it depends on what tax bracket you are in.

In my opinion if you are in the 42% tax bracked it makes sense to put that money towards a pension as you get tax relief on your pension. Also the more you put in younger the larger the pension fund you will have in later years.

You will save money by overpaying your mortgage but it means you will have to put more into your pension later. If it was me I think that I would be fairly aggressive with getting my pension started and then if more money starts to come in put that against the mortgage. Suppose my thinking on this is that you give your pension the opportunity to grow by starting it earlier.

Make sure of course that you have to most competative mortgage deal. If you can get a better deal, overpay what you have saved by switching.
 
SPC100 said:
Don't forget the tax relief is lost if you don't use it.

I would say that all higher rate income tax payers, should fully use their tax relief (at the higher rate) every year, before overpaying the mortgage.
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I disagree. Even after tax relief each €1 in mortgage interest is costing you €0.80 so if you can avoid this cost altogether then you are better off. There is no point in being in debt just to avail of mortgage interest tax relief.
 
Sorry! My mistake. :eek: And of course you get PRSI/health levy relief as well (e.g. a possible 41% + 4% + 2%). But I have seen others recommending that people stay in debt purely to avail of owner occupier mortgage interest relief which I find daft.
 
Sorry to join this thread late.

For the OP I think the pension option looks preferable. 33 years of age and no pension provision is not a healthy position to be in. Frankly, it points to the odd situation whereby the State has been urging people to take out pensions while operating the SSIA scheme - which provided 25% tax relief to higher rate payers who could have been getting 42% + PRSI relief. I have no doubt that tens of thousands of people have postponed taking out pensions due to this mediocre scheme. Of course, if they now feed their SSIA pot into a personal pension they'll do okay - (even if they have missed the last couple of years which have been good for pension investment returns)....my fear is that very few people will take this course of action.

What about people who have pension plans up and running to a level that should (at current contribution levels) provide a comfortable retirement? What should they do with their SSIA €3,000pa? A couple of thoughts:

1) If you're a higher rate taxpayer now and think that you're not likely to be in retirement, beefing up your pension may be a smart move.

2) If you think you'll pay tax at the marginal rate in retirement you're really only deferring tax if you're a higher rate payer now.

3) If you're a lower rate payer now but reckon you might be a higher rate payer in retirement you should consider waiting until your income rises enough to take you into the marginal rate before seriously funding your pension.

4) Mortgage pre-payments aren't tax advantageous but have the potential to be really life changing. Imagine what you could do if you got your mortgage paid off a decade early. Or it might enable you to trade up one last time to a house you might never have aspired to otherwise. Or, of course, it might allow you to retire early...albeit with a reduced pension 'cos you used all your spare income to pay off your mortgage.

Maybe Clubman's right - do both!
 
Thanks for the advice, all. My instinct now is to put most into the pension, but take a chip off the mortgage too for some medium-term gratification!
 
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