Maximise my deposit for a home or make AVCs?

D

ddraws

Registered User
Messages
14
Age:
30
Partner's age:
28

Annual gross income:
E55,000
Annual gross income partner:
E50,000

Monthly take home pay:
E3,100

Monthly take home pay partner:
E2,850

Type of employment:
Both public sector employees.

Expenditure pattern:
Spend and save in equal amounts.

Accommodation:
Renting – E1500 (contribute E750 each)

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
No credit cards

Savings and investments:
E11,000 in state savings five year saving certificate. Matures in June 2025
E16,000 savings in deposit account (E1,000 monthly standing order).
E20,000 in prize bonds. (I buy these periodically as savings in excess of deposit account standing order accumulate – c. E7,500 a year).
Total: E47,000 (growing by c. E20,000 per year).

Savings and investments partner:
Total: E53,000 in savings deposit account. (growing by c. E18,000 per year).

Do you have a pension scheme?
Both on single public service pension scheme (only) and joined public sector in mid-20s.

According to the single scheme calculator tool I will be due a single scheme annual retirement pension + annual contributory state pension of c. E27,500 – E34,000. The former is based on my current wage the latter is based on the wage of the role I am currently trying to get promoted to.

My partner is more than likely to end up on similar if not more.

Do you own any investment or other property?
No.

Ages of children:
None.

Life insurance:
None.

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

I have specific and general questions. Topic I am looking into is whether we should be making AVCs or saving most I can for a deposit on a home at this point. I have a worked example below where I have tried to figure this out and could use help, but also, I have some general questions and have laid these out first.

Q1. The amount I calculated via the single scheme calculator above would seem to me like more than enough to live off assuming we have paid off mortgage by retirement. But one element is that I hear a lot about issues with pension sustainability long-term, should we start a PRSA to diversify risk given we are both on public sector single scheme?

Q2. I have seen people suggest on the forums that saving for a deposit on a house makes more sense than making AVCs. I have tried to figure this out below for my own reassurance and could use some help to figure out AVC returns (I can’t seem to find a calculator for it). This is more from the perspective of value for money as the pension allowance seems like enough.

Q3. Also not tied to the idea of an AVC, if you think there is something better, we should be looking at by all means please advise. Finally, would appreciate any general advice that you think would apply to our situation.

Example. Assumptions (mostly based off our own financial position) to understand effect of whether to go with AVC or not: 1. Want to buy home in 2.5 years for E600,000. 2. We would both be hopeful to be on a salary of c. E75,000 in the next 2-3 years. In terms of a mortgage a combined gross salary of 150,000 * 3.5 = E525000. 3. 2.75% mortgage interest rate. 4. Monthly repayments of c. E2,000.

Scenario 1. We continue to deposit savings into savings account. Deposit of E200,000 (joint current savings of c. E100,000 + another E100,000 over next 2.5 years) and get a mortgage of E400,000. According to the CCPC mortgage calculator, buying a 22 year mortgage at 2.75% for E400,000 would cost c. E135,000 in interest.

Scenario 2. We contribute to a PRSA AVC over the next 2.5 years and put rest on deposit. From what I understand I can make a tax-free contribution of 20% (30 years old) of current salary E55,000 = E11,000. According to my payslip my current contribution to scheme is c. E2600 per annum, which leaves E8,400 I could put into an AVC. Over the 2.5 years that would be E21,000.

As my partner is under 30, 15% rate applies. Roughly this results in E12,500 AVC over 2.5 year period. This is a total of E33,500 into a PRSA. In scenario 1 this would have been taxed at 40%, leaving us with E20,000 for the deposit. So instead of the E100,000 savings for deposit, in this example we have an additional E80,000 towards deposit.

Deposit of E180,000 and a mortgage of E420,000. According to the CCPC mortgage calculator buying a 24 year mortgage at 2.75% for E420,000 would cost c E154,000 in interest.

So scenario 2 mortgage costs an extra E19,000. However, there was the 40% tax free saving of E13,000 under scenario 2. And wouldn’t that also get some returns from the pension investment (minus fees). How do I calculate these?
 
Forget the calculations. You are applying a false arithmetical accuracy to the problem. You have to make lots of assumptions about the next 35 years - the rate of return, the interest rate, the tax treatment of pensions, inflation, etc.

You want to get a house as soon as possible.
When you get that house you want to be as many steps up the ladder as possible.
When you get a mortgage you want it to be as low a Loan to Value as possible. 80% mortgages are generally cheaper than 90% mortgages.

For that reason, you maximise your cash and the way to do this is to avoid making any pension contributions which are not compulsory and which are not matched by your employer.

Mortgage rates are generally lower for 80% LTV than for 90% LTV. So, if possible, you should try to get into the 80% LTV band. When you take out your first mortgage you may well be above 80% but with your savings rate, you could get it down below 80% fairly quickly.

So, when you do buy a house, you then focus on getting the LTV down below 80% before making additional AVCs.
 
Priority for you should be to buy a house and start paying down a mortgage. If you are settled in jobs and in a place it makes all sorts of reasons to buy a house. You will probably have kids as well. They are expensive.

There is no rush to make AVCs. You can do this in 20 years when you have spare cash. You already have pretty good pension coverage for your age and income level.
 
A key principle of financial planning is flexibility. Investments should be liquid and accessible.

Avoid these sorts of products:

ddraws said:
E11,000 in state savings five year saving certificate. Matures in June 2025
Click to expand...

You say you are planning to buy a house in 2 1/2 years. But you might buy it before that or after that. Make sure that you have instant access to your savings if you need them.

It's good to make plans, but they should be flexible. They might change quickly.
 
Thanks very much to you both for the replies, very helpful. I get the point about the calculations. My hope was to do the high-level sums so that I could have the tools to understand and assess these things in the future, rather than just taking others advice as the truth and relying on them. But I appreciate it isn't simple.

Brendan Burgess said:
A key principle of financial planning is flexibility. Investments should be liquid and accessible.

Avoid these sorts of products
Click to expand...

Yeh the savings certificates were one off. From what I understand I can access it without penalty and in short notice, but then I wont get the returns. I figured that it was worth the risk that I need it in the shorter term given there is so little returns from having it in deposit on a savings account.

In terms of us both being on the single scheme pension. Is that something you would view as a risk and that we should address it when it does come to making AVCs down the line?

Also I am open to engaging with an independent financial planner advisor in the future. Do you think there is a particular time in my life when this would yield the most benefit?
 
ddraws said:
Yeh the savings certificates were one off. From what I understand I can access it without penalty and in short notice, but then I wont get the returns. I figured that it was worth the risk that I need it in the shorter term given there is so little returns from having it in deposit on a savings account.
Click to expand...
I agree. Compared to having it on deposit there's no downside and some profit if you hold to the end.

ddraws said:
In terms of us both being on the single scheme pension. Is that something you would view as a risk and that we should address it when it does come to making AVCs down the line?
Click to expand...
It's not really a "risk". You have a far better pension entitlement already built up than many people of your age. It's a DB scheme. This means that you can be pretty sure what your income will be in retirement, but there's no upside like the 12 years of uninterrupted equity gains that your private sector DC friends have enjoyed.
 
ddraws said:
In terms of us both being on the single scheme pension. Is that something you would view as a risk
Click to expand...

This is so far down the line that you should not be giving it any bandwidth now.

Focus on the issue of buying your home.

You both have safe jobs with generous defined benefit pensions. Get the risk of your mortgage down as the first priority and worry about your pension in about ten years.

Brendan
 
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