Overpay mortgage or contribute to a pension; €200k cash in company.

TheBig40

Registered User
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Long time lurker first time posting! I’ve read and used advice from here for years but find myself a little lost at the moment and hoping for some guidance/ advice

Age: 41
Spouse’s/Partner's age: 42

I’m currently self employed and own one third of the business. The company is doing well, profitable and good turnover and the cash (200k) in the bank grows on a monthly basis. We worked our way through the last recession, grew the business and now have 10 employees and all the advantages and headaches that goes with that.

I treat myself as a PAYE worker as outlined below and in recent years when there has been bonus and profit sharing I have taken this as wages and used the cash to aggressively pay down our mortgage. Reading more and more on AAM has made me start to question my strategy and I’m now convinced that I’m not benifitting fully from being self employed and contributing to my pensions etc.
I’ve a lot of variables in my situation but have done my best to be open and honest here in the hope of getting some sensible advice.

Annual gross income from employment or profession: €65k + profit share/bonus last P60 €91k
Annual gross income of spouse: part time 3 day week €20k + bonus of about €5k last two p60 show – approx €25k

Monthly take-home pay
€4000 + €1500 = 5500

Type of employment:
Me: self-employed (SME with 10 employees) 1/3 owner of company/director. Take PAYE salary monthly + bonus/profit share
Wife: employed by my company part time


In general are you:
(a) spending more than you earn, or
(b) saving?
Would generally be savers, modest lifestyle and more inclined to save than spent. Tend to save for things like replacing a car, home renovations or holidays than look at borrowing. In general saving about 1/3 of wages each month.

Rough estimate of value of home:
€400K
Amount outstanding on your mortgage:
~€104K

€56340 fixed for one year (due to review August 2020) 2.99% BOI 12 years remaining €466 monthly but overpaying by 544 – totally monthly €1000 (I allowed the fixed rate to elapse, started variable rate and then fixed at lower interest rate at higher over payment, this seemed like a good idea because the max over pay on a fixated rate with is 10% or €65 whichever is higher.
I viewed this as a guaranteed 2.99% return on my cash rather than having savings?

23103 fixed for one year (due to review August 2020) 2.99% BOI 12 years remaining €191 +€65(over payment)

24197 fixed for one year (due to review Feb 2020) 2.99% BOI 4 years remaining €534 + €65 (over payment)
Total mortgage payments including over payment €-1750

What interest rate are you paying?
Monthly :as outlined above


Other borrowings – car loans/personal loans etc
0% interest car loan from wife’s Dad. Paid €50 weekly (€200 month) by standing order. €2400 outstanding (loans was never needed and could be cleared instantly if required. I’m not fully sure why we have this but I think it’s because we were buying a car and her dad wanted to help out and since there was no interest involved I was ok with it) part of me thinks this is happening because it’s nice for parents in law to have a €50 top up on their state pensions every week)

Do you pay off your full credit card balance each month?
Have CC but paid in full each month. It’s basically used as a means of easily tracking spending but is never used for credit.
If not, what is the balance on your credit card? N/A

Savings and investments:
€20k in prize bonds this is the emergency fund and would cover about 6 months of expensive (possibly a year if required as we can be frugal) we also tend to use this to fund small scale renovations to the house and incedentais but tend to cover these through “current spending” and put the extras or left overs back into bonds ASAP. Savings had been higher until recent works at home and we are currently working to grow the cash savings again

Do you have a pension scheme?
Company pays in €300 per month for me and currently neither me or my wife make any other contributions.

My pension currently sits in two FF/Aviava funds.
40k in a mix of stocks/cash/property etc
21.5k I discovered this week is sitting in a cash account with Cantor Fitz doing nothing (it lost €500 in 18 months due to fees and minus interest rates I’m currently trying to move this money to something else but struggling to understand how the SDIO system works and I’m not getting answers for Aviva.


Do you own any investment or other property? I’m a 33% share holder in my company but take the view that the value here comes from being self employed rather than a tangle cash benifit.

Ages of children: no kids

Life insurance:
Life cover in excess of mortgages for both lives
Me: Death in service for me to 4x salary
Some policy that means if I die the company gets enough money to buy my shares from my wife should she wish to sell.

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

Am I making a mistake by using all spare cash to pay down the mortgages? At this stage should it be going into pension funds/savings instead.

Thanks :)
 
You say that you are self employed and then refer to a company.

Can you confirm that it is a limited company and not a partnership.

Is the long term outlook that you will stay with the company? Might you sell it to a third party? Or might you want to buy out one of the other partners?

Why do you have €200k and growing in the company?

If the company does not need it, take advice on how to get it out as tax efficiently as possible. For example you might declare high salaries in 2019 and create a loss which can be set against 2018 profits.

You could agree between you that you take the cash out and if business declines that you reduce your salaries to conserve cash.


Brendan
 
Thanks Brendan,
It’s a limited company, I own one third.

Long term out look is good, it’s in an industry that people need the services we provide and we have a good reputation and faired well during the last downturn.

I have been actively trying to grown the business and have seen a steady increase in sales and turnover but I think if the right offer came along we would sell up, one of the reasons we are holding cash is so that we’d have the option to buy out other owners if someone decides they want to/need to move on.

On the taking the money out idea I know last year we paid tax on profits and I believed that this was a bit silly when we could have taken the profit as salary but I think there was a view taken that we need to start showing a profit so that the company looks “healthy” to outsiders.
 
Given the PAYE standard rate cut-off point (SRCOP) is around €35k, had your wife's last two P60s been €10k more and yours €10k less you would have had the same gross combined earnings but have paid €4k less tax between you.
 
Given the PAYE standard rate cut-off point (SRCOP) is around €35k, had your wife's last two P60s been €10k more and yours €10k less you would have had the same gross combined earnings but have paid €4k less tax between you.
If they're jointly assessed, it'd only be a few hundred euro difference.
Higher earner can get increased band to 44,300 (2019), reducing 20% band to 26,300 for the lower income earner.
 
Hi 40

You don't have a big mortgage relative to your income or to the value of you house, so paying down the mortgage is not the urgent priority it is for most people. So it's really a toss up between paying down your mortgage and contributing to a pension. Neither is far wrong.

But the bigger issue that you should address is dealing with the company cash. You and your fellow shareholders should have a written plan setting out the reasons you are doing what you are doing. This is very useful as I have often come across cases where I asked people why they did something 10 years ago and they can't remember the justifications. Also plans can change as circumstances change and it's useful to have a written and agreed plan in place.

I am not a fan of having cash in a company. I think that this €200k would be better off in your personal pension pots or else have your mortgages reduced by €100k.

Let's say that your business has a value of €1m + €200k cash or €1.2 m in total.

Reasons for not accumulating cash

1) If you sell it to a third party, they would probably prefer to pay €1m for it than face the complications of paying €1.2m and getting €200k cash.
2) If you decide to take on one of your employees as a shareholder, it's easier to give them a share of €1m than of €1.2m
3) Your balance sheet is a matter of public record. It's probably better than your employees and others don't see €200k cash. For example, if you hit a bad patch and need to cut costs and salaries, it will be more difficult to do if there is €200k cash sitting on the balance sheet.
4) If you and Johnny want to buy out Mary's share, it's cheaper to buy out 1/3rd of €1m than 1/3rd of €2m.
5) If things go wrong e.g. the business declines or someone sues for an uninsured event, the €200k is in your personal accounts and not the company's.
6) The money is far more productive in the shareholders' pension funds


Reasons for accumulating cash
1) If you anticipate a temporary rough patch and want to have cash to tide you over. But it might still be better to take the cash out but prepare the three shareholders for the fact that they should keep the cash available because in the event of a rough patch, the directors' salaries will be reduced.
2) A company can buy its own shares so it might be easier to buy out Mary from the company's assets. I am not sure that this is a good enough reason in your case. If Mary wants to sell her third, she will presumably give plenty of notice and you can work out how to finance it at that stage. You and Johnny might leave a big part of your salaries in the company to help fund that or you might make directors' loans to the company.
3) You can get retirement relief from CGT when you sell the company. Again this is too far into the future to plan based on this.
4) You want the company to look healthier for creditors. This is a serious issues and you should make sure that taking the cash out does not put you into a net liabilities position. So leave enough profits and cash so that the company is solvent. But don't overdo it.

we could have taken the profit as salary but I think there was a view taken that we need to start showing a profit so that the company looks “healthy” to outsiders.

I am not sure that a company using professional advisors would be influenced by this.

They would do the following calculation
Profit before Directors' Salaries and bonuses : €300k
Fair market value of directors' salaries: €200k
Profits €100k

So there may be reasons for leaving cash in the company, but that is not one of them.

Brendan
 
Now, back to the original question. Should you pay down the mortgage or contribute to a pension?

It's a close decision, but I would start maxing the pension contribution now.

There is small financial advantage to paying down the mortgage now and then maxing your pension later when the mortgage is paid off.

However, as a director of a company, you have huge flexibility in how much the company can contribute on your behalf.

If you were guaranteed that would continue for ever, then you should pay down the mortgage now and max the pension contributions later.

However you have no guarantee that this will last.
1) The tax rules might change
2) You might sell the company and become an ordinary employee in which case, you will be restricted to contributing a percentage of your salary.

So I would suggest that any surplus profits in the company should be contributed to your pension fund directly.

It's important that the company contributes it directly and not that they pay you a salary and you make the contributions. But your pension advisor will sort that out for you.

So now we can revisit the "what to do with the cash?" question. I think you should use your share of it towards contributing to your pension fund.

Brendan
 
But the bigger issue that you should address is dealing with the company cash. You and your fellow shareholders should have a written plan setting out the reasons you are doing what you are doing. This is very useful as I have often come across cases where I asked people why they did something 10 years ago and they can't remember the justifications. Also plans can change as circumstances change and it's useful to have a written and agreed plan in place.

I am not a fan of having cash in a company. I think that this €200k would be better off in your personal pension pots or else have your mortgages reduced by €100k

I think you are totally right here and what was the business plan needs a pretty serious review. I think because things and been tipping along nicely we may have taken our eye off the goals and just let things drift along and me taken a closer look at my personal finances has also made me have a bit of a think about the company (hours and hours on AAM over the weekend so thanks for the push)

Reasons for accumulating cash
1) If you anticipate a temporary rough patch and want to have cash to tide you over. But it might still be better to take the cash out but prepare the three shareholders for the fact that they should keep the cash available because in the event of a rough patch, the directors' salaries will be reduced.
2) A company can buy its own shares so it might be easier to buy out Mary from the company's assets. I am not sure that this is a good enough reason in your case. If Mary wants to sell her third, she will presumably give plenty of notice and you can work out how to finance it at that stage. You and Johnny might leave a big part of your salaries in the company to help fund that or you might make directors' loans to the company.

It is mainly number one here but we have been lucky and the rough patches have never been that rough.

There is small financial advantage to paying down the mortgage now and then maxing your pension later when the mortgage is paid off.

However, as a director of a company, you have huge flexibility in how much the company can contribute on your behalf.

Feeling inspired i did some very rough calculations, based on my current level over payment of the mortgages they should all be cleared within the next 5 years. The total cost of this credit in that time will be €8745. In order to clear the loans faster I will have to use more of my salary - Currently over paying €668/month for a total of €1756/month. This is comfortable but i'm aware that any increase in salary will be taxed at the higher rate so taking the money to aid clearing the loans means i miss out of the tax advantages of contributing to the pension.

I have been having a close look at the pension form and realise that I am not taking full advantage of how my/my wife's contributions are made and I am taking steps to fix these quickly.

Thanks so much for the feedback. It has been very helpful.
 
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