# More into pension fund or over pay mortgage



## PaddyW (9 Nov 2015)

Hi mods, not sure which forum to put it in, so please move if necessary.

I'm in a position where I will be able to put an extra €200.00 (possibly up to €400.00) a month against mortgage or pension. Mortgage rate is currently 1.4%, so I'm guessing extra pension payments would make more sense, but would value all opinions.

 Thanks


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## Gerry Canning (9 Nov 2015)

Pension gives tax relief + tax free growth, so versus 1.4% mortgage = makes sense.

A lot depends on your age/family other debt etc, but good pension provision is never ever bad.


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## PaddyW (9 Nov 2015)

That's what I had in my mind Gerry. I'm 34 and have no family at the moment. I would still be keeping within tax relief limits also for my age. Just wanted to make sure there wasn't anything I was missing out!


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## Gerry Canning (9 Nov 2015)

PaddyW,

The beauty of adding 400 extra means that if times get hard you can stop that 400 for awhile and since you had got used to spending 400 less ,your living standard takes less of a hit.(not wishing hard times!)


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## PaddyW (9 Nov 2015)

Great point and something to keep in mind!


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## Steven Barrett (10 Nov 2015)

How many years will you knock off your mortgage by increasing the repayments? 

How much extra will you have in your pension fund if you make the extra contributions? 

Under both scenarios, once the money is paid, you no longer have access to it, so have you an adequate emergency fund and short term savings?

It doesn't have to be one or the other, you can always split the extra cash. 

Do the sums first though. 


Steven
www.bluewaterfp.ie


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## PaddyW (10 Nov 2015)

Hi Steven,

My mortgage is relatively small, at €82,000 euro with approximately 27 years remaining. If I was to pay an extra €200.00 per month, it would take 11 years and 11 months off it, according to the drcalculator.com mortgage calculator. Upping it to €400.00 per month would knock 16 years and 6 months off of it.

I have savings of roughly €20,000 euro put aside, which will not be touched as part of this as they will be my rainy day funds!

I think my ultimate goal is to have a good income in retirement. I've seen too many people surviving just on state pension and that is something I do not want to do!


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## Gordon Gekko (10 Nov 2015)

You've answered your own question so...pension the lot


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## PaddyW (10 Nov 2015)

Thanks Gordon, just wanted to make sure I was covering all my bases and making the most of my money!


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## Plywood (10 Nov 2015)

Pension all the way in your circumstances imo.


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## Brendan Burgess (10 Nov 2015)

Hi Paddy

Pension is clear assuming you are top rate tax payer. 

If not, I think it's clear that you should not contribute, but it's not as clear. 

Brendan


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## Fella (10 Nov 2015)

A lot of people are now looking at paying off trackers early ( myself included ) with deposit rates slashed . 

It's worth remembering that other threads here suggest there will not be enough money in future to pay for pensions , if that's even close to been the case I'd imagine it's not beyond the realms of possibility that the government at the time won't raid pension funds again , for this reason I won't put anything into a pension fund . 

The road I went down is investing in equities , if the risk of equities is too much I'd over pay mortgage or take advantage of the very useful "deposit best buys thread".


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## Gordon Gekko (10 Nov 2015)

Fella said:


> A lot of people are now looking at paying off trackers early ( myself included ) with deposit rates slashed .
> 
> It's worth remembering that other threads here suggest there will not be enough money in future to pay for pensions , if that's even close to been the case I'd imagine it's not beyond the realms of possibility that the government at the time won't raid pension funds again , for this reason I won't put anything into a pension fund .
> 
> The road I went down is investing in equities , if the risk of equities is too much I'd over pay mortgage or take advantage of the very useful "deposit best buys thread".



It seems rather extreme to completely eschew the most efficient investment platform around purely on the basis of what's "not beyond the realms of possibility".

I'd be more concerned about the State Pension being means tested down the line, and people with non-pension assets but no pension income being left in a no-mans land with literally no income in retirement.

Investing personal monies before maximising one's pension funding options is crazy in my view.


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## Fella (10 Nov 2015)

I'm 34 now I by the time I'm due my pension I'd be very surprised if there haven't been levies added again, once one government does it once it's on the table now it's been done it will be done again.

Means tested is also possible but at least if I get an idea of anything like this happening I can make plans to avoid it , your money is locked away in a pension fund and governments can nibble away at it , at least with money in the bank or shares I can get too it when I want.

Just to add I pay little to no tax so it's not as big as a decision as it would be if I was a high tax payer but I still wouldn't put money in a pension after the levy.


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## Sarenco (11 Nov 2015)

Brendan Burgess said:


> If not, I think it's clear that you should not contribute, but it's not as clear.



So, it's clear but not as clear...

The OP has a modest mortgage balance, on a cheap tracker, and has an ample cash reserve to address almost any conceivable uninsured emergency that might arise.

In these circumstances, I would have thought it was pretty obvious that increasing pension contributions, rather than paying down the tracker mortgage or investing outside a tax advantaged wrapper, was easily the better option regardless of whether or not the OP pays income tax at the higher rate.

Based on everything we know today, all the pension contributions have to do is produce an average net annualised return of at least 1.35% over the ECB refi rate over the next 27 years to come out ahead.  To put that modest level of return into context, Zurich's Balanced Fund has produced an annualised reaturn of 10.5% (before deduction of AMC) since 1989.

Also bear in mind that the pension contributions will have a 20% head start over paying down the mortgage if the contributions are relieved at the standard rate and a 40% head start if the contributions are relieved at the higher rate of income tax.

Yes, any pension drawdowns will be subject to income tax at some unknown rate in the future. But on the basis of today's tax rules, the accumulated pension pot would have to be pretty substantial (over €1million) before any income tax actually bites (although USC may take a nibble), assuming the OP retires at 65 or older.

I also suspect the OP is still entitled to MIR for the next couple of years, which skews the decision even further in favour of contributing to a pension before paying down the mortgage.


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## PaddyW (11 Nov 2015)

Brendan and Sarenco, thanks for the views. Yes, I am on top rate of tax and also still receive MIR. I've decided to add more to my pension, as our company has now told us that they are switching us to the Zurich Dynamic Fund, which seems to perform pretty well (or have I talked too soon!)

I will also keep adding to my cash reserve so that in the event that interest rates were to rise sharply at any time in the future I will be able to knock a decent lump off of the balance to negate the interest rises.

I should also add that I am 34 now as I omitted that in the OP


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## Steven Barrett (11 Nov 2015)

PaddyW said:


> Brendan and Sarenco, thanks for the views. Yes, I am on top rate of tax and also still receive MIR. I've decided to add more to my pension, as our company has now told us that *they are switching us to the Zurich Dynamic Fund*, which seems to perform pretty well (or have I talked too soon!)



It is one of Zurich Life's older funds, being created in November 1989. The average annualised return since then to date is 11.45%. Remember though, that is is a 100% equity fund, so you will get plenty of ups and downs. In 2008, the fund fell -37.83%. 

I'm surprised trustees have decided that a 100% equity fund is the fund of choice for a pension scheme. They are leaving themselves open to litigation when there is a stock market crash and the fund value falls dramatically. 


Steven
www.bluewaterfp.ie


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## PaddyW (11 Nov 2015)

Hi Steven,

Yes, I see from the fact sheet they gave us that 93% is invested in equities, with about 4% in cash and 3% in bonds. 2008 was a bad year alright, but they seem to have recovered quite well in following years, apart from a 3.4% fall in 2011.

We are currently in the Irish Life Consensus fund, which has performed pretty well to be fair, but in relation to the Dynamic Fund, I personally would have been about €20k better off in my fund amount if I had been invested in Zurich rather than Irish Life since 2005.
Perhaps the figures are skewing my views on it, do you think this is a bad idea yourself?


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## Dan Murray (11 Nov 2015)

Hi Paddy

Just to clarify, are you saying that you have no choice of funds or are you saying that within a fund range you have elected the Dynamic Fund?


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## PaddyW (11 Nov 2015)

Hi Dan,

The one they recommended to us was the Dynamic Fund as it's the one most of the employees in a sister company are invested in and has performed well. I do see there is a different range of funds that are available though, but I haven't been able to discuss the various options with an adviser yet


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## Bronte (11 Nov 2015)

SBarrett said:


> I'm surprised trustees have decided that a 100% equity fund is the fund of choice for a pension scheme. They are leaving themselves open to litigation when there is a stock market crash and the fund value falls dramatically.
> 
> 
> Steven
> www.bluewaterfp.ie



Can you clarify that please Steven, how are the trustees leaving themselves open to litigation?  On what grounds?


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## Steven Barrett (11 Nov 2015)

From the Trustee handbook issued by The Pensions Authority:



> trustees must invest with the care which an ordinary prudent person would take in investing for the benefit of other people for whom they felt morally bound to provide. As the purpose of the scheme is the provision of benefits for members and other beneficiaries, trustees must invest solely in their best interests. In this context “best interests” should be taken to mean best financial interests. Trustees must also invest the assets of the scheme in a manner appropriate to the circumstances of the scheme, i.e. they must review the general circumstances, such as the age profile, of the members of the scheme and invest the assets appropriately (par. 3.7)



If the trustees have switched the default investment fund to a 100% equity and the markets tank when old Gill is 1 day from retirement, he can quite easily argue that the trustees didn't take *the care which an ordinary prudent person would take in investing for the benefit of other people for whom they felt morally bound to provide.
*
Even if all the members are in their 30's, like the OP, you could say that a 100% equity strategy is on the risky side. 

Steven
www.bluewaterfp.ie


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## elcato (11 Nov 2015)

SBarrett said:


> Even if all the members are in their 30's, like the OP, you could say that a 100% equity strategy is on the risky side.


Maybe I'm thinking of another thing altogether but isn't the amount of risk decided by the individual at the start and can be changed at any stage ? (Usually when the company decide to call the pension advisor for a chat about once a year).


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## Steven Barrett (11 Nov 2015)

elcato said:


> Maybe I'm thinking of another thing altogether but isn't the amount of risk decided by the individual at the start and can be changed at any stage ? (Usually when the company decide to call the pension advisor for a chat about once a year).



It depends. Under most schemes, the trustees may give a choice of 6/7 funds, ranging from 100% equity to cash. Others, allow the members to chose from whatever funds are available while some just have 1 fund. It's impossible to know the exact situation of the OP's scheme but he did say



> our company has now told us that they are switching us to the Zurich Dynamic Fund



It doesn't sound that the member is getting a whole lot of choice.

Steven
www.bluewaterfp.ie


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## PaddyW (10 Dec 2015)

Hi again guys, sorry to dig up the thread but I was hoping you might help me to understand some of the jargon on my new policy.

They have a heading 'Percentage of Premiums used to Purchase Units at the Ruling Offer Price'  - What does that mean
Also, under that they have percentage of 105.25% - Is this the allocation rate?

Also, there is an AMC of 0.75%, would this be a pretty decent charge?

And lastly, they have an Initial Policy Fee of €3.49 monthly, is this deducted from my contributions before purchasing units?

Thanks in advance and sorry for all the questions!


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## Steven Barrett (10 Dec 2015)

Hi Paddy

Answers below

Percentage of Premiums used to Purchase Units at the Ruling Offer Price' - What does that mean * - this is the amount of your money that is invested into your pension e.g. €100 contribution, €105.25 invested*
Also, under that they have percentage of 105.25% - Is this the allocation rate? - *yes. The high allocation rate and low AMC makes me suspect there is a Bid/Offer spread on this policy. The Bid/Offer spread is 5%. You buy units in the fund at one price and sell them at another, lower price. So you may buy units for €1 and sell them for 95c. 

What is 105.25% - 5%? 99.99%. In effect your allocation rate is 100%.*

Also, there is an AMC of 0.75%, would this be a pretty decent charge? *Yes, decent charge*

And lastly, they have an Initial Policy Fee of €3.49 monthly, is this deducted from my contributions before purchasing units? *This is deducted from your fund. 



Steven
www.bluewaterfp.ie*


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## PaddyW (10 Dec 2015)

Thank you Steven, as always you're very helpful!


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