Reduce your mortgage before starting pension?

W

wanball

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Brendan recommends that before worrying about a pension you should get your mortgage 'down'. For us that would cost around €50000 I reckon (303k 30yr). Realisticaly what are the chances of that???!!!

We are OK, after all bills & mortgage out we have about €3700 net. But, we are in the middle of doing the whole house up, we need a new car, then probably get married.....

Surely it would be a good idea to setup a PRSA each and let the mortgage run its course?? We wouldn't notice the money say 150 each (before tax) going out after a while.

What do yis (Brendan!) reckon?
 
Re: Brandans comments on the Last Word last night

It makes sense to avail of the tax relief afforded by a pension regardless of mortgage situation
 
Re: Brandans comments on the Last Word last night

Diversification is important.

If you tie up all of your wealth in one asset class (for example shunning a pension to pay off the mortgage) - one could leave oneself very very exposed to a property wobble.
 
Re: Brandans comments on the Last Word last night

If you tie up all of your wealth in one asset class (for example shunning a pension to pay off the mortgage) - one could leave oneself very very exposed to a property wobble.

Can you explain? I don't see how periodic ups and downs in the value of one's home should affect one's investment priorities.
 
Re: Brandans comments on the Last Word last night

If one ploughs all their money into their own house with the intention that on retirement one wants to trade down and live off the equity - and ignore a pension - then there is an obvious lack of diversification and over-concentration of risk...not to mention the loss of tax relief on pensions :)
 
Re: Brandans comments on the Last Word last night

I think the original argument makes sense, but is now distorted by relatively low interest rates & tax. In the past, mortgage rates were 8%+, hard to find a guaranteed return better than that after tax. Now rates are 4-5%, less maybe if you take interest relief into account. On the other hand, pension contributions potentially get tax relief at the top rate of tax which is a great immediate return, but locks your money away until you retire.
 
Re: Brandans comments on the Last Word last night

Start the pension now. Your mortgage is so big that you'll probably need several years before you get it down to a comfortable level.

It was much easier to follow that advice several years ago before mortgages ballooned (well ahead of wage inflation) to their present multiples.

Chip away at the mortgage with prepayments whenever you can as well.
 
Re: Brendans comments on the Last Word last night

I agree with Brendan. Its important to reduce one's mortgage to a manageable level as early as possible. Tax advantages apart, there may little point in stashing surplus money away in a pension which can only be accessed at age 60 if the size of a person's mortgage would leave them (and their homes) vulnerable in the event of loss of employment, illness etc.
 
Re: Brendans comments on the Last Word last night

People may be starting to price risk correctly - when they do, house prices could underpeform for some time...diversification is crucial.
 
Re: Brendan's comments on the Last Word last night

I don't mean to put words into Brendan's mouth - this is an argument many of us have made repeatedly in these pages and elsewhere.

The point is not to do with investment so the diversification argument is not particularly relevant.

For most people the main motivation for buying their their house is not that it's an investment; it is a purchase.

It's funded with debt.

Debt is potentially a problem for ordinary people - rising interest rates; redundancy; illness; bereavement; family breakdown etc.

Getting debt under control as a priority is a good move. It gives security. That's not fashionable nor is it a goal of entrepreneurial types. That's good for them. But I know when I was briefly quite ill a couple of years ago I was more concerned with the size of my mortgage than that of my pension fund.

And, in any event, there are numerous posts on this site from people noting that their pension investments have been providing risible returns for years. Lots of people would have quite happily settled for fund growth equal to mortgage rates over the last five years. They'd have got that if they'd reduced their mortgages - the tax relief on pension contributions would presumably be available to them as they increase their pension contributions significantly once their debt has been reduced.

Finally, the biggest clincher is that basic rate taxpayers with mortgage debt should never feel under pressure to get on the personal pension treadmill if there is any possibility of them moving into the higher rate as they get older. Wait until you pay tax at the higher rate to get serious about funding your pension - particularly, of course, if you're likely to revert to being a basic rate payer in retirement.
 
Re: Brendan's comments on the Last Word last night

The point is not to do with investment so the diversification argument is not particularly relevant.

For most people the main motivation for buying their their house is not that it's an investment; it is a purchase.

However the opportunity cost of the purchase is alternative investments.
 
Re: Brendan's comments on the Last Word last night

And, in any event, there are numerous posts on this site from people noting that their pension investments have been providing risible returns for years. Lots of people would have quite happily settled for fund growth equal to mortgage rates over the last five years. They'd have got that if they'd reduced their mortgages - the tax relief on pension contributions would presumably be available to them as they increase their pension contributions significantly once their debt has been reduced.
  • Tax reliefs not used in one year do not get carried over to another year.
  • It is interesting to see that the pension managed fund returns achieved by the top five Irish managed funds over the last five years are as follows:
Standard Life: 11% per annum
Irish Life Investment Managers 10.9% per annum
Eagle Star: 10.9% per annum
Friends First: 10.2% per annum
Hibernian Investment Managers 9.9% per annum

These returns would seem to be well ahead of mortgage interest rates over the last five years.
 
Re: Brendan's comments on the Last Word last night

Tax reliefs not used in one year do not get carried over to another year.

When did that happen? I thought unused relief from the immediately preceding year could be carried over.
 
Re: Brendan's comments on the Last Word last night

The limit on personal contributions in a year is x% of salary (x being age related).
 
Re: Brendan's comments on the Last Word last night

Yes, but isn't there a retrospective facility where the unused limit from the previous year can be used.
 
Re: Brendan's comments on the Last Word last night

The limit on personal contributions in a year is x% of salary (x being age related).
Yes...but the % levels are quite high, and unused relief can be carried forward - For example someone over 40 years old can get tax relief on up to 30% of their non-pensionable income in any given year. A 41-year old who earns €100,000 in 2007 can get tax relief on contributions up to €30,000 made in that tax year or by 31 October in the following year. Contributions of over that level can be carried forward to later years. (eg if in the above example, a payment of €40,000 is made in 2007, the tax relief on the remaining €10,000 can be used in 2008 or later years.)
 
Re: Brendan's comments on the Last Word last night

It is still in respect of the same tax year, it is just a question of timing of the payment.
 
Re: Brendan's comments on the Last Word last night

So?

The point of my illustration was that a 40 year old earning an average of €100,000 per annum can invest up to €300,000 in a pension over a 10 year period and get full tax relief on all sums contributed, even if earnings fluctuate to a degree within that timeframe.
 
Re: Brendan's comments on the Last Word last night

My point is that the same person needs a fund of over €2m to retire on a pension of 2/3rds of salary - so the contributions need to be made consistently in each tax year - €300k won't go far for such an individual.
 
Re: Brendan's comments on the Last Word last night

But why would someone earning €100,000 today need a pension of €66,000 (in todays money) on retirement?
 
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