Lump sum pay into mortgage or start pension?

Discussion in 'Money makeover' started by Foodie1, 27 Jan 2019.

  1. Foodie1

    Foodie1 Registered User

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    Looking for advice on 90k lump sum that we have saved. That sum is currently in AIB savings account until decision made. Saving 1k a month also.

    Currently overpaying mortgage by 1k (2.5k) a month and hope to have it cleared in 6 years. Outstanding amount 180k at 1% tracker. No intention of moving.
    Husband aged 45 has no pension and hopes to change job this year. Earning 90k a year and keen to start pension. I am Public service part time who started late to the scheme. Estimated 10k pension at 65.
    No other debts or loans. 2 kids.

    My question is do we pay a large lump sum into mortgage or just put into saving schemes. We are keen to start a pension for my husband when he gets new jobs job but unsure if we can put lump sums into that or if even advised.
     
  2. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Last edited: 27 Jan 2019
    In your circumstances, any mortgage overpayment is madness.

    Stop overpaying and filter the spare cash into your husband’s pension, and perhaps your own.

    He can put €22,500 in for last year; do that now, probably into a PRSA.

    He should do the same for this year.

    You could also look at augmenting your pension position with AVCs.

    Thereafter, keep six months’ worth of net income in cash (maybe circa €40k?).

    Then use the surplus ongoing cashflow from the cessation of the mortgage overpayments to make regular monthly pension contributions for both of you.
     
    Last edited: 27 Jan 2019
    so-crates and galway_blow_in like this.
  3. NoRegretsCoyote

    NoRegretsCoyote Frequent Poster

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    With your tracker you are borrowing at 1%. Over the long run any kind of decent investment portfolio will do better than that. That means you should stop overpaying on tracker and put as much as possible into the pension. This will almost certainly do better than 1% per annum over 20 years, and you can also avail of the tax relief.

    The only benefit I can see of overpaying on the tracker is if you are heavily in negative equity and need to move.

    For the 90k it may be best to drip it into a pension scheme year by year to max the tax advantages.

    As a PS worker you may be well served by buying notional service or AVCs. There are threads on these.
     
  4. moneymakeover

    moneymakeover Frequent Poster

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    You can contribute 25% of salary per year at age 45

    You can back pay for 2018 the full 25% which is good way to get up and running

    You might want to wait until finding the new job and contribute to the employer pension
     
  5. Codogly

    Codogly Frequent Poster

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    What about considering future ECB rate increases ? ... with 180k mortgage what if rates rise to 4/5 %...in that scenario perhaps having cleared the mortgage would prove better ...
     
  6. galway_blow_in

    galway_blow_in Frequent Poster

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    Zero chance of rate increase for years
     
  7. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Almost zero chance of that happening, and if it does, it’ll mean that the returns available from risk assets will be even higher.

    It makes very little sense for the OP to be overpaying.
     
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  8. NoRegretsCoyote

    NoRegretsCoyote Frequent Poster

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    It's completely possible that ECB rates will jump a few percentage points over time.

    If it happens it is highly likely to accompany an extremely strong economy and/or a bout of inflation. Debt is paid out of nominal income and your wages would probably be increasing a lot in these circumstances.
     
  9. Gordon Gekko

    Gordon Gekko Frequent Poster

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    I didn’t say that it wasn’t possible. It’s just extraordinarily unlikely that we’ll see the ECB rate at 5% in a world where Germany still has the mental scars of hyperinflation.

    Either way, it’s a rabbit hole; the OP should cease the overpayments ASAP.
     
    galway_blow_in likes this.
  10. Foodie1

    Foodie1 Registered User

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    Thanks for all your replies. I guess we had hoped to pay off the mortgage and have it gone ASAP as would be a nice position to be in. We will have to re think the whole thing now. As always appreciate the advice from the more finanically savvy than I.
     
  11. RedOnion

    RedOnion Frequent Poster

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    To give another perspective.
    I had the same approach as you - clear all debt as early as possible. We aggressively paid down our mortgage. I changed jobs a few times, and didn't really have much pension contributions.
    Then last year I fully repaid mortgage, and have free cashflow.
    However, there's a limit to the amount I can get tax relief on for pension.
    There were a number of drivers for my desire to be debt free, but in hindsight I should have diverted overpayments to pension a lot earlier.
     
  12. SBarrett

    SBarrett Frequent Poster

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    We'll probably see a rate increase later on in the year. But there would be no chance of going up to 4/5%. Interest rates go up gradually over time.

    Codology makes a good point though. Why not pay down as much of your capital down now in anticipation of interest rate increases in the future?


    But your husband not having any pension at all is something that needs to be addressed. He can invest €22,500 for last year and this year and get a total of €18,000 back in tax relief.

    You should also look at topping up your own PS pension. Depending on when you joined, some PS are a lot more attractive than others.


    Steven
    www.bluewaterfp.ie
     
  13. elacsaplau

    elacsaplau Frequent Poster

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    Is this not a bit of a non sequitur?
     
  14. galway_blow_in

    galway_blow_in Frequent Poster

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    European economy weakening,. Brexit round the corner.

    No chance of interest rate increase this year.

    No need to pay off when money is that cheap unless you insist on getting rid of debt as a point of principal.
     
  15. llgon

    llgon Frequent Poster

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    Principal or principle? Or maybe both?
     
  16. galway_blow_in

    galway_blow_in Frequent Poster

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    I post using my phone so probably American English
     
  17. Codogly

    Codogly Frequent Poster

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    I’ve said it hear many times before ...be very wary of providing a good Pension for yourself ( nowhere to hide that money) ...Governent will eventually have no choice no matter how unpopular but to means test the state pension and that’s a valuable assets to be losing.
     
  18. NoRegretsCoyote

    NoRegretsCoyote Frequent Poster

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    Extremely unlikely.

    What would more likely happen is increases below inflation and/or tightening of eligibility requirements.

    Taxes on pensioners could rise as well. But the contributory pension is likely to stay, it exists in every EU country.
     
  19. Sarenco

    Sarenco Frequent Poster

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    By the middle of this century the old age dependency ratio is projected to double from the current level to around 46%.

    Is it remotely plausible that the State would be in a position to means-test such a high proportion of the population? It would be a logistical and political nightmare.

    Failing to save for retirement out of a fear that you could lose a State benefit would be extremely foolish.
     
  20. SBarrett

    SBarrett Frequent Poster

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    Had this discussion with my in laws at Christmas. If you don't provide for an income in retirement, the State are telling you when you can stop working. It is currently 68 for those born from 1961 onwards. The government plan to increase that age as drugs keep us alive longer. I don't want to have to work until I am 70. My best years of retirement will be behind me at that stage. I want to be in a position in my early 60's to stop working if I want to.

    While the State pension is generous and expensive, it is a big drop in income for a lot of people. If you are used to living on an decent income and it drops to €12,650 overnight, that will take a lot of adjustments. I would prefer not to put myself in that position.

    It would be more prudent to fund for your retirement privately and the State pension is additional rather than not saving at all out of fear that they might take it away.

    Steven
    www.bluewaterfp.ie