Advice on lump sum vs. pension vs. mortgage based on my situation

T

Thecaddie

Registered User
Messages
15
Age: 43
Spouse’s/Partner's age: 41

Annual gross income from employment or profession: €123,000
Annual gross income of spouse: €50,000 (spouse currently working part time (50%)
Monthly take-home pay € 6,500

Type of employment: Private sector, public sector (spouse)

In general are you:
(a) spending more than you earn, or
(b) saving?
ans: saving

Rough estimate of value of home: €580,000
Amount outstanding on your mortgage: €210,000
What interest rate are you paying? 0.85% (tracker)

Other borrowings – car loans/personal loans etc None

Do you pay off your full credit card balance each month?
If not, what is the balance on your credit card?
ANS: We have no credit card

Savings and investments:
1. €84,000 (just finished 5 year state savings investments)
2. €28,000 (accumulated sum from monthly regular investment of €750)
3. €10,000 (cash)

Do you have a pension scheme? Yes
me: DC current value €375,000 (company 8.5%, me 4%, AVC 15%)
spouse: DB (may have to make AVC's to make up shortfall in years service)

Do you own any investment or other property? NO

Ages of children: 3 children all under 10

Life insurance:
1. Joint life mortgage protection
2. Term life insurance for single life €339,000 (expires when 65, non convertible)
3. Death in service benefit (4x) and income protection (75%) via my employer
4. Spouse has 2 x salary as death in service benefit and income protection (75%) via employer scheme



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

Hi All, I have read many posts on this forum and was wondering whether I could get your views. We have €83K which has just matured from a 5 year state savings investment. I was going to take out another 5 year policy but the return is now so low I am not sure it is wise. I was wondering whether anybody had any thoughts what I should do here?
We are paying a monthly mortgage of €1,800 and an over payment of €500. I also have a DC pension which I am paying 19% of the maximum 25% contribution for my age. I was wondering based on the fact we have a very low tracker (0.85%) is it better to invest the savings, pay off lump sum on mortgage, increase pension or a combination?

We have 3 children so the monthly saver we have (€750) is for any educational needs that might arrive in the future.

Any thoughts appreciated.
 
Just for clarity. Two children are in school and the other child is on ECCE and will ve in school September 2019 so childcare costs are behind us now.
 
@Thecaddie

You look like you are doing pretty much all the right things financially so whatever tweaks you make are going to have a relatively modest impact on your overall position.

If was in your shoes, I would be inclined to use the bulk of the €84k to pay down the mortgage (notwithstanding the low tracker) ahead of schedule. I would leave the mortgage term the same and use the improved cash-flow to increase your AVCs so that you max out your tax relieved contributions.

You would still have a decent liquid cash reserve available to address any emergencies that might arise.

Hope that helps.
 
@Sarenco

Thanks for the response. We were thinking along the same lines. We may pay 75% off the mortgage loan and invest the other 25% ( may post something in the "investments section" for some advice!).

Have you or anybody else of any banks offering incentives for lump payments off expensive (from the banks perspective) trackers? I am with BOI but have not heard of anything but it was muted some years back that banks may be forced to do so.

One last question if you or the other members dont mind. I have a single life cover (term to age 65). It is costing me €44 per month. I was considering changing the policy to a convertible policy to age 80 for the same level of cover €339K. The premium would jump to €90 per month but I thought that this may offer me a chance to leave more for my kids (estate) when I finally say goodbye. As I am 43 now I would need to consoder this now for fear of the cost ballooning out of reach in future years. Has anybody done this or considered it? I have also thought whether it would be better getting serious illness cover?

One final thing that has just come into mind. If I pay a lump sum off my mortgage I am assuming that I should leave my mortgage protection policy as is? Will the balance get left to my estate after the mortgage is paid.
 
@Thecaddie

I personally don't think it makes sense to invest outside a pension vehicle while carrying debt but there are plenty of folks on here that disagree with me on this point.

Do you have any say in how your pension is invested? You might think about maintaining (or even increasing) your allocation to equities in your pension and then keep a chunk in (tax free) Savings Certs. The rates are pretty meagre at the moment - until you compare them with the yields on Irish government bonds with an equivalent duration.

As far as I know, no lenders are giving any discounts for the early repayment of tracker mortgages.

On the life assurance front, I personally think you are bordering on being "over-insured" as things currently stand. I certainly wouldn't worry about holding life assurance after you turn 65.

It might make sense to maintain your mortgage protection at it's current level even if you do pay down your mortgage ahead of schedule. It's pretty cheap insurance and, yes, any proceeds from the policy will form part of your estate regardless of the mortgage balance.
 
@Sarenco

Sarenco said:
I personally don't think it makes sense to invest outside a pension vehicle while carrying debt but there are plenty of folks on here that disagree with me on this point.
Click to expand...

Currently my DC is split between a PRSA (€225k) and the remainder in my current employer scheme (€150k).

I therefore have some flexibility to move between selected funds in the current scheme where I am in equity funds.

The PRSA offers much more flexibility I think.

When you say equity investments are you referring to individual shares and ETF's/funds? Is there a reccomended split?

The balance in state savings would pay 0.98% AER in a 5 year plan
 
@Thecaddie

By equities, I really mean equity funds. I personally don't invest in single stocks but that's a whole other conversation!

When it comes to investing your most important decision is the ratio of equities to fixed-income that you hold. There are different approaches here - some folk just decide on a fixed ratio (say, 60/40) and stick with that for their entire investing life. That's a perfectly valid approach and many just put their entire sum in a balanced fund and leave it at that.

I personally prefer a "glide path" approach where my portfolio becomes gradually more conservative as I approach retirement. Again there are different approaches here but one popular approach is to hold 120 minus your age in equities. So using this rule of thumb, you would currently hold roughly 77% of your portfolio in equity funds, with the balance in fixed-income (bond funds, Savings Certs, bank deposits).

Whichever approach you take, it's important to treat all your investments as a single, fungible portfolio.
 
@Sarenco

Thanks for that. So I assume when you say all investments that means pension, cash, funds outside of pension etc..?

Am I correct in saying that that could mean a pension being 100% invested in equity funds if I held enough outside of pension in cash etc...

For pension I am invested in multi asset funds in the PRSA and equitoes in the active pension. At my age have I got the PRSA invested incorrectly? I am invested in the Standard Life myfolio Active 3 and myfolio market 3. I am not sure if I am being too conservative here?
 
@Thecaddie

Yes, by investments I mean everything beyond what you require for day-to-day expenditure, together with a reasonable cash reserve to address unexpected expenses.

Given current low bond yields/deposit rates, I think it can make a lot of sense to hold cash/State savings products outside a pension while maintaining a high allocation to equities within the pension vehicle. However, I still wouldn't make any investments outside a pension vehicle while carrying a mortgage (which could be considered a "negative bond").

It's important to look at your entire financial position and not just the allocation to different asset classes within a single account. Determining an appropriate allocation between different asset classes is very much a personal decision based on you need, willingness and ability to take investment risk. At your age, you could make a case for having an allocation to equities of anywhere between 60-100%.
 
You must log in or register to reply here.
Back
Top