Pensions Dilemma

First off.

Thanks to all who reply to this. I'm sure its done to death elsewhere (I did a wee bit of searching but feel in need of some specific advice).

I've just turned 39. I've no pension to speak of, (assessment from a frozen UK pension at 4,400UK and one that was in Equitable Life (with a few AVC's to boot) I'm struggling to get a handle on the value of this one.

My dilemma is:

Should I cash in these pensions and, with the SSIA due next year buy a small house in the village where I live to rent out and retire to it (and sell my new house once the mortgage is paid off and use it as my pension), or should I consolidate what little bits I have got and kick off my pension / PRSA ?

the mortgage is 25 years but equity stands now at +45% and would be of substantial value in 20 years or so (well, thats the theory!!!)...

I dont have alot of disposable income except whats gone into my SSIA, is this worth paying off the mortgage quicker or using as a PRSA or saving ??

I do plan on putting something into a pension / PRSA but I'm not sure on the other bits ?

Any comments or help much appreciated...

Fatboy..

fatboyPee said:

and one that was in Equitable Life (with a few AVC's to boot) I'm struggling to get a handle on the value of this one.

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It should not be difficult. I recently [broken link removed] to get a valuation on a mixed WP/unit linked pension that I have with them and asking what the current WP MVA is now (4% it seems) and they wrote back with the details within a couple of weeks. Of course the WP part has the usual obfuscation about different valuations (indicative, guaranteed/maturity etc.) but you can generally figure it out. Also they write to me each year with a statement and details of performance and any bonuses declared.

Is your EL pension WP or equities/unit linked funds?

Should I cash in these pensions

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Are you sure that cashing them in is an option? With Irish pensions this is usually only possible with less than two years service in an occupational scheme but otherwise the money is locked away.

and, with the SSIA due next year buy a small house in the village where I live to rent out and retire to it (and sell my new house once the mortgage is paid off and use it as my pension), or should I consolidate what little bits I have got and kick off my pension / PRSA ?

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There is no easy answer to this. You seem to have figured that this is an either/or pension/property question but I don't think that it's as simple as that. Especially when the tax reliefs available on pension contributions are considered.

I dont have alot of disposable income except whats gone into my SSIA, is this worth paying off the mortgage quicker or using as a PRSA or saving ??

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How much is your mortgage and what is the property valued at?

Any comments or help much appreciated...

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I would strongly urge you to get independent, professional advice from a good multi-agency intermediary or authorised advisor who would be better placed to do a more comprehensive fact find/financial health check than others here might be able to do in the face of partial information.

The value of your pension to date (built up in UK) is not really relevant - I think your main question is whether you would be better off paying into a pension or buying a property to fund for your retirement now.

It sounds like you have not built up a significant pension fund so far?

In relation to your future choices - it would certainly make sense to set-up a pension, given the tax-relief and tax-free roll-up it makes more sense than just about any other investment, other things being equal.

(Of course, given the huge increase in property values in Ireland over past five to ten years and the comparatively poor performance of equities over the similar period, other things have not been equal!)

Whether or not you should buy that property is a different question - it depends on your view of property market at this time - overheated maybe...or do you have some inside track on property that makes this property more valuable to you than to the average punter?

Hi ClubMan,

Thanks alot for your comprehensive reply ! Much appreciated !

I will indeed seek proper advice allright, just wondered if there were some polar comments on a "best way" to do things...

Ref EL. I'm not really sure, it was a company pension which I took little notice of, especially when I left, only when EL went "wrong" did I kindof write it off.... as for the being able to cash in, the UK one I have a surrender value for, the other Ihave asked the ex-company a good few times but need to put more pressure on.

ref Either Or: Not quite, but having been quoted an amount to put away given my age at over 800 per month (and knowing I could never reach that figure), I got to wondering if I may be better off directing what little I have elsewhere. A retirement house seems a good option (alongside a smaller PRSA) as the mortgage is 250 but the house on completion was valued at 510 - 530 and 530-550 (2 different Agents). I know it may fall but looking long term If I paid this off earlier by putting in my SSIA then the monthly amount that is currently going to SSIA it maybe worth it ?

Thanks Again.

Fatboy.

Capital1 said:

The value of your pension to date (built up in UK) is not really relevant - I think your main question is whether you would be better off paying into a pension or buying a property to fund for your retirement now.

It sounds like you have not built up a significant pension fund so far?

In relation to your future choices - it would certainly make sense to set-up a pension, given the tax-relief and tax-free roll-up it makes more sense than just about any other investment, other things being equal.

(Of course, given the huge increase in property values in Ireland over past five to ten years and the comparatively poor performance of equities over the similar period, other things have not been equal!)

Whether or not you should buy that property is a different question - it depends on your view of property market at this time - overheated maybe...or do you have some inside track on property that makes this property more valuable to you than to the average punter?

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All points very true (thanks).

I don't have an inroad to property, but where I live its still possible (just) to pick up a small ex-council style house for under 200k in the village. I honestly cannot see this decreasing dramatically given the building work, lack of planning permission for domestic non locals etc and given the 20 year lead time till I'm planning a retirement if I leave it much later I won't get the house paid off in time...?

As explained I am planning to start the pension but having just finished the house etc I've no disposable income for a while...

thanks

Fatboy.

Your best bet might be a pension mortgage - if you could get a tenant for that property to rent it from you between now and your planned retirement date...if you are that "gone" on the property!

fatboyPee said:

Ref EL. I'm not really sure, it was a company pension which I took little notice of, especially when I left, only when EL went "wrong" did I kindof write it off....

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Email them at the contact address on the page linked above with details of your policy number(s) and ask them to send you out a valuation and any other details that you need.

as for the being able to cash in, the UK one I have a surrender value for, the other Ihave asked the ex-company a good few times but need to put more pressure on.

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Surrender value doesn't necessarily mean that you can cash it in. A surrender value may be the value of the fund when transferring it into another pension scheme etc.

but having been quoted an amount to put away given my age at over 800 per month

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By whom? It is not always meaningful to infer what your pension contributions should be based on a target retirement income of x% of your current or projected salary. It often makes more sense to see how much you can reasonably save/invest in your pension and avail of as much tax relief/deferral as possible. In addition just because you can't afford €800 p.m. doesn't mean that you should give up on the pension altogether and look at alternatives such as property.

A retirement house seems a good option (alongside a smaller PRSA) as the mortgage is 250 but the house on completion was valued at 510 - 530 and 530-550 (2 different Agents). I know it may fall but looking long term If I paid this off earlier by putting in my SSIA then the monthly amount that is currently going to SSIA it maybe worth it ?

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Investing in a single propery is arguably a lot more risky than indirectly investing in a basket of equities and other assets diversified by asset class, geographic region, risk/reward profile especially when the pension investments benefit from significant tax reliefs.

Capital1 said:

Your best bet might be a pension mortgage - if you could get a tenant for that property to rent it from you between now and your planned retirement date...if you are that "gone" on the property!

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I know the tenancy thing is a big IF... ... but I have a very specific area in mind.... if I can get a hold of a property there.... just my new house is 3 miles out up a very steep hill .....all things considered, there will come a time when I/we want to live nearer to the village .....

Will check out the pension mortgage.. Thanks

FBP.

Capital1 said:

Your best bet might be a pension mortgage - if you could get a tenant for that property to rent it from you between now and your planned retirement date...if you are that "gone" on the property!

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I don't think that this is necessarily true. If you are investing in a property then you might be better off going for an interest only mortgage and keeping your pension savings separate. I don't think that people should necessarily link investment property interest only mortgages and their pension.

Ultimately I don't think that there are any cut and dried answers here especially without much more detailed information about your overall circumstances. If you are seriously looking at the investment property opportunity then you need to crunch the numbers carefully/objectively (including tax and other expenses) and make sure that the venture is viable. Also don't assume that past property price growth rates will continue indefinitely!

ClubMan said:

Email them at the contact address on the page linked above with details of your policy number(s) and ask them to send you out a valuation and any other details that you need.
Surrender value doesn't necessarily mean that you can cash it in. A surrender value may be the value of the fund when transferring it into another pension scheme etc.

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Will do. Thanks. I understand what you mean. I'll clarify whether this is the case, even transferring (if limited penalties) maybe an option).

ClubMan said:

By whom? It is not always meaningful to infer what your pension contributions should be based on a target retirement income of x% of your current or projected salary. It often makes more sense to see how much you can reasonably save/invest in your pension and avail of as much tax relief/deferral as possible. In addition just because you can't afford €800 p.m. doesn't mean that you should give up on the pension altogether and look at alternatives such as property.

...

Investing in a single propery is arguably a lot more risky than indirectly investing in a basket of equities and other assets diversified by asset class, geographic region, risk/reward profile especially when the pension investments benefit from significant tax reliefs.

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I know, just 2 things in my mind: 1: no pension 2: at some point moving back into civilisation.. the option of buying and renting out seem a good one alongside a pension if possible as I honestly dont envisage house prices in the village to go down, if anything I will shortly be priced totally out of the market....

Thanks

FBP.

ClubMan said:

I don't think that this is necessarily true. If you are investing in a property then you might be better off going for an interest only mortgage and keeping your pension savings separate. I don't think that people should necessarily link investment property interest only mortgages and their pension.

Ultimately I don't think that there are any cut and dried answers here especially without much more detailed information about your overall circumstances. If you are seriously looking at the investment property opportunity then you need to crunch the numbers carefully/objectively (including tax and other expenses) and make sure that the venture is viable. Also don't assume that past property price growth rates will continue indefinitely!

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Currently I'm on an Interest Only mortgage (not moved from Building Phase yet).... will need to sort that out too....

As for overall circumstances, I'm the sole earner, wife at home with 3 children. The area we live in is, like everywhere up and coming and "benefitting" from the Dublin boom in as much as people getting out and relocating to the country life with wads and wads of cash putting house prices comeasurately thru the roof.. this looks set to continue and even if the demand drops off they will not likely come down to prices below what they are now...

Given the choice of staking most or all of my retirement income on a single property or spreading it across a range of asset classes, risk/reward profiles, geographic regions etc. I know which one I'd choose. The latter in case it's not obvious. You already own your own home (albeit mortgaged) as far as I can see so you are already highly invested in Irish property. As such it makes sense to diversify your investments a bit more for example by investing in a pension or other fund which deals in equities etc. If/when property becomes a less significant part of your overall portfolio then see about increasing your exposure to it. Otherwise you are taking more risks that necessary with your current and future net worth.

ClubMan said:

Given the choice of staking most or all of my retirement income on a single property or spreading it across a range of asset classes, risk/reward profiles, geographic regions etc. I know which one I'd choose. The latter in case it's not obvious. You already own your own home (albeit mortgaged) as far as I can see so you are already highly invested in Irish property. As such it makes sense to diversify your investments a bit more for example by investing in a pension or other fund which deals in equities etc. If/when property becomes a less significant part of your overall portfolio then see about increasing your exposure to it. Otherwise you are taking more risks that necessary with your current and future net worth.

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Thanks,

My point I suppose is that at this time in my life I would not ever be able to create a fund equal to the equity that will accrue from the house I have just built before I retire. I will take out a pension but overall if I invested now in my downsized property (fairly inevitable given the location of my current property) I wolud serve 2 purposes, 1 creating myself a reasonable pension fund upon the sale of my existing house and 2 have a mortgage free retirement in a more manageable property. To me this seems to make more sense than trying to build up a pension fund with all available assets and still struggling, inevitably having to sell my existing house but not being able to afford a small house in the village/town as it will be by then....

Once again, thanks for the replies they're greatly appreciated.

Cheers

FBP..

Clubman - a pension mortgage is a pension that invests in a basket of fixed interest/equities/property etc.

The main advantage of this is that the tax free cash from the pension can be used to pay off the capital on the loan.

You seem to be confused, a pension mortage will allow FBP to invest in a broad range of asset classes while gaining exposure to the (hopeful) appreciation in property over the period of his pension.

Capital1 said:

Clubman - a pension mortgage is a pension that invests in a basket of fixed interest/equities/property etc.

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A pension mortgage is a bundling of two otherwise separate products - an interest only mortgage and a pension. A bit like an endowment mortgage being a bundle of an interest only mortgage and a (non pension) investment scheme. Without specific reasons to do so why bundle these? At best it is unnecessary and at worst the one stop shop lender selling the bundled product could charge over the top on commissions etc. If somebody has an investment property then there are strong arguments (outlines elsewhere) as to why they might use an interest only mortgage. If they also need a pension or another investment scheme then, all things being equal, I would tend to keep that separate and shop around for the best value.

The main advantage of this is that the tax free cash from the pension can be used to pay off the capital on the loan.

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That can be done anyway even with a standalone pension not linked to the interest only mortgage.

You seem to be confused, a pension mortage will allow FBP to invest in a broad range of asset classes while gaining exposure to the (hopeful) appreciation in property over the period of his pension.

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I am not confused at all. See above. If you can explain why and when somebody should necessarily buy a bundled pension mortgage (interest only mortgage and pension linked to the mortgage) rather than buying the two products separately they I would be very interested to hear them.

The bank will consider pension as basis for funding mortgage.
This means that person could borrow more than if they do not have pension.

That is just one reason.

The second reason is that it gives someone a goal for their pension funding, and keeps the person focused.

It is certainly not always the best solution - but for some people in some situations it can be a good solution.

You also said earlier that they would be singularly exposed to property by taking a pension mortage - you are utterly incorrect here - the pension will still depend on the performance of the fund in which the pension invests.

Capital1 said:

The bank will consider pension as basis for funding mortgage.
This means that person could borrow more than if they do not have pension.

That is just one reason.

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This does not explain why one should go for a pension mortgage rather than a standaone pension and an interest only mortgage. I am very wary of bundled financial products and industry professionals who recommend them especially given the scope for misselling and high charges.

The second reason is that it gives someone a goal for their pension funding, and keeps the person focused.

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Yes - that is why I recommended pension savings several times above. Just not necessarily as part of a bundled pension mortgage product.

It is certainly not always the best solution - but for some people in some situations it can be a good solution.

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Why do you think that it might be the best or a good solution in this specific case especially in preference to a separate interest only mortgage and pension?

You also said earlier that they would be singularly exposed to property by taking a pension mortage - you are utterly incorrect here - the pension will still depend on the performance of the fund in which the pension invests.

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I did not. I said that by owning their own home (still mortgaged) and investing further in Irish property they would be exposing themselves to significant risk by concentrating most or all of their net worth in a single asset class, risk/reward profile, geographic region etc. I never mentioned pension mortgages in this context. Please don't misrepresent my comments. If you have trouble understanding them ask me for clarification and I will explain them in simpler terms.

You have not explained clearly what the advantages of a pension mortgage are over a separate pension and interest only mortgage in this specific case or in general. As I said I am wary when industry professionals recommend bundling of products without explaining the advantages to the consumer clearly.

On a more general point the original poster really needs to get away from the specifics of pensions and investment properties and take a broader view of his situation, plans, needs etc. This should probably be done with a good multi-agency intermediary or authorised advisor who knows what they are talking about.

I did not say it was the best solution in this case.

I said they can be a good solution in certain cases.

For self-employed people who do not have significant equity or personal savings it can be difficult to raise >70% on an investment property.
The best opportunity this person may have to raise more (enough to buy the property of interest) may be through a pension mortgage.

The interest only loan will hopefully be met by the rental income.

Keeping interest high in this way is good because it means all of the rent can avoid paying tax because it will be offset by the interest.

In the meantime the person has a SPECIFIC TARGET (it sounds to me like FBP has never had a specific target for pension funding before) - and that will be to match the capital repayment.

This can be met by the TFLS from the pension mortgage (25% of the fund).

So, advantages:

• Ability to borrow more than if just went for interst mortgage
• SPECIFIC TARGET for the first time in relation to his pension funding

Disadvantages:

• Interest only mortgage expensive compared to capital & interest mortgage
• Risk of property fall
• Make sure interest rate is most competetive available (bundled financial products can sometimes take advantage of consumers)

Capital1 said:

For self-employed people who do not have significant equity or personal savings it can be difficult to raise >70% on an investment property.
The best opportunity this person may have to raise more (enough to buy the property of interest) may be through a pension mortgage.

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Is the original poster self employed? I can't see anything to that effect earlier.

The interest only loan will hopefully be met by the rental income.

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Still no explanation as to why one should bundle the pension and interest only mortgage.

Keeping interest high in this way is good because it means all of the rent can avoid paying tax because it will be offset by the interest.

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I know - covered here: Interest only mortgage

In the meantime the person has a SPECIFIC TARGET (it sounds to me like FBP has never had a specific target for pension funding before) - and that will be to match the capital repayment.

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Again the target can be set independent of bundling the pension and mortgage. Unless I'm mistaken the lender is not going to keep tabs on the borrower's pension contributions so the target must be set and adhered to unilaterally anyway.

This can be met by the TFLS from the pension mortgage (25% of the fund).

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Jargon explanation for those who might now know: TFLS = tax free lump sum.

• Ability to borrow more than if just went for interst mortgage
• SPECIFIC TARGET for the first time in relation to his pension funding

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These advantages all apply to an unbundled pension and interest only mortgage. I was asking what the specific advantages of a bundled product were. I think it's important that an industry insider recommended bundled products should be challenged to explain why consumers should do this. In the absence of clear advantages of buying bundled financial products and in the presence of the risk of misselling and overcharging I strongly believe that they should shop around for them separately and mix and match to their own specific needs.

• Make sure interest rate is most competetive available (bundled financial products can sometimes take advantage of consumers)

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This alone is a good reason to avoid them unless there are clear advantages to bundling.

This is ridiculous!

I just outlined advantages and disadvantages.

A good AA will keep the focus on the target.

It is not up to lending institiuion to keep tabs on his pension - the AA will do that.

The lending institiuion may offer better terms to borrowers (>70% for example) on a bundled product than unbundled product - that is the AA's job to make sure - if you trust advisers and institutions so little as you seem to, then I am amazed that you do not keep all your cash in a mattress under your bed.

Cynicism is not constructive.