Why would you pay off the mortgage quickly when the interest is low like 2% and you csn get a better return by investing the money in Etfs? Surely the only benefit is the poece of mind of not having a mortgage over your head but if you run the figures its better to slowly pay off the mortgage and invest instead?It's not clear cut - it depends on the contribution of dividends to total return over your holding period (which is obviously unknowable in advance).
I would invariably advise (a) to maximise all tax-relieved pension contributions; and (b) to pay off all debt (including mortgage debt) before investing after-tax savings in equities.
It's about the risk/return trade off.Why would you pay off the mortgage quickly when the interest is low like 2% and you csn get a better return by investing the money in Etfs?
There are certainly circumstances where it makes sense to contribute to a pension in circumstances where you do not pay income tax at the higher rate.Also, I am wondering whether pensions are actually beneficial if you are in the 20% income tax bracket?
Thanks.It's about the risk/return trade off.
By paying down your mortgage ahead of schedule, you are guaranteed to get a (tax-free) return equivalent to the weighted average mortgage rate over the original term of your mortgage. That's guaranteed.
If you invest in a global equity fund or ETF, you might get a return that is higher than the savings you would make on your mortgage, over the same term. Or you might not.
But you have to pay tax on any return that you make on the investment fund. Currently an exit tax of 41% is payable on any return on an Irish/EU domiciled fund so your fund would have to return nearly double your mortgage rate for you to come out ahead.
That's certainly possible, but it's far less likely. So, paying down your mortgage has a higher projected return, on a risk adjusted basis.
There are certainly circumstances where it makes sense to contribute to a pension in circumstances where you do not pay income tax at the higher rate.
However, unless your employer is making a matching contribution to your pension, I would concentrate on paying off debt (including mortgage debt) in the first instance.
If you're a lower rate tax payer, and will be for a while, why look at ETFs at all?The figures are complex on this one, do you have thoughts on this scenario
I want to invest excess income to make more money of course...I could put it in my pension but there is a question whether, there would be better returns outside of a pension when at the low tax rate?If you're a lower rate tax payer, and will be for a while, why look at ETFs at all?
Why question was why ETFs in particular?I want to invest excess income to make more money of course...
Very good points. Well wouldn't building a big portfolio of shares bringing dividends push me into the high income tax bracket. Im just on the edge I think. What wiuld you suggest, investing in the big value stocks like Johnson a Jonnson etc, apple et all and take the dividends?Why question was why ETFs in particular?
All gains are taxed at 41%.
You're a low rate tax payer. With shares, dividends would be 20%, and capital gains 33%.
I'm not saying one us better than the other, but trying to understand why you've decided ETFs are best option outside of a pension wrapper.
The last 100 hundred years of global equities says otherwise?I think you are over complicating things.
An All World ETF is far from “safe”. Equities are volatile and there is no guarantee that they will produce a positive return over your holding period.
If you have a mortgage, pay it down ahead of schedule.
Keep it simple.
But, what's your investment period? You're asking a lot of questions in abstract.The last 100 hundred years of global equities says otherwise?
27. Saving in bank for house. Nearly ready to get a mortgage. Self employed sole trader. 6k in a crap irish life pension but changing it to a better one either 1% zurich dynamic fund or davy prsa 0.75% and in vwce all world vanguard fund adding 0.22 on, if pension works out to be the most efficient route. If it is, il max it out. Il maybe pay off mortgage quickly as Sarenco advised or invest any excess I have....just need to find out where. Currently have a small Degiro etf position with some excess I have now.But, what's your investment period? You're asking a lot of questions in abstract.
Do you need the money available for anything in particular in the next 5 to 10 years? Can you handle a drop in value of investment over multi year periods?
Have you actually paid off your mortgage? Or are you planning to buy a house? Or a car? What kind of money are you talking about?
You mentioned maxing out pension already. What's it invested in?
There are several factors to consider, before suggesting a 'best' approach for your circumstances.
Curious Aaron, did you make a decision on ETFS vs Investment Trusts and what did you decide on and why?Hi,
I had planned on investing a lump sum in ETF's (not in pension account) but the 8 year taxation system is off putting.
So that has led me to Investment Trusts. Being taxed the same as shares is the big advantage over ETFs.
However, choosing what Investment Trusts to invest in is not as easy as choosing ETFs!
So if you wanted to choose an Investment Trust or a selection of them, the idea being to mirror what a global ETF does...
What would you buy?
Thanks
I have only read that they are but could Brexit change this. I have been looking into them but some of them are not available on degiro now, which is odd, wonder if anyone knows if this is also attributable to Brexit?I’d like to just check something if I may.
question: are U.K. investment trusts always subject to income tax and CGT?
if you think the answer is yes, please like the post
If not please set out your reasons below.
I’ll run this for say a week.
thanks
Hi Sarenco,There are some closed-ended funds listed on the London Stock Exchange that are domiciled in the Channel Islands and treated as offshore funds for Irish tax purposes.
Best avoided.