Using my pension fund to pay a lump off my mortgage. Good idea?

[outsider]

Note: This entire thread is based on a misunderstanding that one can cash one's pension fund early and pay 20% tax on the proceeds - Brendan


Hi,
Here's my situation:
I have a mortgage with my wife which is a 600,000 euro 35 year mortgage. We are one year into the mortgage, and we're both 30 years old.
If we leave the mortgage as is, the cumulative interest payments over 35 years will be 508,000 euro.

Now, I have a pension, which I've been paying into generously with a vaue of approximately 100,000 euro. I believe that I can cash in this pension and get a lump sum of approximately 78,000 euro after paying 22% tax.

What I am thinking about doing is using that 78,000 to pay a lump sum off the mortgage, and reduce the term to 30 years, which means our monthly repayments will remain the same. It also means that the cumulative interest payments on the mortgage would be 369,000 instead of 508,000, a saving of 138,000 euro.

Obviously I'd lose my pension and have to re-start it.

Is this a good idea?

 

[ClubMan]

Now, I have a pension, which I've been paying into generously with a vaue of approximately 100,000 euro. I believe that I can cash in this pension and get a lump sum of approximately 78,000 euro after paying 22% tax.

Are you sure that you can get this refund? What sort of pension is it and how long have you been contributing to it? Does the current value represent personal and employer contributions because if the latter are included then you probably can't get a refund of them.

 

[outsider]

Are you sure that you can get this refund? What sort of pension is it and how long have you been contributing to it? Does the current value represent personal and employer contributions because if the latter are included then you probably can't get a refund of them.

It is mentioned here, about half way down the page:
http://www.askaboutmoney.com/guide/ch11.htm
I read it wrong actually the tax is 20% not 22%.
I've heard for a long time that you can 'cash in' a pension and pay 20% tax, this option was given to me when I left my first employer.

I've been paying into the fund for 6 years with my present employer (which I'm hoping to leave soon) and with the first employer for 2 years before that.
Whether or not I can keep the employer contributon to the pension, I think my question is still the same, even if the amount of money in the lump sum is less the 8% employer contribution, but I'm pretty sure I can keep some if not all of it.

 

[cormacol]

If you have more than 2 years qualifying service then you cannot take a refund of contributions

 

[outsider]

If you have more than 2 years qualifying service then you cannot take a refund of contributions

That seems like a strange rule, but assuming you're right, my original question is still the same, just less 8%.
Thanks.

 

[bocade]

Maybe a strange rule but a rule nonetheless. You cannot cash in any of your pension at this stage. If you had left the service of an employer prior to having two years pensionable service in the pension scheme then you could have cashed in your own contributions and paid 20% tax (the employer contributions would be paid back to the employer).

 

[outsider]

Maybe a strange rule but a rule nonetheless. You cannot cash in any of your pension at this stage. If you had left the service of an employer prior to having two years pensionable service in the pension scheme then you could have cashed in your own contributions and paid 20% tax (the employer contributions would be paid back to the employer).

Ok, well, thats that idea sunk!

It doesn't seem right that you cannot cash in your own pension. What if you found out you were terminally ill and you wanted to go and spend your own money.

Any thanks for the info, and for tolerating what was probably a stupid and badly researched question.

 

[ClubMan]

It doesn't seem right that you cannot cash in your own pension. What if you found out you were terminally ill and you wanted to go and spend your own money.

I think that there may be some special circumstances in which you can encash a pension or draw down benefits early - for example if you are prevented from working due to illness or disability.

Going back to your original query €600K over 35 years seems like a very heavy mortgage burden so perhaps prioritising acclerated repayments on this over pension contributions (other than those necessary to secure employer contributions) might be a good idea. Karl Jeacle's mortgage calculator suggests that the repayments on such a mortgage might be c. €2,700 excluding owner occupier mortgage interest tax relief, home insurance and mortgage protection life assurance premiums etc.

 

[bocade]

Yes there is a special consideration for serious illness but I don't think illness was suggested here. The Revenue must give approval for this and they define serious illness as just that, generally they will only approve if the prognosis is that lifespan is cut short by the illness i.e. a terminal illness.

 

[kramer2006]

It doesn't seem right that you cannot cash in your own pension. What if you found out you were terminally ill and you wanted to go and spend your own money.

AFAIK, there are special pension rules when a person is diagnosed with a serious illness. The pension holder may be allowed to "retire" early, e.g. take a 25% tax-free lump sum. I'm pretty sure this is the case with my own pension plan.

As a matter of interest, why are so desperate now (a year in) to take a chunk off your mortgage?

 

[ClubMan]

Yes there is a special consideration for serious illness but I don't think illness was suggested here.

Sorry - I was just mentioning it for background info and in relation to the comment about terminal illness etc. - not on the basis that it was relevant to the original query.

 

[outsider]

As a matter of interest, why are so desperate now (a year in) to take a chunk off your mortgage?

I'm not particularly desperate I was just looking at ways of reducing the mortgage term and therefore saving on interest payments.

 

[outsider]

Going back to your original query €600K over 35 years seems like a very heavy mortgage burden so perhaps prioritising acclerated repayments on this over pension contributions (other than those necessary to secure employer contributions) might be a good idea. Karl Jeacle's mortgage calculator suggests that the repayments on such a mortgage might be c. €2,700 excluding owner occupier mortgage interest tax relief, home insurance and mortgage protection life assurance premiums etc.

Yep, it's a big 100% mortgage, and its a bit crazy, but I won't go into the numerous reasons why we did it. The identical house next door sold for 800,000 recently, thats 200k more than we paid for ours less then 12 months later.... But I'm getting off topic....

Your suggestion for reducing my pension payments and increasing my mortgage will only have a marginal effect. My employer matches my contribution up to 8%. So if I dropped my pension contribution to zero, I would only be ending up with a few hundred euro extra a month (net) and would lose the employer contribution so it doesn't seem worth it.

Thanks for all the replies.

 

[ClubMan]

My employer matches my contribution up to 8%.

Would seem to make sense to match this so.

 

[GeneralZod]

I must be misunderstanding something here.

Where's the 22% coming from? Assuming you were still within the 2 year period wouldn't you only get a refund of your contributions and not including the 48% (top tax rate and prsi/health levy) relief that boosted your fund to 100k?

If that was the case people would be doing it all the time.

 

[ClubMan]

I must be misunderstanding something here.

Where's the 22% coming from? Assuming you were still within the 2 year period wouldn't you only get a refund of your contributions and not including the 48% (top tax rate and prsi/health levy) relief?

If that was the case people would be doing it all the time.

In such circumstances you would get personal/AVC contributions back net of 20% (or is it 22%?) tax. Remember that the original contributions were most likely exempt from tax and PRSI/health levy deductions and so taken directly from gross income. I think it may be a bit of a loophole that high rate taxpayers can contribute to an occupational pension scheme for less than two years and then take a refund and only pay 20/22% tax on the refund. However there may be limits (e.g. can you only do this refund once? maybe PRSI is due on the refund? Maybe the refund is assessable as income in the year of refund with a tax credit for the tax deducted?) or I may be mistaken.