Increase Pension or pay down mortage..

rodneytrotter15

Folks, Looking for some thoughts/opinions here, have an idea as to what I should do myself but just wanted to see what the general concensus is. Currently earn E63k per year or E3.2k per month after tax. After finally clearing down all short term debt, car loan, wedding loan, credit card etc. I'm now in a position where I could make better use of E800 to E1,000 per month. At the moment I am paying very little into my pension ( I'm 33 ) only E180 per month. Mortgage is about E250k and is one of the old First Active ones that I have no made on use of to date.
The question is, should I considerably up the pension contribution or make use of the Off Set mortgage and start to clear it down. Any money put in the Off Set account doesn't earn any interest, however it is available should we need it in case of emergencies....from speaking with them last week if I was to put E800 per month into the Off Set account I would reduce interest payments by E27k for the remainder of the term and redice the term by 8 years and 6 months if I kept going with the E800 per month until the amount saved would clear what was owned. Any thoughts appreciated, it seems like a no brainer decision in favour utilising the Off Set, however I am worried over the very small pension contributions...

The Corinthian

In the current economic climate you may be better off concentrating on your mortgage as pensions go down as well as up and currently most appear to be going down.

As such if your pension fund is currently losing money, then putting more money into it will mean you'll lose more. A mortgage, on the other hand, is losing you money the longer you have it, so putting more money into that means paying it off faster and thus paying less interest in the long term.

I suggest you look at how your pension is presently doing. While this is no guarantee of future earnings, it will give you a basis of comparison against your mortgage - i.e. if you increase payments to your mortgage, how much interest will you save? If you increase payments to your pension fund, what will the percentage increase/decrease to that fund be (based upon performance)?

And the one that either makes more or loses least is your better bet. Additionally, you may choose to hedge between them, for example setting aside €500 and putting €200 into one and €300 into the other, to offset risk.

coylemj

The Corinthian wrote: »

In the current economic climate you may be better off concentrating on your mortgage as pensions go down as well as up and currently most appear to be going down.

As such if your pension fund is currently losing money, then putting more money into it will mean you'll lose more.

That's the classic mistake that amateur investors make: 'the stock market is down so now is not the time to invest'. That principle says that you should only buy in a bull market when the market is booming and stocks are on the up, the result of following that strategy is that you will buy close to a market high and then there is then only one direction that shares will go....

When shares are cheap (i.e. the market is down) is the time to buy, that time is now.

The Corinthian

coylemj wrote: »

That's the classic mistake that amateur investors make: 'the stock market is down so now is not the time to invest'. That principle says that you should only buy in a bull market when the market is booming and stocks are on the up, the result of following that strategy is that you will buy close to a market high and then there is then only one direction that shares will go....

When shares are cheap (i.e. the market is down) is the time to buy, that time is now.

Fair enough, but suggesting that one should buy when the market is down also ignores the distinct possibility that it could go down even further or simply stay down.

coylemj

The Corinthian wrote: »

Fair enough, but suggesting that one should buy when the market is down also ignores the distinct possibility that it could go down even further or simply stay down.

True but waiting for it to bottom out means that you get left behind when it starts to go up again. If you think that markets will 'stay down' then you need to invest your pension in German bonds (currently paying 1.7%) and look forward to poverty in old age.

The Corinthian

coylemj wrote: »

True but waiting for it to bottom out means that you get left behind when it starts to go up again. If you think that markets will 'stay down' then you need to invest your pension in German bonds (currently paying 1.7%) and look forward to poverty in old age.

The thing is, while I would agree that past performance was probably a poor measure to recommend, the present reality is that the markets are more than likely to 'stay down' for the foreseeable future.

If we accept this likelihood, that doesn't mean that we should be investing in German bonds, but returning to the OP's question, we're better off investing in clearing that mortgage.

stepbar

rodneytrotter15 wrote: »

Folks, Looking for some thoughts/opinions here, have an idea as to what I should do myself but just wanted to see what the general concensus is. Currently earn E63k per year or E3.2k per month after tax. After finally clearing down all short term debt, car loan, wedding loan, credit card etc. I'm now in a position where I could make better use of E800 to E1,000 per month. At the moment I am paying very little into my pension ( I'm 33 ) only E180 per month. Mortgage is about E250k and is one of the old First Active ones that I have no made on use of to date.
The question is, should I considerably up the pension contribution or make use of the Off Set mortgage and start to clear it down. Any money put in the Off Set account doesn't earn any interest, however it is available should we need it in case of emergencies....from speaking with them last week if I was to put E800 per month into the Off Set account I would reduce interest payments by E27k for the remainder of the term and redice the term by 8 years and 6 months if I kept going with the E800 per month until the amount saved would clear what was owned. Any thoughts appreciated, it seems like a no brainer decision in favour utilising the Off Set, however I am worried over the very small pension contributions...

One question. How safe is your job? In truth accelerating your mortgage will mean SFA if you have no savings. This is a very important point - if you can answer this with certainty, you then have real options.

I agree that the offset mortgage option would make the most sense but I would also be ensuring that you are maximising the TRS available on your mortgage. Also, remember that savings rates are very competitive at the minute - depending on the rate it may make more sense to clear your mortgage off in lump sums.

However, if you could do it, it would be worth trying to max out pension contributions before the incentives on same are reduced... and then tackling the mortgage - I believe that the top rate of relief will be reduced to 20% by 2014. As a 33 yr old, you can contribute a max of 20% of your gross salary into your pension up to a max gross of 115k (of qualifying earnings 2011). Even better if you were self employed, as you would have 2 years available to max out contributions (mind you it could be too late for 2010 as the closing date to submit tax return etc was yesterday). 20% of your salary would be c€1k p.m, so you would have scope to do this.

rodneytrotter15

My job is fairly secure to be honest, I don't receive TRS as it's my 2nd house ( sold the first one ). As regards the pension can you make lump sum contributions and still avail of the tax break ? I exercise stock options every year that are generally worth between E10k to E15k after tax, could these be transferred to the pension fund with the same tax break..

coylemj

rodneytrotter15 wrote: »

As regards the pension can you make lump sum contributions and still avail of the tax break ? I exercise stock options every year that are generally worth between E10k to E15k after tax, could these be transferred to the pension fund with the same tax break..

The shares can't be but if you are allowed make AVC contribustions then the cash can be lodged to the AVC scheme before Oct 31st and backdated to the previous tax year.

From the Revenue website...

If a contribution is paid after the end of the year, but before the following 31 October, relief may be allowed in the earlier year provided an election to do so is made by the individual on or before the 31 October.


http://www.revenue.ie/en/tax/it/leaflets/it14.html

In each tax year your employee contributions (typically made each month through the payroll) plus the AVC contributions cannot exceed the allowable limits which are based on age and which are currently...

Up to 30 15% of remuneration/net relevant earnings
30 – 39 20%
40 – 49 25%
50 – 54 30%
55 – 59 35%
60+ 40%

The tax relief on pension contributions is going to reduce over the next couple of years so if you are currently paying tax at the higher rate it would probably be worthwhile to divert spare cash to the pension for the next year or so and then when the tax relief on pensions drops back to the standard rate or something similar, you could consider paying down the mortgage.

Relief at the top rate on AVC contributions is currently the best deal you'll get from the taxman, I'd avail of the relief at the top rate if you can get it while it's going because it means that every €1 paid into your pension only costs you 59c.

NIMAN

coylemj wrote: »

True but waiting for it to bottom out means that you get left behind when it starts to go up again. If you think that markets will 'stay down' then you need to invest your pension in German bonds (currently paying 1.7%) and look forward to poverty in old age.

Using this logic, is it not the time to buy property now?

Kennie1

NIMAN wrote: »

Using this logic, is it not the time to buy property now?

Well overseas investors are becoming a regular feature at the auctions over the last few months and they seem to think there is good value in the market in certain areas based on current rental yeilds.

So if you have the cash and dont need the credit, now could be as good as time as any if you can get the right property! That said I can still see the overall market falling another 15% to 20% over the next 3 years.

NIMAN

Not a great looking property, but a 3 bed semi for €21,000.

http://donegalnow.com/sp/article_manager/detail/want_as_house_for_21000_euro

Can it get any lower?

Another link to the same property, also mentions a 4 bed detached for €55k
http://donegalnow.com/sp/article_manager/detail/distressed_property_auction_update__nine_donegal_properties

coylemj

The current problem with property is that there is too much of it lying idle and there's going to be drip drip sales by NAMA and corporate receivers happening over the next few years so prices will remain soft and with the glut of rental properties, rent yields are low.

Auctioneers are trying to talk up the market and going on about the 'bargains' that are available but for the moment I can't see any improvement in property prices.