Increase Pension Contribution or Consider Buy to Let

[Maigheoabu]

Increase Pension Contribution or Consider Buy to Let​

Age:
37
Spouse’s/Partner's age:
36

Annual gross income from employment or profession:
€82,000
Annual gross income spouse:
€13,000 (Part time) no child care costs as a result.

Type of employment:
Both private sector employees

Expenditure pattern:
Saving. I try to keep a good handle on household budget and total yearly expense work out around €4,500 a month which includes holidays, kid activities, health insurance, cars and all the essentials).

Rough estimate of value of home
E600,000 (Forever Home)


Mortgage on home
Zero

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
Currently don’t have a credit card

Savings and investments:
€20,000 current account rainy day savings (contributing €500 per month)

€12,000 with Standard Life in world equity fund (AMC of 0.9% and allocation rate of 101%) for college fund for kids (contributing €500 per month)


Do you have a pension scheme?
Yes Current Value €90,000. ER matching contributions and also making AVCs

Spouse has a pension fund of €20,000, however, is no longer making contributions.


Do you own any investment or other property?
No.

Ages of children:
3 under 5

Life insurance:
4 times salary under pension scheme

1 times salary under another arrangement

What specific question do you have or what issues are of concern to you?
I am currently considering stopping the monthly payments to the rainy day fund and reducing contribution to college equity fund to increase AVCs to maximum allowable for my age. If I did so there would be a total of around €20,000 per annum in contributions going to my scheme. Spouse is unlikely to be in a position where she works full time in the future so will not be funding towards her pension.

The alternative options are to stick with current approach or save for deposit for BTL investment. It is likely we could be given an additional €20,000 to assist with deposit for a buy to let of needed.

We currently have 2 cars on the road with a combined value of €18,000 and I save €300 towards depreciation. Wife thinks we should upgrade car significantly and use the €300 month towards loan for a new car. Personally, I think cars are the biggest waste of money possible and appreciate it if anyone has any views of how much should a household like ours spend on cars a month?

I would also appreciate thoughts on how much life cover we should have place? Wife currently has none.

 

[noelÓm]

Hi Maigheoabu,

Rough estimate of value of home
E600,000 (Forever Home)

Mortgage on home
Zero

This is a huge head start. Most married couples in their 30s are either struggling to qualify for a mortgage or just beginning to pay one down. You are already quite well off.

Do you have a pension scheme?
Yes Current Value €90,000. ER matching contributions and also making AVCs

Spouse has a pension fund of €20,000, however, is no longer making contributions.

These are very light, but you are still young and can start contributing heavily now.

Expenditure pattern:
Saving. I try to keep a good handle on household budget and total yearly expense work out around €4,500 a month which includes holidays, kid activities, health insurance, cars and all the essentials).

Expenditure of €54,000 is high given that you don't have a mortgage to repay. You are only saving about €13,500 a year by my calculations or about 20 per cent of your net income. You have young children, so there will be things you can't do without. But be sure that you aren't living a lifestyle based on the joint income you used to have. If you can lift the €13,500 to closer to even €20,000 per annum (30% of net income), that will make paying for college and funding your pensions much easier. A lot of people in their 30s pay 20-30% of their net income on mortgage principal and interest, and some pay even more. €20,000 savings per annum is an achievable target for you.

Spouse is unlikely to be in a position where she works full time in the future so will not be funding towards her pension.

Is there a good reason for this? What happens when the children start school? Having one parent out of work or working part-time is a luxury. You can probably afford it, but it puts a lot of pressure on you to provide for today and save for tomorrow.

I would also appreciate thoughts on how much life cover we should have place? Wife currently has none.

Five times salary is good coverage for you. Your wife doesn't bring in much presently and, were they to die, you would likely get a widows' pension of about €13,000 per annum anyway. The question is whether your costs would escalate in this scenario (e.g., childcare) and/or your income would fall (e.g., because you have to work fewer hours or switch job). A lump sum insurance payout might help, so I'd think about it if the price was right. But you are best placed to now how you would manage day-to-day. The alternative is self insuring by keeping a large pile of cash and financial assets outside of a pension that can be sold as needed.

I am currently considering stopping the monthly payments to the rainy day fund and reducing contribution to college equity fund to increase AVCs to maximum allowable for my age. If I did so there would be a total of around €20,000 per annum in contributions going to my scheme. Spouse is unlikely to be in a position where she works full time in the future so will not be funding towards her pension.

The alternative options are to stick with current approach or save for deposit for BTL investment.

€32,000 is an okay emergency cash reserve. I would prioritise pension contributions right now. The tax treatment of contributions, investment gains within the pension, and the drawdown of pension income are all quite favourable. I would max out income tax relief on pension contributions instead investing in a BTL. And if the contributions are done through your payroll, then you are basically hardwiring in saving into your monthly finances and won't get the temptation to spend the money.

We currently have 2 cars on the road with a combined value of €18,000 and I save €300 towards depreciation. Wife thinks we should upgrade car significantly and use the €300 month towards loan for a new car. Personally, I think cars are the biggest waste of money possible and appreciate it if anyone has any views of how much should a household like ours spend on cars a month?

If it makes sense to replace older cars, then do it. But keep it economical. And ideally without resorting to expensive credit. You really don't need to be spending more money on luxuries like high spec new cars.

Prioritise what you care about, which seems to be your children's education and your family's financial security in future.

 

[moneymakeover]

The depreciation saving makes perfect sense

When the pot reaches a certain size you can trade up

 

[Gordon Gekko]

Saving €13,500 is more than enough. Increasing it to €20,000 in unnecessary. College expenses are a red herring. When the college expenses arise, you might not save that year, that’s all. Pension contributions should be prioritised above everything else. It’s all about tax efficiency when you’re generating a surplus.

 

[noelÓm]

Saving €13,500 is more than enough. Increasing it to €20,000 in unnecessary. College expenses are a red herring. When the college expenses arise, you might not save that year, that’s all. Pension contributions should be prioritised above everything else. It’s all about tax efficiency when you’re generating a surplus.

I think we are in agreement on substance, if not terminology. Contributing €95,000*0.2 = €19,000 would maximise their income tax relief. Or are you saying that they should contribute less?

 

[Maigheoabu]

Expenditure of €54,000 is high given that you don't have a mortgage to repay. You are only saving about €13,500 a year by my calculations or about 20 per cent of your net income. You have young children, so there will be things you can't do without. But be sure that you aren't living a lifestyle based on the joint income you used to have. If you can lift the €13,500 to closer to even €20,000 per annum (30% of net income), that will make paying for college and funding your pensions much easier. A lot of people in their 30s pay 20-30% of their net income on mortgage principal and interest, and some pay even more. €20,000 savings per annum is an achievable target for you.

Hi Noel, many thanks for your thoughts. The expenditure figure probably is slightly higher than reality. We have just finished doing finishing touches to the house for example which I had included last year, however, I think we would struggle to keep it below €50,000 per unless we give up on a family holiday.

Is there a good reason for this? What happens when the children start school? Having one parent out of work or working part-time is a luxury. You can probably afford it, but it puts a lot of pressure on you to provide for today and save for tomorrow.

This might change when all 3 are in primary (hard to imagine at the moment), however, just working off the assumption for the moment. This might also change if family holiday is in danger!

€32,000 is an okay emergency cash reserve. I would prioritise pension contributions right now. The tax treatment of contributions, investment gains within the pension, and the drawdown of pension income are all quite favourable. I would max out income tax relief on pension contributions instead investing in a BTL. And if the contributions are done through your payroll, then you are basically hardwiring in saving into your monthly finances and won't get the temptation to spend the money.

Currently strongly leaning this way and maxing the age related limits. I would have concerns that the tax relief of 40% won't be around for ever if there is a change in government.

 

[Maigheoabu]

Saving €13,500 is more than enough. Increasing it to €20,000 in unnecessary. College expenses are a red herring. When the college expenses arise, you might not save that year, that’s all. Pension contributions should be prioritised above everything else. It’s all about tax efficiency when you’re generating a surplus.

Hi Gordon, thanks for replying. Do you think that I should max out pension contributions to age related limits?
PS - apologies, i cannot figure out how to like a post!