Pension versus Mortgage Overpayments

R

rmelly

Guest
On a number of posts I have seen people say that you should focus on mortgage rather than pension.

I am single, early 30's currently paying 12.5% into defined contribution pension (have been for 5 or so years incl. previous employer) and plan to start overpaying my 35 year mortgage by €200 per month.

I'm aware of the PAYE/PRSI relief for pension contributions and benefits of overpaying mortgage.

In general which should I focus on - the pension or the mortgage? I am 'happy' with my level of debt and ability to service it, and am probably more concerned with boosting pension fund (value of approx 75k currently after market hiccups).

On top of these I expect to be saving approx €700 - 800 per month after annualising/budgeting for all costs including annual contingency for house repairs etc etc.

Should I increase the 200 to 250 or even 300? Or increase pension further? Employer pays 5%, so current total is 17.5%.
 
rmelly said:
On a number of posts I have seen people say that you should focus on mortgage rather than pension.
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Most people qualify such comments somewhat. For example:
[FONT=Verdana, Arial, Helvetica, sans-serif]FOUR SITUATIONS WHEN A PENSION FUND MIGHT NOT BE ADVISABLE

[/FONT] [FONT=Verdana, Arial, Helvetica, sans-serif]IF YOU AREN'T CONTRIBUTING THE MAXIMUM TO YOUR SPECIAL SAVINGS ACCOUNT
The Special Savings Account is more tax attractive than contributing to a pension. Don't contribute to a pension if you are not putting in the maximum €254 per month into your SSA.[/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif][/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]IF YOU DON'T OWN YOUR OWN HOME
Your first investment priority has to be to own your own home. Many people start off a pension in their early 20s frightened by salesman's mantra : "You cannot be too young to start a pension". This should be rephrased "You cannot be too young to start saving". You will need all your money for a deposit on a house and that takes priority over everything including a pension.[/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif][/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]IF YOU HAVE A BIG MORTGAGE OR OTHER BORROWINGS
 After buying a house, your next priority is to get your mortgage down to a comfortable level. What is comfortable depends on a number of factors: The security of your job, your career prospects and the value of your home in relation to your mortgage. As a general guide, if your job is reasonably secure, anything over twice your salary is uncomfortable. Don't start a pension until your mortgage is down to less than twice your salary. [/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif][/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]IF YOU ARE PAYING TAX AT THE LOWER TAX RATE
Pensions are only attractive if they save you tax at the top rate of 42%. If you are on the 20% band, don't bother with a pension. You might end up in a situation where you save tax at 20% only to pay it at 42% on your retirement.[/FONT]
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Thanks, I didn't mean to imply otherwise.

I'm more interested in the logic of this though. In what way is 'anything over twice your salary is uncomfortable'?

Yes, my repayments are approx 1/3 of my take home salary, but I had been saving almost twice that consistently for 2 plus years (living at home) without a massive drop in standard of living.

I also have sufficient savings to cover at least 6 months of no income.

Why should I feel uncomfortable?
 
rmelly said:
I'm more interested in the logic of this though. In what way is 'anything over twice your salary is uncomfortable'?
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That is just Brendan's personal rule of thumb. There is no specific science to this. I think the general thrust of his comments should be clear though.

It sounds to me like you can afford to both increase your pension contributions towards/to you age related tax relief limit AND make accelerated capital repayments on your mortgage. If so why not do both?
 
Have you calculated how much your mortgage repayments will be shorten by if you over pay by €200?
 
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