Pension and general financial advice

[MrBrurns]

Hi all,

I'm looking for advice about what to do with spare cash and if I and wife should/can contribute to AVCs. We are both working in the public sector with the following details:

Age: 37
Spouse’s/Partner's age: 34

Number and age of children:
3.5!: 5, 2, 2, and one on the way (hope to maybe have more if we are lucky enough but will see how things go)

Income and expenditure
Annual gross income from employment or profession: €145k
Annual gross income of spouse: €55k

Monthly take-home pay
Me: approx 7K, wife approx: 3k,

income from rental property €1.8k (this is gross)

Type of employment: e.g. Civil Servant, self-employed
Both public servants

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving approx 7k per month

Summary of Assets and Liabilities
Family home worth €700k with no mortgage
Cash of €90k
Defined Contribution pension fund: None
Company shares : 20k
Buy to Let Property worth €400k with no mortgage rented for 1800 gross pcm.

Other borrowings – car loans/personal loans etc

Do you pay off your full credit card balance each month?
If not, what is the balance on your credit card?

Yes

Buy to let properties
Value: 400K
Rental income per year: 21.6k
Rough annual expenses other than mortgage interest : 3k
Lender: no mortgage

Other savings and investments:

Do you have a pension scheme? Me 6 years in public sector single scheme.
Wife 9ish years (not sure exactly) in single scheme

Do you own any investment or other property?
Wife has approx €20k worth of directly held shares in a few different blue chip companies

Other information which might be relevant

Life insurance: None


What specific question do you have or what issues are of concern to you?
We both have good public sector pensions, I started late in the ps on the single scheme but luckily started at a high salary and should continue to earn well if I stay in the public sector. I am currently at the top of my scale but if I get promoted (which I would hope for in the coming years) would earn €170-200k depending on the role. Positions above that would be difficult to forecast the likelihood of me getting at this stage.

Q1:
If I were to contribute to avc would I be at risk of breaching any pension limits?

I'm reluctant to lock money away for the long term as we will receive substantial assets/gifts/inheritances over the coming decades (houses, blue chip stocks, land, etc) with a current after tax value of approx 4 million which would make us wealthy as we approach retirement.

Q2:
Are we better using the extra money we have now for something knowing we possibly won't need the possible enhanced benefits from avcs when we are older?

Q3:
Is there anything else we should consider financially?

Thanks for reading,

 

[Brendan Burgess]

I'm reluctant to lock money away for the long term as we will receive substantial assets/gifts/inheritances over the coming decades (houses, blue chip stocks, land, etc) with a current after tax value of approx 4 million which would make us wealthy as we approach retirement.

I don't understand this point.

The fact that you expect to get substantial inheritances means that you can lock money away in a pension scheme?

People are often reluctant to put money away in a pension scheme, in case they need it for their kids' education.

Brendan

 

[Brendan Burgess]

I don't know the pension rules, but with the amount of cash you have, you should be maxing your pension contributions.

It's the best long-term vehicle for investing.

Brendan

 

[Brendan Burgess]

Any remaining cash should be invested in a diverse portfolio of equities.

Brendan

 

[Early Riser]

PS pensions are good but the Single Scheme is considerably less generous than previous schemes. Your wife especially should top up her pension with AVCs. Even more so if at some stage she might consider taking a career break or going part-time (at the risk of sounding sexist here).
Normal retirement age is State Pension age in your scheme - likely to be 68 plus by the time you reach retirement. Either or both of you might appreciate the option of retiring before then with the assistance of an AVC enhanced CNER pension.

 

[Steven Barrett]

Get life cover! You have the public service cover (1 times salary and 50% of the pension you would have received if lived to retirement) but with 3 kids, one on the way and you want more, you need to protect each other financially. That is your biggest exposure as a family.

Max out your pensions
Create an investment fund for future education. We don't know your location but if you have to pay for rent as well as fees for 4 kids, that's expensive.


Steven
www.bluewaterfp.ie

 

[NoRegretsCoyote]

Monthly take-home pay
Me: approx 7K, wife approx: 3k,

income from rental property €1.8k (this is gross)

Type of employment: e.g. Civil Servant, self-employed
Both public servants

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving approx 7k per month

It's hard to imagine how you are saving 70% of your take-home pay with three kids under 5 but congratulations! In your shoes I would recommend one partner cuts back on hours if possible. Kids are only that age once and you can well afford it. It depends a bit on where you live but if I had four young kids and a job in Dublin I would prefer the space and live in a >€1m house if I could afford it.

If I were to contribute to avc would I be at risk of breaching any pension limits?

I'm not an expert on the single scheme but for your age and income you might be bumping off the standard fund threshold of €2m when retirement comes already. So I think it's probably too early too be investing in AVCs. If you do it now you could be in your 60s wanting to stay in work but building up further pension benefits that would be taxed at penal rates. Also the SFT might not be in the same place in 25 year too. So all too early.

 

[thedaddyman]

Start with the obvious stuff and make sure you have wills squared away, done a full tax review to ensure you have claimed for everything and that you are set up in the most tax efficient manner possible and have claimed historically for everything you can.

Worth you wife just confirming her private sector pension position so you are clear. Also have you ever worked overseas or in the UK (see the posts on the UK state pension on here)

Are there any big spends coming up, anything you need to do to your own house, cars that need changing etc.

Given the great position you are in, I'd be focussed now, whilst you and the kids are young, on long term investment options for College in 15 or so years times

 

[MrBrurns]

I don't understand this point.

The fact that you expect to get substantial inheritances means that you can lock money away in a pension scheme?

People are often reluctant to put money away in a pension scheme, in case they need it for their kids' education.

Brendan

Hi Brendan,

My point is that by the time my AVCs would bear fruit in my 60s we would be substantially wealthier than we are today through inheritance and the proportionate utility of extra income then would potentially not be felt.

In effect the extra money sacrificed at this stage in our life would not change our lifestyle then but might impact it now.

 

[Brendan Burgess]

In effect the extra money sacrificed at this stage in our life would not change our lifestyle then but might impact it now.

Ah, I see your point now. It is a valid point for discussion. We are wealthy or expect to be, so we don't need a pension.

And if you were under financial pressure now e.g. an uncomfortably large mortgage or looming education expenses, I would definitely advise against contributing to a pension.

However, in your case...

Buy to Let Property worth €400k with no mortgage rented for 1800 gross pcm.

Cash of €90k

Saving approx 7k per month

contributing to a pension now does not impact your lifestyle in any way. You have plenty of cash and you are saving €7k a month.

If you need cash before your inheritances come through, you can always sell your investment property.

Come to think of it, it might be worth selling the investment property now and investing the proceeds in something more liquid such as a portfolio of shares. If you need €50k, you can't sell a bit of the property. But you can sell €50k worth of shares.

It might be difficult to sell an investment property in the future if the government says that you must offer it to the local council first or that you must sell it with the tenant in situ.

Brendan

 

[MrBrurns]

PS pensions are good but the Single Scheme is considerably less generous than previous schemes. Your wife especially should top up her pension with AVCs. Even more so if at some stage she might consider taking a career break or going part-time (at the risk of sounding sexist here).
Normal retirement age is State Pension age in your scheme - likely to be 68 plus by the time you reach retirement. Either or both of you might appreciate the option of retiring before then with the assistance of an AVC enhanced CNER pension.

Thanks Early Riser, I admit to not understanding much about our pensions so I think I need to do some research and see what they options would be re early retirement and how AVCs could fund this. I feel I know much more about the older schemes from listening to conversations from my older colleagues but know very little about the one I am in!

I will talk with my wife about when she would see herself retiring etc and go from there.

 

[MrBrurns]

Get life cover! You have the public service cover (1 times salary and 50% of the pension you would have received if lived to retirement) but with 3 kids, one on the way and you want more, you need to protect each other financially. That is your biggest exposure as a family.

Max out your pensions
Create an investment fund for future education. We don't know your location but if you have to pay for rent as well as fees for 4 kids, that's expensive.


Steven
www.bluewaterfp.ie

Hi Steven,

Thanks for the feedback - I'll look into life cover, I never actually considered that but it makes sense to think about.

Re the investment fund - should I be looking to put the money/investment in the children's name now or just give them money when the time comes?

Re 3rd level expenses - we don't live in Dublin but have a property there in the center that the children could live in so rent should hopefully not be a issue but we would of course lose the income from the rent.

 

[Brendan Burgess]

I'll look into life cover, I never actually considered that but it makes sense to think about.

The case for a wealthy person not needing life cover is much stronger than the case for not needing a pension.

You have no mortgage.
You have about €500k in assets.
You expect big inheritances.

I am not convinced that you need life cover.

Brendan

 

[MrBrurns]

It's hard to imagine how you are saving 70% of your take-home pay with three kids under 5 but congratulations! In your shoes I would recommend one partner cuts back on hours if possible. Kids are only that age once and you can well afford it. It depends a bit on where you live but if I had four young kids and a job in Dublin I would prefer the space and live in a >€1m house if I could afford it.


I'm not an expert on the single scheme but for your age and income you might be bumping off the standard fund threshold of €2m when retirement comes already. So I think it's probably too early too be investing in AVCs. If you do it now you could be in your 60s wanting to stay in work but building up further pension benefits that would be taxed at penal rates. Also the SFT might not be in the same place in 25 year too. So all too early

Thanks for the feedback Coyote, the 7k figure was worked out roughly by me, it varies from month to month but we are generally not big spenders.

My wife will be going on mat leave again in a few months and might take some extended parental leave after that. She has a very family friendly position so has been able to get by ok until now with grandparents help but this will change when the new baby arrives.

Our house is suited to our future needs, we don't live in Dublin and I work mostly remotely so are lucky in that respect.

The standard fund threshold is a concern, I don't know how to calculate if that is an issue or not. I know a friend who is training to be a medical consultant has told me that is an issue for them but maybe I don't earn enough to have to worry about it? If I get promoted again it might be even more of an issue and I would expect to have good promotional opportunities as I am significantly younger than others at my level and above

 

[Steven Barrett]

The case for a wealthy person not needing life cover is much stronger than the case for not needing a pension.

You have no mortgage.
You have about €500k in assets.
You expect big inheritances.

I am not convinced that you need life cover.

Brendan

That is awful advice Brendan. He'll have 4 kids soon! 500k is about 5 years net income.

The inheritance should be kept out of planning until there is more certainty around when it will be received and how much. He could be retired himself by the time he receives it.

 

[Steven Barrett]

Re the investment fund - should I be looking to put the money/investment in the children's name now or just give them money when the time comes?

Re 3rd level expenses - we don't live in Dublin but have a property there in the center that the children could live in so rent should hopefully not be a issue but we would of course lose the income from the rent.

Putting it in a child's name is to gift them money in a tax efficient manner. It is their money. If you want to use it for education, keep it in your own name.

Great that you have a property in Dublin, but don't rely on them all going to college in Dublin either, they may want to go somewhere else. It's always good to have the funds to hand. If they all end up in Dublin, you can just spend the money on yourself!

 

[Brendan Burgess]

That is awful advice Brendan. He'll have 4 kids soon! 500k is about 5 years net income.

What you mean is that you disagree with it. You are wedded to the life industry propaganda that everyone must be fully insured for everything that might possibly happen.

I think it's important to challenge this and not to insure against risks which are low and which can be easily handled if they do happen.

Their combined income is €12k a month
Their expenditure appears to be about €5k - don't forget that they have no mortgage on either property.
They are both working.
If one dies suddenly and the other quits work, they will have 100 months of expenditure - about 8 years.
And they clearly have wealthy family who would advance some of the gifts if they were needed.

It's absolutely clear to me that their wealth is their life insurance.

Brendan

 

[NoRegretsCoyote]

That is awful advice Brendan. He'll have 4 kids soon! 500k is about 5 years net income.

I think you are both right and both wrong.

Brendan is correct that OP's wealth is so large he doesn't need explicit insurance. Steven is correct however that it is more efficient to insure against this explicitly rather than carrying it in cash.

The standard fund threshold is a concern, I don't know how to calculate if that is an issue or not.

Basically you have to work out the likely value of your pension and lump sum at normal retirement age. Then you multiply the annual amount by 20 (the standard capitalisation factor) and add the lump sum to see if you are over the SFT. This is the Revenue manual. But please do own homework on this and search other AAM threads on this as there are much more expert posters than me. Likewise for the Single Scheme where you will get useful answers to well-formulated questions. Rule of thumb is that for Single Scheme members almost only medical consultants will be impacted by the SFT as most other public servants just won't have a salary long enough and high enough to build up a pension and lump sum large

Otherwise I repeat it is really hazardous to be making assumptions three decades away about the value of your own pension given inflation and other factors and indeed the SFT in force at the time. The standard capitalisation factor might also change too.

 

[Early Riser]

Basically you have to work out the likely value of your pension and lump sum at normal retirement age.

And that is very difficult to do in the Single Scheme, as it is based on career average earnings rather than final salary (as in older PS schemes). And, in turn, career average earnings are impacted not only by starting salary and final salary but whether promotions occur relatively early in the career or relatively late.

But as an example, here is a rough estimate. Lets say the OP accumulates 35 years service and has career average earnings amounting to €171,600 pa (in todays terms). At normal retirement age this should yield an annual pension in the region of €63,000 and a lump sum in the region of €225,000. (This annual pension excludes the State Pension, which does not count towards the Standard Fund Threshold).

In any event, the SFT should not present any barrier in his wife's case.

 

[_OkGo_]

That is awful advice Brendan. He'll have 4 kids soon! 500k is about 5 years net income

What you mean is that you disagree with it. You are wedded to the life industry propaganda that everyone must be fully insured for everything that might possibly happen.

Steven is right, it's terrible advice. The OP is wealthy for their age but they also have a larger family than most and plans to expand further. The family would really struggle if anything happened to the OP

Hypothetically, if the OP kicked the bucket, the spouse would be left with 4 or 5 kids. They could not afford to work and look after children and they may not get the financial support from the grandparents for several reasons.

If the €4m inheritance is from the OP's parents, then the spouse can forget about ever remarrying or doing anything that would jeopardize that relationship so it can't be relied on. The spouse would struggle to give the children a 3rd level education

However, the OP could manage without life insurance on his spouse. Between his salary and the rental income, he could definitely afford the extra support to raise his family while continuing to work.

It's pretty clear that the OP needs his life insured but the spouse not so much