Use DB Pension to Pay Off Mortgage?

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PatrickD2024

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Age: 55

Spouse’s/Partner's age: 54

Number and age of children: 4 children. 3 in their twenties, finished college and now working. One with two years left at college.

Income and expenditure

Annual gross income from employment or profession: €60k

Annual gross income of spouse: €63k

Monthly take-home pay: €2864

Type of employment:

Me - Private Sector

Spouse - Public Sector

In general are you:

(a) spending more than you earn, or

(b) saving?



Saving a small amount



Summary of Assets and Liabilities

Family home worth €350k with a €92k mortgage

Cash of €10k

Defined Contribution pension fund: €100k

Company shares : €10k


Family home mortgage information

Lender: AIB

Interest rate: 5.4%

Type of interest rate: Tracker

If tracker, what is the margin ECB + 0.85%

Remaining term: 10 years

Monthly repayment: €983


Other borrowings – car loans/personal loans etc:

Car Loan. €320/month. 9 months remaining.


Do you pay off your full credit card balance each month? Yes.

Other savings and investments: None

Do you have a pension scheme?

Current DC scheme. 5% employer match plus 10.5% AVC. Currently worth €100k.

Previous DB scheme from UK employment. See details below.

Spouse - Public Sector Pension

Do you own any investment or other property?

No.


Other information which might be relevant

Life insurance: Yes. €150k


What specific question do you have or what issues are of concern to you?

I've always prioritised paying into my pension over paying extra off my mortgage. When interest rates were low, this was an easy decision. However, I've recently turned 55 and I'm eligible to draw down my UK DB pension. The option that I'm looking at is (amounts converted into Euro):

Income Levelling : €98,782 Lump Sum. Annual Pension of €14,829 until age 67, then drops to €5,488

With the increased mortgage payments, rent for child at college, increased cost of living etc., I'm living payday to payday. Therefore I'm considering the previously unthinkable and taking my DB pension before retirement. I'd use the lump sum to pay off my mortgage, freeing up some much needed cash. Then with the monthly pension payment, I'd be able to increase my DC pension contribution to the 35% limit. My DB pension benefits increase each year deferred by around €6k for the lump sum and €900 per year for the pension payment. However I'm paying €11,800 each year on my mortgage with about half of that going to interest payments.

My plan is to retire at 60 and I've calculated that I'd need €30k/year to be comfortable. This should be doable under this plan by combining DB and DC pensions. I don't smoke /drink or have any expensive habits. We've lived frugally for the past 30 years, so is it time maybe to take the financial pressure off a bit as we move towards older age?

It instinctively feels wrong to lift my pension before retirement, but the numbers seem to suggest otherwise.

Thanks in advance for any advice.
 
Hello,

Are the two adult children, who are working, living with you?

If so, are they contrubuting to the household bills, and assuming they are, how much does each individual contribute?

While there are no guarantees, it is looking like the ECB will begin to reduce interest rates, in the coming months, which will take a little pressure off, as your mortgage repayments are then reduced.
 
What would the pension payout look like if you drew down at 65?

In other words, what are giving up by drawing down early?
 
MrEarl said:
Hello,

Are the two adult children, who are working, living with you?

If so, are they contrubuting to the household bills, and assuming they are, how much does each individual contribute?

While there are no guarantees, it is looking like the ECB will begin to reduce interest rates, in the coming months, which will take a little pressure off, as your mortgage repayments are then reduced.
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The two children are not contributing. They're instead saving for a future house purchase. My wife and I would have slightly different views on this, but I'm aware that they won't be here for many more years and we enjoy having them in the house.
 
Sarenco said:
What would the pension payout look like if you drew down at 65?

In other words, what are giving up by drawing down early?
Click to expand...
My options at 65 are:

Tax free lump sum of €132,000 and annual pension of €19,900.

Or

Tax free lump sum of €173,000 and annual pension of €25,900 until age 67, then €16,400 for life.
 
PatrickD2024 said:
The two children are not contributing. They're instead saving for a future house purchase. My wife and I would have slightly different views on this, but I'm aware that they won't be here for many more years and we enjoy having them in the house.
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I think that's a mistake, tbh.

It's nothing to do with enjoying their company, it's to do with them contributing towards the costs that they are generating.

Do three realise that their parents are worried about money, while they live for free, and get to use their earnings for other discretionary purposes?

There's no reason why they can't save, and contribute to the house, they'll still be living a lot cheaper than if they had to pay rent to a third party, or a mortgage.
 
I also think that working children out of education should somewhat contribute to their keep all the more so if their parents are under pressure. (Apart perhaps if there's an imminent buying goal). I think it gives totally unrealistic expectations in terms of money/saving and discretionary spending not to contribute to your basic keep. Life is expensive... and a lot of the money we spend on a daily basis is just spent on basic needs. I think learning that in your twenties is an important lesson .
 
PatrickD2024 said:
Current DC scheme. 5% employer match plus 10.5% AVC. Currently worth €100k.
Click to expand...

You would need to pay an actuary to look at the figures for you.
But it seems instinctively wrong to cash one pension early so that you can max your contributions to another pension.
My gut feeling is that DB pensions are better value the longer you leave them which is why Sarenco's point is really the key:

Sarenco said:
What would the pension payout look like if you drew down at 65?

In other words, what are giving up by drawing down early?
Click to expand...
 
PatrickD2024 said:
€92k mortgage
Click to expand...

PatrickD2024 said:
If tracker, what is the margin ECB + 0.85%

Remaining term: 10 years

Monthly repayment: €983
Click to expand...

So you are paying about €5k interest and €7k capital.

If AIB were agreeable, and switched this to interest-only, it would free up €7k cash for you which would be very helpful. I don't think that they would be agreeable but you could ask them to do something for you e.g. extend the term.

Stop making any pension contributions other than those needed to be matched by your employer.

Sell your company shares and use the proceeds to clear the car loan - assuming the loan is interest-bearing.
 
100% those working ADULTS need to contribute. Even if it is to cover short term spend for you ie bills and you note it and gift it back to them when you get your dB pension further down the line. I would support adult offspring through education, periods of illness and periods of true unemployment but beyond that is not doing them any favours. They probably have more discretionary income than you guys !
 
I think your DB pension is too valuable to consider giving up. I cannot see how you can reduce your DB and make it up with your DC.

Draw down at 55
Income Levelling : €98,782 Lump Sum. Annual Pension of €14,829 until age 67, then drops to €5,488

Draw down at 65
Tax free lump sum of €132,000 and annual pension of €19,900.
Or
Tax free lump sum of €173,000 and annual pension of €25,900 until age 67, then €16,400 for life.

DC pot €100K. annual income €60K. If you contribute 35% to this each year in next 5 years maybe you can add another €130K to it. So you get probably around €9K per annum from this.

Draw down your DB now ultimately gives you €14.5K + state pension each year
Draw down at 65 gives you €24K plus state pension each year.

I have a lot of assumptions in there so you are probably better off getting out the spreadsheet and working it out year by year to run the figures side by side. Asking yourself - will you max your contributions to your DC in next 5 years. How much state pension will you get in Ireland and the UK. What is the spouse pension of each scheme? You took a long time to build your DB pension pot, it is very valuable so I would personally want to max my yearly income from my DB scheme, not break it down early.

Ask your adult kids for a contribution of €100 each per week if they are working. It will help with the utilities, food, repairs to your house.
 
PatrickD2024 said:
rent for child at college, increased cost of living etc., I'm living payday to payday.
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But you have €10k in cash and €10k in shares. And you are paying down €7k capital a year.

I presume there is no way out of the rent for the child at college? They can't continue to live with you while in college?

PatrickD2024 said:
My plan is to retire at 60
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I am not sure you should be planning to retire at 60. You need a better pension and the extra earnings would give you a more comfortable life and the ability to help your kids onto the housing ladder.
 
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