Advice re whether to make an AVC

J

Johnny Lawrence

Registered User
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1
Hello,

I am 41. I needed to stop my AVCs for all of 2020 because I was trying to fund a significant renovation of my home. That's finished now. Outside of my mortgage, which I'm comfortable with, I have some other debts related to the refurb job. I owe the Credit Union €58,000 plus €18,000 (both at 10%) and I owe Bank of Ireland €18,000 (the rate is 7.5%). I also owe €27,000 on a 0% PCP deal.

I have €300,000 in my pension fund and between my employer and I there's around €40,000 a year going into the fund. It's invested in Zurich's Global Equity fund at a cost of 0.45% a year.

I'm about to complete my 2020 tax return and I have €20,000 saved. I have scope to make an AVC for 2020 of around €20,000 which will cost me €12,000. I'm on the fence about whether to clear the €18,000 Credit Union loan now or to do the AVC. If I don't do it by 31 October, I've missed out on a year's contributions. I would keep the €8,000 that's left for emergencies pending me being able to build up my savings again.

Using the money to clear the loan instead might seem the wise thing to do but I have two very good guaranteed bonuses coming in December 2021 and December 2022. With that money, I'll be able to clear the Credit Union loans, the Bank of Ireland loan, the PCP finance, set aside some money for emergencies, and pay down my mortgage a bit.

If I had that money now, I'd use some of it to do the AVC, but I don't. So basically I'm not sure what to do! Your help would be much appreciated.

Thank you,

John
 
Essentially you have the guts of 100k debt costing around 10%. So taking an AVC and saving 8k will ensure the debts costs you around €8000-€8300 for the 10 months period remaining this year.

Is the AVC worth that? Not 100% sure how to value that, but I do think funds are far from a safe bet this year.

My instinct would be to pay down debt. All things considered paying off debt which is costing 10% interest is unlikely to ever be a major error in my experience.
 
presidenttttt said:
Essentially you have the guts of 100k debt costing around 10%. So taking an AVC and saving 8k will ensure the debts costs you around €8000-€8300 for the 10 months period remaining this year.

Is the AVC worth that? Not 100% sure how to value that, but I do think funds are far from a safe bet this year.

My instinct would be to pay down debt. All things considered paying off debt which is costing 10% interest is unlikely to ever be a major error in my experience.
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I don’t think your maths are right there. Putting €20k into the AVC only costs him €12k, so it’s the interest on that €12k that’s relevant. So basically €1,000 for 10 months.

Even though the OP “only” has €300k in his fund, the €2m Standard Fund Threshold will probably be any issue. €300k invested in global equities for 24 years with at least €40k being clipped in each year probably smashes through the threshold. That’s a consideration.
 
Others can advise better but maybe it's also worth considering what your outstanding mortgage balance is, ie may be better to focus on that going forward rather than paying AVCs... Also are you getting a good mortgage rate considering loan to value... Again it could be a prudent financial exercise to shop around if not.
 
presidenttttt said:
Essentially you have the guts of 100k debt costing around 10%. So taking an AVC and saving 8k will ensure the debts costs you around €8000-€8300 for the 10 months period remaining this year.

Is the AVC worth that? Not 100% sure how to value that, but I do think funds are far from a safe bet this year.

My instinct would be to pay down debt. All things considered paying off debt which is costing 10% interest is unlikely to ever be a major error in my experience.
Click to expand...
I would pay down the debt. You never know what's around the corner, we are living in strange economic times, regardless of which sector you are working in.
 
Starting with €300k, assuming a retirement age of 65, using your €40k annual contribution, and assuming an annual return of 6% from your all-equity approach, your fund would be worth €3.25m at retirement.

That’s obviously far in excess of the current Standard Fund Threshold of €2m and would leave you with a Chargeable Excess Tax liability (i.e. penalty) of €500k.

An annual return of 4% gets you to €2.33m.

So you’re on track to be in CET territory.

Of course, the rules may change and of course returns aren’t linear or guaranteed.

And who’s to say you’ll be in a position to continue working or contributing, which might be an argument for making the AVC. Plus doing it now should mean having to do less later on.

So...I’m not sure. On balance, I feel that not making the AVC is the right move, but I’m not 100% convinced.
 
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