Key Post Continue with AVC's or pay extra off buy to let mortgage?

Duke of Marmalade

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Lol Marc! That is tremendous..You guessed correctly on the house value, about €100k...based on what I've learned this bank holiday I'll make a move to reduce my avc contributions to the minimum, say €50 p/m and arrange to pay an extra €600 p/m off the mortgage.
You guys are top class. There is one other thing but I'm afraid to mention it because Brendan might tell me off for not saying it at the start...We have another investment property in Dublin in negative equity as well. Bought for €460k with a mortgage of €360k, interest only for 5 years, now on repayment but thankfully on a tracker. This means the payments are now 1750p/m at the moment with a rental income of 1300p/m...The reason I haven't been as concerned about this one is the tracker. I know I'm dumping hundreds a month to keep it going but what the hell, I'm o e of many. In a perverse way I'm more exorcised by the 120k variable rate property, deal with that and then look at the big one. I'm at leased soothed by the prospect that the interest rate can't go too mad on the tracker...Of course some genius's are suggesting that the government should put a levy on trackers as they are "not fair"..Dear o dear!
back you really have two separate issues. The first is should you keep lashing it into your AVCs? I think you have arrived at the answer to that one which is right for you, though there may be a case to put money into your wife's AVCs.

The second issue is where should you put the cash you would then have available for investment? You have rightly identified that paying off your variable mortgage could be a good "investment", I don't think you can get any better without taking risks. Definitely do not pay down your tracker. That is because it can never be better to pay down your tracker versus your variable. Now when you have paid off your variable then the issue of whether you pay down your tracker comes on the radar.

Finally, I hear what Marc is saying about using your CGT losses, but believe me I know from experience that it is hard to get a suitable fund which is in the CGT net. I don't know the first thing about property but it seems to me that your best prospects for utilising your CGT losses is to stick with the property you have as any growth from now until its original purchase price is in effect CGT free. Certainly to sell your property at a loss and move into conventional funds is not good tax planing.
 

Brendan Burgess

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44,659
Hi back

The fact that you have a cheap tracker on another property sways me even further towards paying down the SVR mortgage as much as possible.

You have your own home and two investment properties which is probably too much property. So you should aim to sell the SVR property. I prefer the Duke's idea of waiting until the property increases in value to the purchase price.

After you have paid off or sold the investment property you can redo the calculations on the tracker investment. My gut feeling is that you should not pay this off early, as the net cost of borrowing must be very small - probably less than 1%.

Don't do anything which increases the risk of a default on the tracker. You could lose the tracker rate. Given your financial position, this is unlikely. But by paying down the SVR mortgage quickly you will be improving your actual cash flow. This is not the time to be putting money into a pension scheme you can't touch.

You need to look at the keep or sell decisions separately. In short, you are getting €6,000 a year on a property worth €100,000. That is a reasonable return. Any gain up to €68,000 will be free of CGT. If you have a good, hassle-free tenant, you probably should keep it. But be prepared to sell it if the situation changes. You need to get rid of the negative equity to be sure to be able to sell it.
 

Brendan Burgess

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44,659
There is one small other factor to be considered, but I don't think it really affects the overall decision.

The lender of the cheap tracker mortgage may, at some stage, offer a deal to repay it early. This argues again for not locking money away in a pension scheme. If you pay off your SVR mortgage instead, you won't be able to access it but at least your commitments will be lower.

If there is talk of a scheme for early repayment of trackers, you should stop overpaying the SVR and keep the cash available to take advantage of any such deal. I think that the chances now are too remote to stop you paying down the SVR.

You might ask the SVR lender to treat the additional payments as payments in advance, so that if you need to take a payment break later, you would be allowed to do so.
 

backothehill

Registered User
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28
That sounds good.Im all set to go online to my avc account online tonight when I get home. I'll adjust my contributions down to say, €100 p/m from €1200p/m.
When that begins to be reflected in my salary I'll get onto ICS and arange to top up my payments on the mortgage by €600 p/m.This will even leave me with an extra €49 in my pocket at the end of the month.
Great stuff Brendan, thanks to You and the others on here.
 

meadow

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48
If the government reduces the tax relief to 30%, it will not be attractive to higher rate tax payers who will be getting tax relief at 30% on the way in only to pay 54% on it on the way out. .

Hi Brendan
Can you explain this as its something I have been confused by ?

On the way out, I assume this means either buying an annuity or taking a cash lump sum.

Assume for the moment, you buy an annuity, then as I understand this would mean taking an annual pension payment based on the size of the annuity lump sum value.

Assume for this example the annual pension payment you receive from the annuity is 30k.

Is this not subject to the standard rate of tax of 20% ? or are you saying all income from annuities is taxed at the higher rate of 54% regardless of size.
 

Brendan Burgess

Founder
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44,659
Hi meadow

Your pension payment is subject to the same tax as any other income.

If you have no other income, and you have a small pension, then it will be tax-free.

For people like the OP who will have big pensions, big savings, and who will have used up their €200k tax-free lump sum, any further contributions will be taxed at the top rate.
 

Duke of Marmalade

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3,398
Hi meadow

Your pension payment is subject to the same tax as any other income.

If you have no other income, and you have a small pension, then it will be tax-free.

For people like the OP who will have big pensions, big savings, and who will have used up their €200k tax-free lump sum, any further contributions will be taxed at the top rate.
Just for avoidance of doubt, on figures presented OP does not have capacity for a 200k tax free lump sum. His salary is 70k. 1.5 times this is 105k, that's the most he can take by way of lump sum and under current rules it is tax free.
 

backothehill

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That's how I see it as well Duke. Of course while my salary is 70k now, I have about 12 years untill I hit 65 the retirement date for my company pension.i am hoping that over that period we may see a return to some increases in salary that may mean my 1.5 times for my lump sum could approach the 200k in question.
 

Brendan Burgess

Founder
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44,659
The Key Point is not to fund beyond the €200k, or in your case €150k.

If the rules change before you retire, you can start contributing again.
 

backothehill

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Sound Brendan, I did that today, reduced the avc contributions to €100p/m down from €1200p/m. Just to keep it ticking over while these levy's are been taken & to cover fees etc.
 

Marc

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1,479
Finally, I hear what Marc is saying about using your CGT losses, but believe me I know from experience that it is hard to get a suitable fund which is in the CGT net. I don't know the first thing about property but it seems to me that your best prospects for utilising your CGT losses is to stick with the property you have as any growth from now until its original purchase price is in effect CGT free. Certainly to sell your property at a loss and move into conventional funds is not good tax planing.

Duke,

As usual, you are correct in your assessment here. It has taken us over 5 years of development and thousands in tax and legal fees to develop our Separately Tax Managed Portfolios to "harvest" CGT losses effectively.

So, I would tend to agree with your assessment that a typical DIYer might actually be better off staying with their original "bad investment" rather than risk making matters worse.

http://wealth.goldcore.com/blog/do_you_have_capital_gains_tax_losses
 

backothehill

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28
Hi all, still waiting for my avc reduction instruction to be reflected in payroll. Another thought came into my head last night. Michael Noonans scheme whereby 30% of the value of an avc fund can be withdrawn as a once off.This is availible for the next three years. Marginal rate tax would have to be paid on the amount, in my case 42%.
So say if I was to withdraw 60k and pay 42% = €25,200 leaving me with €34,800.
I know it's a dose having to pay the tax but there is no mention of clawing back the Prsi relief I would have received on the contributions in previous years.
Just thinking if I paid off that €34k on the nuisance variable mortgage would it be a good move for me?
 

LDFerguson

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4,268
Hi all, still waiting for my avc reduction instruction to be reflected in payroll. Another thought came into my head last night. Michael Noonans scheme whereby 30% of the value of an avc fund can be withdrawn as a once off.This is availible for the next three years. Marginal rate tax would have to be paid on the amount, in my case 42%.
So say if I was to withdraw 60k and pay 42% = €25,200 leaving me with €34,800.
I know it's a dose having to pay the tax but there is no mention of clawing back the Prsi relief I would have received on the contributions in previous years.
Just thinking if I paid off that €34k on the nuisance variable mortgage would it be a good move for me?

Hi backtothehill,

I'm catching up on interesting threads and this one is certainly interesting. :) I hope you're still around.

Looking at your position, I'm thinking: -

  • You have already contributed enough in AVCs to "max out" your tax-free lump sum at retirement to €200,000 and this is only if your salary by then is €133,333 or more - 1.5 times rule. That's a strong increase on your current salary. Annual increases of 3% for the next 12 years would have you on €100,000 by 65. Anyway, I'd agree with all previous comments about reducing or stopping any future AVCs.
  • Let's say you do withdraw €60,000 now - you'll have €140,000 left over. If we assume a 4% annual growth on the remaining €140,000 for 12 years, we're back to €224,000 anyway, so the AVC can still fulfil its purpose of maxing out your tax-free cash.
  • Looking at it this way, I'm inclined to think that you may be one of a fairly small group of people for whom the early withdrawal of AVCs makes sense. Yes it's a sickener to pay 41% tax on the withdrawal, but you don't pay PRSI or the USC on it. Assuming you were always a high-rate taxpayer, you'll have received high-rate reief including PRSI relief on the way in. So you're probably doing a bit better than breaking even. And you'll have got tax-exempt growth on the funds, so hopefully you're ahead.
Cheers,

Liam
 

backothehill

Registered User
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28
Thanks Liam. Yes I have submitted the paperwork about a week ago to withdraw the 30% from my avc fund.My intention is to use the circa 30k to reduce the amount owing on a nuisance variable rate buy to let mortgage.
Originally 129k, now down to about 123k.
Monthly payments are €980 p/m.
I will ask the bank to reduce the monthly payment and keep the term length. They have led me to believe that this will mean paying about 700 ish per month.
Once that is established I will continue to overpay by making the total payment about €1100 per month (700 ish + 400 ish).
This will be affordable as I am up €708 per month by virtue of stopping my avc payments of €1200 p/m.
We will see, no doubt the budget will throw another couple of curve balls at us evil amateur landlords.There is no way they are going to let us get away with the finishing of the €200 nppr charge.
Thanks again for Your interest.
 

Bronte

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14,165
We will see, no doubt the budget will throw another couple of curve balls at us evil amateur landlords.There is no way they are going to let us get away with the finishing of the €200 nppr charge.
.

I'm not so sure about this as so many landlords are stuggling and the property market is non existent outside Dublin. Plus politicians cannot resist interfering in the property market, so they might actually decide on some kind of stimulus/incentive to try and get it moving again. They did so last time with the CGT changes.
 
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