Advice on savings and retirement

T

Tuscany

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Age: 59
Spouse’s/Partner's age: 50
Annual gross income from employment or profession: 85,000
Annual gross income of spouse: Nil
Will return from career break in next couple of months worksharing; expect salary of about 23,000 based on 50% job sharing.
Household income varied in recent years from roughly 130k to 108k to 85k currently.

Monthly take-home pay: Currently 4,000; expect this should rise to 5,400 approx when spouse returns.

Type of employment: e.g. Public Servants

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

Rough estimate of value of home: 380,000.

Amount outstanding on your mortgage: Nil

What interest rate are you paying?

Other borrowings – car loans/personal loans etc Nil

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: approx 500,000 in bank and credit union
Do you have a pension scheme? Yes, both Defined Benefit

Do you own any investment or other property? No

Ages of children: Nil

Life insurance: Nil

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

We are looking for advice please about better use of our savings and also if we should be doing something to boost retirement benefits.

Savings
Savings are doing little for us currently and risk losing value over long term. We are reasonably good savers; however, we got money through an inheritance which accounts for a portion of our savings. Will be using them to supplement pension in future. I’m aware we’re not well diversified as all assets other than house is in cash. Risk appetite is lowish & lack knowledge on how to proceed regarding shares or funds.


Retirement (Me)
Retire Age 60 just under 40,000; lump sum of about 120,000
Retire age 63 (full service) 42,500; lump sum of about 127,000

Probably will retire before I am 63 – no firm view really yet.

Spouse
21 approx years’ service. If works till 60, will only have around 25 years approx.
May take another career break when I retire.

Retirement
Would plan to travel & spend a portion of the year living abroad. My pension would be a lot less than income in recent years. If anything happened to either of us, especially me, spouse’s pension income (50% of pension) would be low. Purchasing service looks to be very expensive for spouse.

Questions
  • We would welcome advice if we should be making better use of savings.
  • Is it a good idea to use income/savings to boost income in retirement.
  • Are AVCs a good idea for spouse immediately on return to work?
  • Are they an option if somebody isn't working?
  • Should I consider them; If I started AVCs and then worked until nearly 63 would they be of any benefit?

Thanks for any suggestions, from a first-time poster.
 
I would have thought that, on the face of it, purchasing notional service for your spouse would be the best option.

When you say purchasing service looks very expensive, could you post some numbers?

You already have an awful lot of cash on hand and that’s only going to increase when you get your lump sum.

Other than purchasing notional service, could you spend money on your house to make it more energy efficient?
 
I don't know how buying service works. I presume you get tax relief on it just like ordinary pension contributions?

If she is earning €23k , it is taxed at 20%.

Is there a risk that pension contributions now would get only 20% tax relief, but end up being taxed at 40% when you draw it down on retirement?

If so, would it make more sense for you to make the contributions and get 40% tax relief on them?

Any money left over should be invested in the stockmarket for the long term.

Brendan
 
Thanks, Sarenco and Brendan.

The cost of purchasing 8 years’ service, was around 150 euro per week, until age 60. That’s a gross figure.

We thought that it was expensive for the likely benefit. 8 years would give an additional 8/80 of retiring salary on pension which amounts to about 4,500 per year (on current salaries). Lump sum would be tax free and would rise by 13,500. Another issue was that in the event of early retirement, under the cost neutral scheme, the pension and lump sum could be further reduced by around 10/20% depending on her age of retirement.
Brendan, under, the scheme I can’t buy service for her.

That is why we were wondering if AVCs might be a better option but we haven’t got the costs on those yet.
 
Tuscany said:
The cost of purchasing 8 years’ service, was around 150 euro per week, until age 60. That’s a gross figure.

We thought that it was expensive for the likely benefit. 8 years would give an additional 8/80 of retiring salary on pension which amounts to about 4,500 per year (on current salaries).
Click to expand...

Gross cost is €150*52*8=€62,400. With 20% tax relief that is €52,000

With benefits it's a bit trickier. Female life expectancy at 60 is 25 years. There is a small chance you will outlive her and draw a spouse's half pension, but it's not likely as you're a man, and already older*. So let's add on 2 years.

So expected gross benefit is (8/80*46,000*27)=€124,200 (pension) and (8/80*3/2*46,000)=€6,900 (lump sum).

So in expected nominal terms you will take out 2.5 times what you put in. That's before you account for likely indexation of pensions which makes it more valuable. I think this is a really good expected return. It's a no brainer given you have half a million sitting on deposit earning nothing. Buy as many years as you can.
 
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Tuscany said:
Brendan, under, the scheme I can’t buy service for her.
Click to expand...

Hi Tuscany

I wasn't suggesting that. I was suggesting that as a couple, you might get a better return on your investment if you contribute to your own pension scheme.

Brendan
 
Thanks for the feedback and steering me towards purchase of service which we were not really looking at.

Me:
It seems that I can buy over 2 years and each year costs about 27,000EUR pre tax relief (17,000 after tax, I reckon). That would give about 1,000 per year on pension and just over 3,000 on lump sum. So, using variation of coyote’s formula, I think that for investment I might get a reasonable investment without indexation. The key of course is that my worked service plus purchased would not exceed 40 years, otherwise purchased service is wasted. To pursue this, I’d need to decide when I plan to retire.

Spouse:
This would be clear-cut, I think, if she worked until 60.

Spouse might take further career breaks (but then there would be no tax benefit as she would have no salary) but that would not seem to be too serious. I’m presuming that people can purchase service on a career break; I need to confirm that.

I think if she chooses retirement under cost neutral scheme, at some stage, the situation becomes complicated. On the main thread comparing Buying v AVCs, it refers to risks in purchasing due to reductions by not working until 60 - due to ‘loss’ of years and also actuarial reductions due to early retirement. I think that the return on investment referred to by coyote could then be somewhat lower. Coyote, would you be good enough to give your opinion please if the cost neutral impact would alter your advice or is it still a ‘no brainer’ eg if somebody retired for example at 55 on 78% of pension and 91% lump sum approx.

The interaction between purchase of service and the cost neutral scheme seems complicated. Are people going to advise me to consult an independent pension adviser on this, if they exist; not underestimating the expertise of people on this website.

Thanks again for your responses.
 
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