€220k mortgage ; €157k in investments; maxing AVCs

Ndiddy

Registered User
Messages
241
Age: 36
Spouse’s/Partner's age: 37

Annual gross income from employment or profession: 35k
Annual gross income of spouse:33k
Monthly take-home pay : 3800 after 20% AVCs each, motor and health insurance comes out

Type of employment: Private sector

In general are you:
(a) spending more than you earn, or
(b) saving?
Both, put full AVC into pension and a regular savings of 400, then allow ourselves to spend the rest if needed/wanted. No cable/satellite and use prepaid phones, old car paid off. Like a bit of GAA , pub and travel.

Rough estimate of value of home 315k
Amount outstanding on your mortgage: 220k
What interest rate are you paying? 3.5% SVR, approx. 1000 per month (one year done, 29 more to go!)

Other borrowings – none but approx. 1000 in crèche fees

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Savings and investments:
Regular savings account: 27k, and 400 per month

Do you have a pension scheme?
Defined Contribution through work about 70k and 105k for spouse, we are putting in full 20% AVC and company puts in 15% for me and 11% for spouse

Do you own any investment or other property?
130k in target date index funds ( 80%stock, 20% bonds), have already checked that this is the lowest choice in fees

Ages of children:
1 girl, 2 years old, hope for one more

Life insurance:
Just mortgage cover and cover through DC pensions at work, approx. 130k each

What specific question do you have or what issues are of concern to you?
We don’t have any major debt problems as we came into home buying and kids later so had a chance to save up. However as we are relatively low earners for our age and don’t see any big changes in future income coming our way, we wanted to hear if there were any other suggestions for improvement and/or thoughts on below.
- Thinking of paying 200 extra to mortgage from December, but otherwise don’t know what else we could be doing. Went for 30 years mortgage with the intention of paying more than just the monthly payment but giving us room in case of job loss/ illness/ etc.
-Currently have VHI health insurance where work pays half but wondering if the policy for daughter is even needed with GP care free until 12 and it seems that most paediatric hospital work is on a public basis anyways? We attend a renal clinic in Temple Street several times a year for a checkup but she seems to be on a public list for all visits and scans.
-Planning for 2nd child, but should we hold off 2 months to get Sept 2016 Paternity Leave? Last time around, pregnant within 2 weeks so just thinking ahead
-With new budget, is it a flat 2 years of preschool or from 3 until 5 ½, therefore maximum of 2 ½ years free? Does anyone know approx. fees to top up the free preschool to a full day in crèche?

Thanks for any help.
 
some thoughts that you may need to consider
  • What happens when your OH is on maternity leave, is it paid or unpaid and will she want or be entitled to take additional unpaid leave- what is the impact of that on your income?
  • Have you done a thorough review of your tax situation so it is the most effective it can be and have you claimed historically for everything you can
  • Ensure you have a will in place
  • All very well to plan for paternity leave in Sept but baby won't know when it is Sept, could arrive early
  • Are you considering any long term saving options for kids, I reduced AVC's when we had our 2nd and are putting the money into a long term savings plan for college/weddings etc
 
Rough estimate of value of home 315k
Amount outstanding on your mortgage: 220k
What interest rate are you paying? 3.5% SVR, approx. 1000 per month (one year done, 29 more to go!)

Do you own any investment or other property?
130k in target date index funds ( 80%stock, 20% bonds), have already checked that this is the lowest choice in fees

Savings and investments:
Regular savings account: 27k, and 400 per month

You are effectively borrowing €130k to borrow at 3.5%. Whatever income or gains you get from your investment will be taxed at 41%. So you would have to get a return of almost 7% before tax for this to make any sense.

You should probably pay all of this against your mortgage.

Likewise, you don't really need €27k in a savings account. You are getting less than 1% on that after tax, and paying 3.5% for your mortgage!

You are saving around €1,400 a month. And if you pay down your mortgage, you will be saving a lot more. So you don't really need a rainy day fund as you can replenish it very quickly.

You mention that your car is old. You should have enough of a fund to replace it when you need to replace it, but no more.

Brendan
 
Annual gross income from employment or profession: 35k
Annual gross income of spouse:33k
Monthly take-home pay : 3800 after 20% AVCs each, motor and health insurance comes out

I am very concerned about this.

If your salary is €33k and you put €6k into an AVC, you reduce the taxable salary to €27k.

This means that for a good chunk of your AVC, you are getting tax relief at just 20%. This is terribly wasteful. You should only contribute to an AVC when you are getting tax relief at the higher rate. Don't forget, you will be subject to income tax when you draw down your pension.

It seems to me that you would be better off paying the net AVC money off your mortgage. At some stage in the future if you are paying the top rate of tax, then you can start contributing to the AVC.

Brendan
 
This means that for a good chunk of your AVC, you are getting tax relief at just 20%. This is terribly wasteful. You should only contribute to an AVC when you are getting tax relief at the higher rate. Don't forget, you will be subject to income tax when you draw down your pension.

I would take a different view.

Under current tax rules, the first 25% of each pension pot (to a maximum of €200k) can be taken as a tax free lump sum and the OP and his spouse will have a tax free allowance of €36,000 per annum once one of them reaches 65.

While tax rules can obviously change, it seems highly probable that any amount subsequently drawn down from their pension pots will be largely (if not entirely) tax free, even though all pension contributions and all investment income and gains will have been fully relieved of Irish taxes.

Also, their respective employers are giving them very generous "matches" to their pension contributions. I don't see any reason to leave employer contributions on the table.
 
Last edited:
I agree that it will be challenging for the target date index funds to produce a compound annual return of 3.5% after costs and taxes over the next 30 years. It's certainly possible but it's far from guaranteed.

If I was in the OP's position, I would liquidate the index fund investments and apply the proceeds against the mortgage balance. A guaranteed, cost-free and tax-free return of 3.5% is hard to beat in the current environment.

I also agree that the cash balance looks a bit on the high side. My suggestion would be to retain 6 months of household expenses as a cash reserve and to apply the balance against the mortgage balance.
 
Also, their respective employers are giving them very generous "matches" to their contributions. I don't see any reason to leave employer contributions on the table.

Good point. If your company's contribution is dependent on you contributing a certain amount to the pension fund, then you should contribute the amount necessary to maximise this.

Under current tax rules, the first 25% of each pension pot (to a maximum of €200k) can be taken as a tax free lump sum and the OP and his spouse will have a tax free allowance of €36,000 per annum once one of them reaches 65.

We can argue about that and it may be correct for someone close to retirement to contribute to a pension even if they are getting only 20% tax relief.

However, it's not right for a 37 year old to do so. There is a good chance that you will be paying tax at the top rate before you hit retirement, and you should maximise your contributions at that stage. It would be a financial disaster if you contribute now instead of paying down your mortgage and then find yourself paying tax at 40% and not being in a position to make pension contributions.
 
However, it's not right for a 37 year old to do so. There is a good chance that you will be paying tax at the top rate before you hit retirement, and you should maximise your contributions at that stage. It would be a financial disaster if you contribute now instead of paying down your mortgage and then find yourself paying tax at 40% and not being in a position to make pension contributions.

I see two difficulties with that argument:
  • Firstly, there's an annual limit to the amount you can contribute to a pension scheme and therefore a 60 year old can't simply make up for the fact that he didn't contribute to his pension scheme when he was 37; and
  • Secondly, you are shortening the time during which your contributions can generate income and gains in a tax free environment.
Given the very high taxes on unearned income and capital gains in Ireland this later reason is a particularly strong argument in favour of making contributions to a pension as soon as possible, even if the contributions are only being relieved of 20% tax. It's entirely possible that contributions made to a pension fund by a 37 year old today will remain invested for 30, 40 or even 50 years. The compounding effect of the tax drag on returns over that time period would have very significant impact.

Sure, 20% relief on contributions is not as good as 40% but it's certainly better than nothing! The OP has told us that he doesn't foresee any major increases in their earnings so it's hardly a forgone conclusion that they will ever pay income tax at the higher rate.
 
I thought I'd run some numbers to demonstrate my thinking.

Let's say the OP has a choice whether to contribute €1,000 (pre-tax) to his pension pot as an AVC or to take the post-tax amount of €800 and use this to pay down his mortgage. Let's ignore the boost provided by the employer's matching contribution to his pension for this purpose.

After 29 years, the €800 paid ahead of schedule will result in a saving of €467 in his cost of credit at a mortgage rate of 3.5%. However, the pension contribution would only have to generate an annualised net return of 1.75% (half his mortgage rate) to produce an investment gain of €653 over the same 29 years. Even in the very unlikely event that the full amount drawn down from the pension was taxed at, say, 25% the pension contribution would still "win" in these circumstances.

To put an annualised net return of only 1.75% into context, the annualised return of the S&P500 with dividends reinvested over the 29 years ending 30 October 2015 was 10.16%.

Don't get me wrong, I'm a big fan of paying down mortgage debt ahead of schedule but not at the expense of maximising annual pension contributions.
 
Are you guys saying that in general having a long term investment plan while paying a mortgage is a bad idea (if not on tracker) and that any investment monies should be redirected to mortgage instead?
 
I would agree with that. Paying off debt that's costing 4% per annum generally makes more sense than investing personal monies. Similarly, maxing out one's AVCs generally makes more sense than investing personal monies.

However, I'm hesitant about the wisdom of making AVCs if one is a standard rate tax payer. The PRSI (albeit only to 66) and USC colour things. The time horizon would be key.
 
Are you guys saying that in general having a long term investment plan while paying a mortgage is a bad idea (if not on tracker) and that any investment monies should be redirected to mortgage instead?

They are I think, but I wouldn't agree.
 
They are I think, but I wouldn't agree.

Say I owe €100k on a 25 year home mortgage and I'm paying 4%. Say I have €100k in cash. Why would I not clear the mortgage?

I can lock in a 7/8% return by paying off the mortgage.
 
Say I owe €100k on a 25 year home mortgage and I'm paying 4%. Say I have €100k in cash. Why would I not clear the mortgage?

I can lock in a 7/8% return by paying off the mortgage.

Because in my experience money makes money and I'd be looking at buying property based on the cash, but when everything is tied up in your home you can't do naught.
 
Agreed re: AVC vs post tax investing. But if you have cash available post tax I'm not sure sure mortgage vs invest.

If you say don't invest until mortgage paid off then you'd not start until mid fifties (probably), resulting in not enough time for stock market long term gains?
 
Because in my experience money makes money and I'd be looking at buying property based on the cash, but when everything is tied up in your home you can't do naught.

That's an excellent argument for not tying up too much capital in your PPR but it's not a valid argument for not paying down a mortgage on your PPR.

The annualised return on paying down a mortgage on your PPR is simply the interest rate on the home loan (less any available interest relief), with absolutely no investment costs or taxes.

Would an investment in a BTL produce an annualised return on capital of over 4% per annum over the same time horizon as the term of a PPR mortgage after all costs and taxes are taken into account? It might but it's very far from guaranteed.
 
Last edited:
However, I'm hesitant about the wisdom of making AVCs if one is a standard rate tax payer. The PRSI (albeit only to 66) and USC colour things. The time horizon would be key.

Yeah, I ignored USC/PRSI for simplicity but it wouldn't change the conclusion as USC/PRSI would reduce the amount available to pay down the mortgage by exactly the same percentage as the amount available for the pension contribution.

You're absolutely right that the time horizon and assumed rate of return is key. In my example, I simply chose the outstanding term of the OP's mortgage (29 years) as the time horizon and assumed an improbably low rate of return on the pension contribution of half the mortgage rate. Even on those facts, the return on the AVC contribution by a standard rate taxpayer still came out way ahead.
 
Are you guys saying that in general having a long term investment plan while paying a mortgage is a bad idea (if not on tracker) and that any investment monies should be redirected to mortgage instead?

That's certainly my opinion.

To come out ahead of simply paying down a mortgage on a PPR the return on an investment portfolio, less all taxes and investment costs, would have to beat the rate of interest on the home loan (less any available mortgage interest relief). This will be very challenging given our high mortgage rates (relative to the "risk-free" rate of return on highly rated, short term sovereign bonds) and our high rate of tax on investment income and gains.

We recently had a lengthy debate on another thread on the challenge of achieving a nominal 3% return, net of investment costs, on assets held within an ARF given the expected returns on stocks and bonds at current valuations. Outside of a tax exempt pension wrapper, that challenge becomes immeasurably more daunting.
 
We recently had a lengthy debate on another thread on the challenge of achieving a nominal 3% return, net of investment costs, on assets held within an ARF given the expected returns on stocks and bonds at current valuations. Outside of a tax exempt pension wrapper, that challenge becomes immeasurably more daunting.

......I remember that thread:)
And I have a double :) :) when I see all the references to nominal returns on this thread........whatever happened to real returns and where has inflation gone?! (A dangerous omission!!) - Just kidding.......cryptic message which maybe one or two people will get.

On a more serious note, the math here is flat wrong......I shall leave it as a puzzle/challenge for others to work out. I want to see who has the mathematical gene!! Happy to líon na bearnaí myself, if required!

I thought I'd run some numbers to demonstrate my thinking.
Let's say the OP has a choice whether to contribute €1,000 (pre-tax) to his pension pot as an AVC or to take the post-tax amount of €800 and use this to pay down his mortgage. Let's ignore the boost provided by the employer's matching contribution to his pension for this purpose.

After 29 years, the €800 paid ahead of schedule will result in a saving of €467 in his cost of credit at a mortgage rate of 3.5%. However, the pension contribution would only have to generate an annualised net return of 1.75% (half his mortgage rate) to produce an investment gain of €653 over the same 29 years. Even in the very unlikely event that the full amount drawn down from the pension was taxed at, say, 25% the pension contribution would still "win" in these circumstances.

To put an annualised net return of only 1.75% into context, the annualised return of the S&P500 with dividends reinvested over the 29 years ending 30 October 2015 was 10.16%.

Don't get me wrong, I'm a big fan of paying down mortgage debt ahead of schedule but not at the expense of maximising annual pension contributions.
 
I'd like to follow up but want to hijack OPs make over thread. Maybe I'll start my own thread with my scenario
 
Back
Top