Advice Please?

[Keyboard]

[FONT='Verdana','sans-serif']Age: 31
Spouse’s/Partner's age:

Annual gross income from employment or profession: €56,000
Annual gross income of spouse:

Type of employment: e.g. Civil Servant, self-employed Private Sector

In general are you spending more than you earn or are you saving? Spending slightly more

Rough estimate of value of home €450K
Amount outstanding on your mortgage: €250K
What interest rate are you paying?5%

Other borrowings – car loans/personal loans etc[/FONT]
[FONT='Verdana','sans-serif']Personal Loan 1 - €275 PM – Balance €4,300 [/FONT]
[FONT='Verdana','sans-serif']Personal Loan 2 - €290 PM – Balance €10,500[/FONT]
[FONT='Verdana','sans-serif']
Do you pay off your full credit card balance each month? No
If not, what is the balance on your credit card? €11,000

Savings and investments: No

Do you have a pension scheme? Yes[/FONT]
[FONT='Verdana','sans-serif']I pay 6%, employer pays 8% and I pay a further 10% in an AVC, have been doing this for over two years now. Almost €1,000 per month gets paid into my DC pension. Also have a deferred DB pension worth approx €7K PA (index linked) when I reach retirement age.[/FONT][FONT='Verdana','sans-serif']

Do you own any investment or other property? No

Ages of children:

Life insurance:

What specific question do you have or what issues are of concern to you?[/FONT]
My net take home pay is usually about €2,500 per month after PAYE, BIK and pension contributions etc. My share of the mortgage and bills comes to about €1,000 per month. Loan repayments and minimum payment on CC come to about another €1,000 which doesn’t leave very much and I’ve found myself taking out cash on the CC which is keeping me up near the limit and it’s becoming a bit of a cycle.
I’ve not much opportunity to increase my take home pay at the moment and if anything it has reduced over the last 12 -18 months due to not being eligible for OT and the company not paying any bonuses.
I’ve no extravagances really but am getting a bit worried that I’m broke at the end of each month and miss the occasional windfalls I would get from OT and a yearly bonus.
I suppose I’m looking for advice on how to reduce my monthly repayments whilst still paying off the €25K or so I owe at a reasonable pace. I think I’m perhaps paying too much into my pension(if that’s possible) and should try to reduce the amount and clear the expensive debts first but I think it will be well worth it in the long run.
Releasing equity/re-mortgaging is not something I’d be interested in.
Any thoughts or advice?

 

[Satanta]

I think I’m perhaps paying too much into my pension(if that’s possible) and should try to reduce the amount and clear the expensive debts first ....

Personally (this is subjective, it all depends on your own aims/goals/wants/etc), I tend to agree with this.

You already have a relatively healthy pension set up in place. By reducing it (in the short term) you can free up your monthly cashflow, reduce the expensive debt, get back to being debt free and gain the freedom of not having to worry about the debt (if you've come here posting about it I'm guessing its gotten to the stage where it is worrying you a little).

You have to weigh up the above with the fact that you're losing out on the tax saving (at the higher rate) available from pension contributions, potential (I don't know the exact details of the scheme so might not be an issue) to lose the employer contributions etc.

It's not exactly clear cut, it really comes down to how big a strain the debt is putting on you.


The real issue you need to tackle is what lead to you getting into this situation? You have a very healthy wage, but is your lifestlyle living beyond this? Without tackling this issue, it's near impossible to clear the existing debt as you'll just continue to add more.

 

[shoppergal]

Personally, I think that paying €1000 a month into a pension when you have 25k of debt is crazy. I agree that we need to save for the future but you're leaving yourself tight in the present to pay for that.
Think of the interest you're paying out on that 25k. If you stop the AVC's and throw that 1k a month at your debt as well as the 1k you're already paying you'd be clear of your debt in just over a year. You could then resume your AVC's at a grand a month and have an extra grand that you won't have to pay on debt repayment. You'd still only be 32/33 which is an age lots of people havn't even started thinking of AVC's yet.

 

[Satanta]

Personally, I think that paying €1000 a month into a pension when you have 25k of debt is crazy.

I wouldn't say "crazy", technically it might actually result in a net positive result.

Personally, I wouldn't like to have the debt so from a psychological pov I'd clear it for the additional peace of mind and the short term benefit in monthly cash flow (at the OPs age retirement is a long way off, so short term pain [issues with current monthly cash flow] may not be worth the long term potential [financial] gain - obviously can't say for sure it is a positive result as it would take a very detailed review of the figures).

I assume the figure of €1000 per month is a rough assessment of the total contributions (on €56k, 6% + 8% + 10% = ~1120 per month). The 8% contribution from the employer costs the OP nothing and the other 16% is providing tax relief at the higher rate for the majority of the amount, so a rough cost of around €450 - €500 per month (very rough and quick calcs so apologies if they're off by much).

I would point out that at 31 the max threshold for tax relief on pension contributions is 20%. I'd certainly look to lower the AVC to a level where you are receiving the full margainal rate of relief and avoid tying up much/any funds which aren't receiving the relief (e.g. drop from a total contribution of 24% to 20%, so an AVC of approx 6%).

Having said all that (and assuming that the net financial result is/would be positive - I couldn't say for sure with all the rates etc. varying and the CC balance changing monthly), I still feel that going through hardship now (possibly the wrong word, but certainly short term cash flow issues) while building up a very healthy pension fund isn't a sensible decision. The mental impact of the debt will have negative quality of life issues, worrying about monthly spending will also cause issues and have negative financial implications in the short term etc., while the benefits of the move are completely tied up until retirement.

Who knows what changes will occur in the next 30 odd years, so sacraficing quality of life in the short/medium term just doesn't seem to be worth it IMHO.

 

[rmelly]

Personally, I think that paying €1000 a month into a pension

Where are you getting 1000 on pension per month? He pays 16% - NOT 24%.

As Satanta has said, in reality the pension is costing him just under EUR400 per month.

There have been threads on whether the employer contribution is included in the threshold - I don't think it is.

Having said that I think he needs to cut out the AVC in the short term to at least address the CC debt.

Plus as I'm sure the OP is aware an LTV mortgage should give a better rate if he can switch.

 

[Satanta]

There have been threads on whether the employer contribution is included in the threshold - I don't think it is.

I wasn't 100% sure on that one. Again, I remember a few previous threads on the matter and couldn't remember what the final/definitive answer was.

Having a google, I came across [broken link removed] from Irish Life, it would suggest that it is a combination of the employee and employer...

Contributions can be paid by both the employer and employee. There is no limit to either contribution but tax relief can only be claimed in the bands below.

Maximum combined employee and employer contributions​

Age in tax year Tax relief limit
Under 30 15% of annual earnings
30–39 20% of annual earnings
40-49 25% of annual earnings
50 and above 30% of annual earnings

PRSI relief may also be available.

 

[rmelly]

In my previous employment when I was under 30, I paid 14% incl. AVC, employer paid additional 4% (combined this was greater than the <30 max of 15%) but I got full tax relief on my part. Maybe the employer didn't/doesn't get PRSI relief if exceeded?

 

[NC6000]

I thought that the %s in that table only applied to the AVC contribution. EG. for an under 30 up to 15% of their salary can be a tax-free AVC.

 

[Satanta]

Decided to have a closer look at this. (No offence to IL, but I wouldn't take the couple of lines on the above page as something to stand by).

Having a quick look on the Pensions Board website, they suggested for tax rules relating to PRSAs to check out the [broken link removed].

On page 4 of that document...

2.2 Contributions made by your employer to your PRSA are aggregated with your own contributions for the purpose of calculating the maximum tax-relieved contribution. They are treated for relief purposes as contributions made by yourself.​

For example, if you contribute 5% of your earnings to a PRSA and your employer contributes a further 10%, you are treated as having made total contributions of 15% of your earnings and chargeable on a corresponding benefit in kind of 10%. While technically you are chargeable on the employer’s contribution of 10% as a benefit in kind, where the aggregate contributions (15%) are within the limits for tax relief purposes the benefit in kind charge is negated by the tax relief due to you on the employer’s contribution. ​

In the small number of cases where aggregate contributions made by you and your employer exceed the limits for tax relief purposes in the tax year, the excess may be carried forward and relieved against your tax in future years subject to the overall relevant limits in each year. In a very small number of cases (where the employer pays the full or substantial part of the contributions to the employee’s PRSA and the aggregate contributions exceed the age based limits) a benefit in kind charge may arise in the tax year but the amount brought into charge will be available for relief in future years subject to the overall relevant limits in each year.​

....... ..........

2.5 Where total contributions in any year exceed the limit for tax relief, you can carry these unrelieved contributions forward to the following year. They are then treated as contributions of the following year.​

 

[Satanta]

I thought that the %s in that table only applied to the AVC contribution. EG. for an under 30 up to 15% of their salary can be a tax-free AVC.

No, the threshold relates to the total contributions (employee [regular and AVC] and employer).

 

[Caveat]

Keyboard, have you investigated the possibilty of a 'mortgage break' ?

Not a long term solution, but can maybe help you get your bank balance looking a bit more healthy.

 

[Keyboard]

Keyboard, have you investigated the possibilty of a 'mortgage break' ?

Not a long term solution, but can maybe help you get your bank balance looking a bit more healthy.

Caveat, I think I'll look into that thanks. Paying the mortgage hasn't been an issue since we took it out about 5 years ago.

Do the institutions mind requests for "breaks"? Just wondering if it is something they are typically happy to facilitate or would a request set alarm bells ringing. Would taking a "break" have any impact on my credit rating? It's fine at the moment, I got a copy of my ICB report a couple of weeks ago and it's all OK.

 

[Satanta]

Just wondering if it is something they are typically happy to facilitate or would a request set alarm bells ringing. Would taking a "break" have any impact on my credit rating? It's fine at the moment, I got a copy of my ICB report a couple of weeks ago and it's all OK.

Most banks are happy to facilitate break requests. The terms for each does seem to vary (e.g. some banks only allow one break up a max of six months while others allow multiple breaks for shorter periods etc.). There are a few threads which discuss mortgage breaks on AAM, this recent one might be of interest so you can get an idea of the potential implications. Again, similiar to the pension stuff, the linked thread only looks at the financials of the situation and doesn't take into account the "additional" benefits of clearing debt (e.g. a freeing up of monthly cash flow, improve quality of life not worrying about debt etc.).

As long as the break is agreed with the lender, it will have no impact on your ICB report (e.g. you've agreed the break so no missed payments).

I don't believe it would set any "alarm bells" ringing and as long as the cash is diverted to lower (or even remove some of) the outstanding debt you'll be in a far more attractive position re your credit situation.

[Again, to repeat myself, do try and address the reasons that the debt was built up in the first place. The exercise of trying to clear the debt might be enough on its own to ensure better future financial planning but if you feel it might be of benefit, talking to the likes of www.mabs.ie is always an option to aviod a similiar situation in the future]

 

[Keyboard]

Satanta, Thanks for the advice.

I've cut way back on my expenditure over the last few weeks by not buying items which I simply don't need or will not use and by generally just watching what I spend.

I've applied for a 0% credit card to save me accumulating interest on my existing balance. If I get that it should help.

I made a couple of decisions with regard to work and family life etc which result in me earning less now than I was 12-18 months ago and I suppose I never changed my spending to match. Also, I didn't receive a bonus in work last December which I really noticed. It wasn't just me, a large number of people didn't get anything. That used to come in handy each year for clearing off balances etc.

A couple of tough months ahead but I'm looking forward to getting as debt free as possible as soon as possible.

 

[Satanta]

I've cut way back on my expenditure over the last few weeks by not buying items which I simply don't need or will not use and by generally just watching what I spend.

Fair play, it's a lot more than some of us can say

I've applied for a 0% credit card to save me accumulating interest on my existing balance. If I get that it should help.

Certainly can/could help. Do take care with the terms attached to this (e.g. what happens if you don't clear the full amount by the end of the interest free term? what will the new apr be on any outstanding debt? etc.).

If you can tackle each loan/debt and concentrate on reducing the highest cost ones first to minimise the repayments going on interest you'll soon find the debt dropping.

I made a couple of decisions with regard to work and family life etc which result in me earning less now than I was 12-18 months ago

While financial security is one element that can help with quality of life, it certainly isn't the be all and end all, IMHO. I'd certainly take the view that lifes too short to just worry about money and end up forgetting about enjoying life!

 

[Vanilla]

Who else is paying the mortgage and bills? How does their income affect the overall picture if they are your partner?