Artist with volatile income. Prioritise pension or mortgage?

[Indigo]

Age:
35
Spouse’s/Partner's age:
n/a

Annual gross income from employment or profession:
~90,000

Monthly take-home pay:
~5000

Type of employment:
Self-employed (and in receipt of the artist’s exemption for some of my work so a portion of my earnings (up to 50k) are not subject to income tax currently)

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving ~3k per month

Summary of Assets and Liabilities
Family home worth ~€400k with a ~€230k mortgage
Cash of ~€120k (includes ~2 years of living expenses and money loosely earmarked for house renovations/mortgage overpayment/additional pension contributions)
PRSA of ~€35k and small DB pension

Family home mortgage information
Interest rate: 2.25, fixed until 2024
Overpayment allowed of up to 20% per year

Other borrowings – car loans/personal loans etc:
None. No credit cards.

Other information which might be relevant:
My choice of career has the potential to be very variable income wise (more likely to go down than up). To combat that, I have two years worth of living and business expenses set aside.

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

Up until last year, my priority was buying a house which made everything relatively simple (earn, save, put some money into pension). Now, I don’t know what to prioritise, but being self-employed in a more volatile field makes me feel like I should put financial security above things like renovations (which aren't essential just yet).

Should I prioritise overpaying my mortgage or should I be investing more in my pension? I know it’s generally not recommended to fund your pension where there’s no tax relief, but in a way, with the artist’s exemption, I’m getting the tax relief up front, so my situation might be the exception to the rule.

Thanks in advance.

 

[sm7940333]

By reducing your mortgage & thus your cost base, you less exposed to the impact of your income volatility. So your current strategy of overpaying makes sense. Given you are still making €3k saving with your 2 years of living expenses already saved, could you afford to overpay more?

I know it’s generally not recommended to fund your pension where there’s no tax relief, but in a way, with the artist’s exemption, I’m getting the tax relief up front, so my situation might be the exception to the rule.

I think we need some more insight on your income... Is all of your income subject to volatility? Or is €40k consistent (non-artist) income? €50k is volatile (artist related)?

 

[Brendan Burgess]

Hi Indigo

This is a very interesting question.

With the huge uncertainty over your future earnings, it's not really possible for anyone to give you a definitive answer.

I hate the idea of borrowing €120k at 2.25% to put it on deposit at 0%. That is costing you €2,700 a year.

Social welfare payments in Ireland are very generous but are means tested. If you have €120k in cash and you apply for social welfare, you will have the payment reduced. Your home does not form part of your means so you could be living in a €1m house and still get social welfare.

By reducing your mortgage & thus your cost base, you less exposed to the impact of your income volatility.

This is the key point. If you face an income reduction, but you don't have any mortgage payments to make, you will survive quite well on social welfare. Or if you are not on social welfare, you can rent a room.

So pay down the mortgage with the bulk of your savings. You do need a higher rainy day fund than most people. But still, don't overdo it.

Brendan

 

[Brendan Burgess]

Check out permanent tsb and consider switching to them.

They have very high mortgage rates but they have one very useful facility.

Any overpayment is considered to be a credit against future mortgage payments.

With your current lender, if you overpay by €100k, and then your income collapses and you miss payments, you will go into arrears. With ptsb, the payments are deducted from your overpayment, so you don't go into arrears until the €100k is used up. (Maybe check in writing with your current lender that this is the case.)

If you decide to switch to ptsb - then don't overpay your mortgage until after you have switched. You will get 2% cash back so the more you borrow the better.

Brendan

 

[Brendan Burgess]

If you decide to overpay your mortgage by €100k you do not need to wait until the fixed rate ends. Check the break fee. It is very likely to be a lot less than the interest you would pay over the next two years of the fixed rate.

 

[Brendan Burgess]

Forget about pension contributions for the moment.

At age 35, the future is very uncertain. The artists' exemption could be reduced further and you would find yourself paying top rate of tax. Or your income could increase and that would put you in the top tax rate.

Your priority is to get your cost base down i.e. to clear your mortgage.

Paying €100k off your mortgage compounds by 2.25% every year. That is a very good investment.

When you are older and your mortgage is cleared, it may well make sense to contribute to a pension even if you are getting only lower rate tax relief.

Brendan

 

[Brendan Burgess]

in a way, with the artist’s exemption, I’m getting the tax relief up front, so my situation might be the exception to the rule.

This is very woolly thinking. You are getting the artists' tax exemption, whether you make a pension contribution or not.

If you have some ethical or political view that you should not be getting the artists' tax exemption, that is a separate issue.

You can secure your immediate future by clearing your mortgage. This also secures your long-term future.

Pension contributions only secure your long-term future. You could well get into trouble in the immediate or medium term future.

Brendan

 

[Indigo]

Thanks for the responses, it is really helping to clarify things for me.

By reducing your mortgage & thus your cost base, you less exposed to the impact of your income volatility. So your current strategy of overpaying makes sense. Given you are still making €3k saving with your 2 years of living expenses already saved, could you afford to overpay more?


I think we need some more insight on your income... Is all of your income subject to volatility? Or is €40k consistent (non-artist) income? €50k is volatile (artist related)?

Thanks sm. I see where you're coming from—that makes a lot of sense. I could definitely put additional savings toward overpaying my mortgage. If I stick to the overpayment my current provider allows, I could possibly pay around 100k off the mortgage in the next year and a half. (1st payment before month 12, 2nd at 13 months, and 3rd at 25 months).

Yes, all my income is artist-related and so subject to volatility. It’s been quite stable since I’ve been doing this full time but it’s very hard to predict how this will continue into the future.

Check out permanent tsb and consider switching to them.

They have very high mortgage rates but they have one very useful facility.

Any overpayment is considered to be a credit against future mortgage payments.

With your current lender, if you overpay by €100k, and then your income collapses and you miss payments, you will go into arrears. With ptsb, the payments are deducted from your overpayment, so you don't go into arrears until the €100k is used up. (Maybe check in writing with your current lender that this is the case.)

If you decide to switch to ptsb - then don't overpay your mortgage until after you have switched. You will get 2% cash back so the more you borrow the better.

Brendan

Thanks Brendan. I had discounted ptsb when choosing a mortgage initially (higher rates, etc) but I must look into this as an option. I might be stuck for the present as I’m not even a year with my current lender and I see ptsb might not allow a switch before 24 months. I’ll contact my current lender (FI) to find out exactly how an overpayment is handled by them and check the current break fee, and I’ll check with ptsb if it would be a firm no to a switch this early.

This is very woolly thinking. You are getting the artists' tax exemption, whether you make a pension contribution or not.

If you have some ethical or political view that you should not be getting the artists' tax exemption, that is a separate issue.

You can secure your immediate future by clearing your mortgage. This also secures your long-term future.

Pension contributions only secure your long-term future. You could well get into trouble in the immediate or medium term future.

Brendan

You make a good point regarding pension and not factoring the artist’s exemption into that decision. I’m very grateful for the exemption, it’s been a real benefit to me, and I want to use that benefit to best secure myself financially. That was the angle I was coming at with regards to my pension, but I can see exactly what you’re saying. Securing myself financially now should be the priority. And paying down my mortgage looks like the best way to do that.

 

[Brendan Burgess]

I’ll contact my current lender (FI) to find out exactly how an overpayment is handled by them

They promote their mortgage as flexible and this would be the type of thing a flexible mortgage should provide. I have not heard that they do this, but it's well worth checking.

Brendan