Family Financial Planning - Advice Needed

Finance_Novice

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Age: 38
Spouse’s/Partner's age: 36

Annual gross income from employment or profession: €80,000 base + ~€10,000 bonus + ~€15k shares + other healthcare benefits
Annual gross income of spouse: €45,000 (€57,000 base but only working a 4 day week)

Monthly take-home pay: €5,500 (after pension contributions, AVC, contribution to stock purchase plan)

Type of employment: Both employed in the private sector

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


Saving

Rough estimate of value of home: €325,000
Amount outstanding on your mortgage: €78,000 (monthly repayment is €356 per month but overpaying by an extra €1,000 per month)
What interest rate are you paying? 2.75% variable

Other borrowings – car loans/personal loans etc - None

Do you pay off your full credit card balance each month? Yes (only used sparingly)
If not, what is the balance on your credit card? N/A

Savings and investments: €75,000 savings, ~€55,000 company shares (APSS and RSUs vesting over 4 years and always sold immediately to reduce exposure to one company)

Do you have a pension scheme? Yes

Me - 10 years DB before moving to DC. Contributing 12% to pension plus employer contributing 8%. DB pension worth ~€9,000 per year at retirement and DC pension fund is currently worth €65,000
Wife - Contributing 7% and employer contributing 5%. Currently worth €55,000

Do you own any investment or other property? No

Ages of children: 2 years old and one on the way in May

Life insurance: Yes for me (3 * salary plus spouse/child pension) but no for wife. Planning to get one for my wife soon too


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

In the near future, our only planned major expense is a new car for my wife costing ~€20,000. She will likely reduce her working hours even further and possibly quit work altogether if we are lucky enough to have a third child. We want to have a solid financial strategy to allow her to quit work if she decides to and still remain comfortable financially (fund our children's education, regular holidays etc.).

1. Our strategy has always been to repay our mortgage as quickly as possible while maintaining our lifestyle but having watched "How to be good with money" with Eoin McGee and following him on Instagram, we are wondering if that is still the right strategy. He suggests that investing into a fund is a better use of excess cash than overpaying the mortgage. I've always hated debt so clearing off the mortgage early would give me peace of mind but only want to do that if it makes sense financially. We know we have too much cash in savings so would like advice on whether it would make more financial sense to overpay the mortgage or invest it our excess cash (excluding saving for a rainy day) into an investment fund?

2. Another question we have is whether my wife should also maximise her pension contributions and should we prioritise this over any other fund investment/clearing the mortgage?

3. Lastly, is my employers 8% contribution to my pension included in my overall 20% allowance or can I increase my current 12% contribution?
 

Brendan Burgess

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1. Our strategy has always been to repay our mortgage as quickly as possible while maintaining our lifestyle but having watched "How to be good with money" with Eoin McGee and following him on Instagram, we are wondering if that is still the right strategy. He suggests that investing into a fund is a better use of excess cash than overpaying the mortgage.

Eoin is just plain wrong. This is such bad advice, that I have created a separate thread for it here:


With such a low mortgage as a proportion of your salary and your house value, you should probably max your pension contributions as a first priority.

Any money left over should be use to clear your mortgage.

You should make sure in particular to max your wife's pension fund while she is still earning. It's not as critical for you, as you will be able to contribute later.

Your strategy of selling your shares as soon as they vest is correct as well.

With both of you working at present and earning more than you are spending, you do not need a rainy day fund. So just make sure you have the €20k necessary to buy the car and use the rest to stuff your pensions and clear your mortgage.

Brendan
 
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Finance_Novice

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Thanks very much for taking the time to reply Brendan :) I'm relieved to hear you say that paying down the mortgage once both pensions are maxed out is the right strategy as it just sits better with me personally.
 
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RedOnion

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6,209
Some personal experience here, so some things I would have done differently which may give you some ideas. I'm a few years further along the path you've mentioned.

We've no mortgage, and my wife gave up work 'for a few months' a few years ago.

What I would do differently if I was to go back a few years in time is to put a lot more into both our pensions, but especially my wife's.

With my wife not working, there's no pension being built for her. I'm of a similar age to you, so there's only so much I can get tax relief on putting into my own pension. If this continues to retirement, we could end up in the higher tax bracket on my pension drawdown, with a limited pension for my wife, so not making the most of tax efficiencies.

Your mortgage is already very manageable, even on your salary alone, so if you decide that one of you should take time off to spend with family, you can definitely afford to do it. Speaking from experience. I would say 'comfortably', but you will need to make some prioritisation choices at times.

What I would do is calculate the maximum that can be back dated to pensions for last year, and make an AVC for that amount. Your wife should increase her AVCs now to maximum that she'll get tax relief on.

3. Lastly, is my employers 8% contribution to my pension included in my overall 20% allowance or can I increase my current 12% contribution?
If it's a PRSA, then the employer contribution is included. Otherwise it's not.
 

Brendan Burgess

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What I would do differently if I was to go back a few years in time is to put a lot more into both our pensions, but especially my wife's.

With my wife not working, there's no pension being built for her

I had not noticed this being discussed before and it seems really important and not many seem to pay attention to it.

It's probably a good policy to balance out the pension fund sizes if one has to be prioritised.

Brendan
 

Finance_Novice

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Thanks RedOnion. I wasn't aware that we could back date our pensions for last year. It would be great to do that as it looks like I wrongly assumed that my employers 8% contribution on top of my 12% was maxing my 20% yearly allowance.

How do we contribute to our 2020 pension fund in a tax free way given our pension contributions and AVCs are deducted directly from our salary by payroll which go towards our 2021 contributions by default? Is it something that we need to talk to our employers about?
 

RedOnion

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How do we contribute to our 2020 pension fund in a tax free way given our pension contributions and AVCs are deducted directly from our salary by payroll which go towards our 2021 contributions by default?
You should have contact details for your pension provider. If not, your HR should be able to help you.

For me, I contact the provider and tell them I want to make a back dated AVC to maximise tax relief. They ask for a copy of my P60 (or whatever it's called now), and they calculate the maximum contribution I can make. They then send me bank account details and a reference number that's unique to me. I transfer the gross amount of money, and they send me a certificate in case I need it to claim tax.

Then, I log into Revenue, and add the details in my tax details for the previous year. They recalculate a balancing statement, and transfer the tax relief back to me within a few days.

Your HR department should be able to help you with the full process.
 

Finance_Novice

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Hi,
Not sure whether to continue this thread considering all our personal and financial details are already posted here or start a new one so Mods can feel free to move to another forum if required.

I have a family member who is sick and it has really raised the question with us about life assurance, income protection and serious illness cover especially for the sake of our children.

I have income protection with my job (6 months full pay and 66% afterwards) and death in service benefit of 3 times my salary. My company also provide a VHI healthcare policy for my entire family. My wife has no income protection or death in service benefit. We have a basic mortgage protection policy too but no other life assurance policy.

After speaking to a broker, we are thinking about:
  • Life assurance equating to 10 years of our combined yearly net salary (~$800k including the death in service benefit that I already have) and also critical illness cover for ~$100k (i.e. 2 years expenses)
  • Income protection for my wife

This works out at ~€200 per month but we have no idea if this is on the high side or if we are over protecting ourselves so hoping to get some more good advice on this site. Is there a normal rule of thumb for protection/insurance policies of this nature?
 

niceoneted

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IN relation to life insurance, when we say a broker he looked at our annual expenses, then he looked at what the income would be if I passed away and the same if my spouse passed away. The advice we got was for me not to take out life insurance ( my job pays out a decent lump and pension for spouse) and the mortgage would be cleared with a lump. It was advised to take out life assurance on my spouse only and the broker calculated the amount he reckoned we needed
 

RedOnion

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After speaking to a broker, we are thinking about:
  • Life assurance equating to 10 years of our combined yearly net salary (~$800k including the death in service benefit that I already have) and also critical illness cover for ~$100k (i.e. 2 years expenses)
  • Income protection for my wife

This works out at ~€200 per month but we have no idea if this is on the high side or if we are over protecting ourselves
Do you have a breakdown of the costs? Income protection premiums are tax deductible, at your marginal rate.


Income protection for your wife doesn't make any sense if the following happens: if you don't have an income, you can't have income protection.
She will likely reduce her working hours even further and possibly quit work altogether if we are lucky enough to have a third child.


How long are the policies being quoted for? For example, I calculated mine to run until my youngest child is 23 in the hope they'll be finished college by then. It works out a good bit more expensive to run them until my normal retirement age.

Personally, I am currently reviewing my critical illness cover. They are very expensive, and pay out in quite limited circumstances - without being too morbid, the newer policies tend to really only pay out on something that you will probably die from. It'd be more beneficial to have income protection in my view.

You mentioned that your company provides a wife/child 'pension' in additional to the 3 times salary life cover. Look into details behind this - it probably provides adequate life cover for you. Your pension will also have an element of payout in addition to this - I can't remember the exact rules, but I think your contributions (plus any growth) pay out to your estate. That's part of the reason I've only got policies running until my mid 50's - by that time there should be a decent sized pension pot.
 

Finance_Novice

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Thanks niceoneted and RedOnion. Some good points that I hadn't considered. To answer your questions below:

We haven't got the formal quote yet but it is roughly €140 per month for the life assurance and critical illness cover for 10 years and €60 per month for income protection for my wife. This is after the tax deduction is taken into account.

Good point about the pension as I forgot to include that. My wife would get a pension of 20% of my salary and my children would receive a pension of 6.67% of my salary each.

I agree that it doesn't make sense to have income protection for her if she quits work and can re-assess if she reduces her working hours.

Does it seems like we are over protecting ourselves here as it seems quite expensive but then again, I have no idea what are reasonable rates for this?
 

RedOnion

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We haven't got the formal quote yet but it is roughly €140 per month for the life assurance and critical illness cover for 10 years and €60 per month for income protection for my wife. This is after the tax deduction is taken into account.
That all looks very expensive, unless one of you have an underlying health condition? I'll dig out details of my policies to give you a comparison.

Your wife can only get very limited income protection. I think the max is 75% of her salary, less the illness benefit amount for a single person. So it'd be only a bit over 20k per annum.
 

RedOnion

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Details of my life covers, etc. Just posting for price comparison.

Life cover / critical illness:
Me: 100k lump sum on death. 125k on specified illness.
Wife: 100k on death, 60k on specified illness.
This is a dual-life policy.

We were 36 / 37 when policy was put in place, so very similar to OP, and they run for 24 years.
Policy is with New Ireland, and costs 95.00 per month (including stamp duty). This was arranged through a broker, so their commission is factored in. (The specified illness element is c. 75.00 per month).

Income protection:
As my wife isn't working, income protection is for me only. It only kicks in after 26 weeks (my work pays full salary for 26 weeks).
It runs until I am 60, pays out 1,281 per week (increasing by 3.5% per annum). And it costs 101.17 gross (I get tax relief on that).
This is with Friends First / Aviva, and again was arranged through a broker.
 

RedOnion

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In terms of how much insurance you might need. These are just my thoughts (as I said, I'm reviewing something similar myself at the moment).
This might sound morbid, and matter of fact, so apologies in advance for the tone.

Firstly, look at what happens if one of you die. This is the most straight forward.

If you die.
  • Mortgage will be paid off in full.
  • There'll be a lump sum of 3 times salary (I'm assuming this is base as this is usually the case - the wording is normally 'pensionable salary'). That's 240k.
  • There'll be another lump sum based on your pension contributions.
  • There'll be a work 'pension' paid to you wife / children for a period, usually until children turn 18. 16k per year for wife, and 5,400 per child per annum.
  • Your wife will be eligible for widows pension.
You probably don't need any additional life cover.

If your wife dies.
  • Mortgage will be paid off in full.
  • You will receive widowers pension.
  • There'll be a small payout from her pension.
  • Looks like that's all?
You would need to continue to work.

You should get additional life cover for your wife. At the very least, I would suggest that you should have enough that you can afford to take at least a year off work to be with your children.


Now the more complex scenarios.

What if one of you has a serious illness? This is where is gets difficult to think about what you would want to be able to do in various circumstances, particularly where there is a long illness.

Say for example if your wife became ill. Your work most likely won't pay for you to take extended time off to spend time with her and your family. But if you became ill and couldn't work, your sick pay from work would likely provide enough income for the family so long as you didn't have massive medical bills.

How long does your work pay sick leave at the 66% rate? Is it just 12 months?

I'd be inclined to suggest that you get specified illness benefit cover for your wife.
And possibly income protection for yourself to kick in after your work would stop paying.
 

Finance_Novice

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Thanks a million RedOnion for the detailed replies. This is exactly what I was looking for and I really appreciate it.

That all looks very expensive, unless one of you have an underlying health condition? I'll dig out details of my policies to give you a comparison.
We have no major underlying health conditions.

Policy is with New Ireland, and costs 95.00 per month (including stamp duty). This was arranged through a broker, so their commission is factored in. (The specified illness element is c. 75.00 per month).
Just to clarify whether the total life cover and critical illness cost for you is €95pm (which includes €75pm for critical illness) or is it €95pm for the life cover and an additional €75pm for critical illness (i.e. €170pm in total)?


There'll be a lump sum of 3 times salary (I'm assuming this is base as this is usually the case - the wording is normally 'pensionable salary'). That's 240k.
Yes you are correct as it is 3 * pensionable salary rather than just 3 * salary.

How long does your work pay sick leave at the 66% rate? Is it just 12 months?
I believe my sick pay with work at 66% is indefinite as I had a colleague that was out sick for 2 years and he was never cut off. I will clarify that with HR though.

There'll be another lump sum based on your pension contributions.
Regarding the lump sum based on my pension contributions, would my wife get all my contributions tax free? I assume my employer contributions would not be included.

Overall, I think what you are saying makes sense. My cover through work seems pretty good but we definitely need to improve on my wife's cover. I really like your strategy about taking out the policy until your youngest is 23 and relying on pension after that. We are now both maxing our pension contributions so would hope to have a decent fund by that age. Would you agree that it makes more sense than taking out a 10 year policy and then renewing in 10 years time at a significantly higher cost?
 

RedOnion

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Just to clarify whether the total life cover and critical illness cost for you is €95pm (which includes €75pm for critical illness)
Apologies, the above is the situation.
Life cover is c. 20 per month, and critical illness is 75.
Personally I think critical illness is expensive, and there is an ever decreasing list of illnesses that new policies actually cover.

My own aim is to build up a nest egg, and potentially cancel this element of cover in a few years.

Regarding the lump sum based on my pension contributions, would my wife get all my contributions tax free? I assume my employer contributions would not be included.
My understanding is your contributions, and any growth, can be paid out tax free.

Your death in service and the pension to your family are all linked to your work pension. Your HR should be able to provide you with a pension booklet that will detail it all for you. One of those things you likely ignore until you start looking specifically at it.

Would you agree that it makes more sense than taking out a 10 year policy and then renewing in 10 years time at a significantly higher cost?
Personally, I think so. You can cancel it after 10 years if your circumstances change.
There's no point taking income protection that'll only pay for 10 years for example - if something happens, you can't extend it if you're already drawing it.
 

cremeegg

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Thanks very much for taking the time to reply Brendan :) I'm relieved to hear you say that paying down the mortgage once both pensions are maxed out is the right strategy as it just sits better with me personally.
While I agree with the advice here, what about the €75k in savings. I suggest that once you are maxing out the pension you use this to clear the mortgage.

You will get an after tax return 2.75%. And you do not appear to need a rainy day fund.
 

Finance_Novice

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Thanks RedOnion. Your posts have really given us food for thought and will probably take most if not all of your suggestions.

While I agree with the advice here, what about the €75k in savings. I suggest that once you are maxing out the pension you use this to clear the mortgage.
Thanks cremeegg, that is more or less the plan. From our savings, we will spend around €20k on a car for my wife. We also need to consider my wife's maternity leave where she doesn't get full pay. I also have a family member who is unfortunately sick so want to hold a bit of cash back in case they need financial help. Any further excess will go against the mortgage.
 
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