# €220k mortgage ; €157k in investments; maxing AVCs



## Ndiddy (3 Nov 2015)

Age: 36
Spouse’s/Partner's age: 37

Annual gross income from employment or profession: 35k
Annual gross income of spouse:33k
Monthly take-home pay : 3800 after 20% AVCs each, motor and health insurance comes out

Type of employment: Private sector

In general are you:
(a) spending more than you earn, or
(b) saving?
Both, put full AVC into pension and a regular savings of 400, then allow ourselves to spend the rest if needed/wanted.  No cable/satellite and use prepaid phones, old car paid off.  Like a bit of GAA , pub and travel.

Rough estimate of value of home 315k
Amount outstanding on your mortgage: 220k
What interest rate are you paying? 3.5% SVR, approx. 1000 per month (one year done, 29 more to go!)

Other borrowings – none but approx. 1000 in crèche fees

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

Savings and investments: 
Regular savings account: 27k, and 400 per month

Do you have a pension scheme?
Defined Contribution through work about 70k and 105k for spouse, we are putting in full 20% AVC and company puts in 15% for me and 11% for spouse

Do you own any investment or other property?
130k in target date index funds ( 80%stock, 20% bonds), have already checked that this is the lowest choice in fees

Ages of children:
1 girl, 2 years old, hope for one more

Life insurance:
Just mortgage cover and cover through DC pensions at work, approx. 130k each

What specific question do you have or what issues are of concern to you?
We don’t have any major debt problems  as we came into home buying and kids later so had a chance to save up.  However as we are relatively low earners for our age and don’t see any big changes in future income coming our way, we wanted to hear if there were any other suggestions for improvement and/or thoughts on below.
- Thinking of paying 200 extra to mortgage from December, but otherwise don’t know what else we could be doing.  Went for 30 years mortgage with the intention of paying more than just the monthly payment but giving us room in case of job loss/ illness/ etc.
-Currently have VHI health insurance where work pays half but wondering if the policy for daughter is even needed with GP care free until 12 and it seems that most paediatric hospital work is on a public basis anyways?  We attend a renal clinic in Temple Street several times a year for a checkup but she seems to be on a public list for all visits and scans.
-Planning for 2nd child, but should we hold off 2 months to get Sept 2016 Paternity Leave?  Last time around, pregnant within 2 weeks so just thinking ahead
-With new budget, is it a flat 2 years of preschool or from 3 until 5 ½, therefore maximum of 2 ½ years free?  Does anyone know approx. fees to top up the free preschool to a full day in crèche?

Thanks for any help.


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## thedaddyman (3 Nov 2015)

some thoughts that you may need to consider

What happens when your OH is on maternity leave, is it paid or unpaid and will she want or be entitled to take additional unpaid leave- what is the impact of that on your income?
Have you done a thorough review of your tax situation so it is the most effective it can be and have you claimed historically for everything you can
Ensure you have a will in place
All very well to plan for paternity leave in Sept but baby won't know when it is Sept, could arrive early
Are you considering any long term saving options for kids, I reduced AVC's when we had our 2nd and are putting the money into a long term savings plan for college/weddings etc


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## Brendan Burgess (3 Nov 2015)

Ndiddy said:


> Rough estimate of value of home 315k
> Amount outstanding on your mortgage: 220k
> What interest rate are you paying? 3.5% SVR, approx. 1000 per month (one year done, 29 more to go!)





Ndiddy said:


> Do you own any investment or other property?
> 130k in target date index funds ( 80%stock, 20% bonds), have already checked that this is the lowest choice in fees





Ndiddy said:


> Savings and investments:
> Regular savings account: 27k, and 400 per month



You are effectively borrowing €130k to borrow at 3.5%.  Whatever income or gains you get from your investment will be taxed at 41%. So you would have to get a return of almost 7% before tax for this to make any sense. 

You should probably pay all of this against your mortgage. 

Likewise, you don't really need €27k in a savings account. You are getting less than 1% on that after tax, and paying 3.5% for your mortgage!  

You are saving around €1,400 a month. And if you pay down your mortgage, you will be saving a lot more.  So you don't really need a rainy day fund as you can replenish it very quickly. 

You mention that your car is old. You should have enough of a fund to replace it when you need to replace it, but no more.

Brendan


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## Brendan Burgess (3 Nov 2015)

Ndiddy said:


> Annual gross income from employment or profession: 35k
> Annual gross income of spouse:33k
> Monthly take-home pay : 3800 after 20% AVCs each, motor and health insurance comes out



I am very concerned about this. 

If your salary is €33k and you put €6k into an AVC, you reduce the taxable salary to €27k. 

This means that for a good chunk of your AVC, you are getting tax relief at just 20%.  This is terribly wasteful.  You should only contribute to an AVC when you are getting tax relief at the higher rate.  Don't forget, you will be subject to income tax when you draw down your pension. 

It seems to me that you would be better off paying the net AVC money off your mortgage.  At some stage in the future if you are paying the top rate of tax, then you can start contributing to the AVC. 

Brendan


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## Sarenco (3 Nov 2015)

Brendan Burgess said:


> This means that for a good chunk of your AVC, you are getting tax relief at just 20%.  This is terribly wasteful.  You should only contribute to an AVC when you are getting tax relief at the higher rate.  Don't forget, you will be subject to income tax when you draw down your pension.



I would take a different view.

Under current tax rules, the first 25% of each pension pot (to a maximum of €200k) can be taken as a tax free lump sum and the OP and his spouse will have a tax free allowance of €36,000 per annum once one of them reaches 65.

While tax rules can obviously change, it seems highly probable that any amount subsequently drawn down from their pension pots will be largely (if not entirely) tax free, even though all pension contributions and all investment income and gains will have been fully relieved of Irish taxes.

Also, their respective employers are giving them very generous "matches" to their pension contributions.  I don't see any reason to leave employer contributions on the table.


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## Sarenco (3 Nov 2015)

I agree that it will be challenging for the target date index funds to produce a compound annual return of 3.5% after costs and taxes over the next 30 years.  It's certainly possible but it's far from guaranteed.  

If I was in the OP's position, I would liquidate the index fund investments and apply the proceeds against the mortgage balance.  A guaranteed, cost-free and tax-free return of 3.5% is hard to beat in the current environment.

I also agree that the cash balance looks a bit on the high side.  My suggestion would be to retain 6 months of household expenses as a cash reserve and to apply the balance against the mortgage balance.


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## Brendan Burgess (3 Nov 2015)

Sarenco said:


> Also, their respective employers are giving them very generous "matches" to their contributions. I don't see any reason to leave employer contributions on the table.



Good point.  If your company's contribution is dependent on you contributing a certain amount to the pension fund, then you should contribute the amount necessary to maximise this. 



Sarenco said:


> Under current tax rules, the first 25% of each pension pot (to a maximum of €200k) can be taken as a tax free lump sum and the OP and his spouse will have a tax free allowance of €36,000 per annum once one of them reaches 65.



We can argue about that and it may be correct for someone close to retirement to contribute to a pension even if they are getting only 20% tax relief.

However, it's not right for a 37 year old to do so. There is a good chance that you will be paying tax at the top rate before you hit retirement, and you should maximise your contributions at that stage.  It would be a financial disaster if you contribute now instead of paying down your mortgage and then find yourself paying tax at 40% and not being in a position to make pension contributions.


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## Sarenco (3 Nov 2015)

Brendan Burgess said:


> However, it's not right for a 37 year old to do so. There is a good chance that you will be paying tax at the top rate before you hit retirement, and you should maximise your contributions at that stage.  It would be a financial disaster if you contribute now instead of paying down your mortgage and then find yourself paying tax at 40% and not being in a position to make pension contributions.



I see two difficulties with that argument:

Firstly, there's an annual limit to the amount you can contribute to a pension scheme and therefore a 60 year old can't simply make up for the fact that he didn't contribute to his pension scheme when he was 37; and
Secondly, you are shortening the time during which your contributions can generate income and gains in a tax free environment.
Given the very high taxes on unearned income and capital gains in Ireland this later reason is a particularly strong argument in favour of making contributions to a pension as soon as possible, even if the contributions are only being relieved of 20% tax.  It's entirely possible that contributions made to a pension fund by a 37 year old today will remain invested for 30, 40 or even 50 years.  The compounding effect of the tax drag on returns over that time period would have very significant impact.

Sure, 20% relief on contributions is not as good as 40% but it's certainly better than nothing!  The OP has told us that he doesn't foresee any major increases in their earnings so it's hardly a forgone conclusion that they will ever pay income tax at the higher rate.


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## Sarenco (3 Nov 2015)

I thought I'd run some numbers to demonstrate my thinking.

Let's say the OP has a choice whether to contribute €1,000 (pre-tax) to his pension pot as an AVC or to take the post-tax amount of €800 and use this to pay down his mortgage.  Let's ignore the boost provided by the employer's matching contribution to his pension for this purpose.

After 29 years, the €800 paid ahead of schedule will result in a saving of €467 in his cost of credit at a mortgage rate of 3.5%.  However, the pension contribution would only have to generate an annualised net return of 1.75% (half his mortgage rate) to produce an investment gain of €653 over the same 29 years.  Even in the very unlikely event that the full amount drawn down from the pension was taxed at, say, 25% the pension contribution would still "win" in these circumstances.

To put an annualised net return of only 1.75% into context, the annualised return of the S&P500 with dividends reinvested over the 29 years ending 30 October 2015 was 10.16%.

Don't get me wrong, I'm a big fan of paying down mortgage debt ahead of schedule but not at the expense of maximising annual pension contributions.


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## Boyd (3 Nov 2015)

Are you guys saying that in general having a long term investment plan while paying a mortgage is a bad idea (if not on tracker) and that any investment monies should be redirected to mortgage instead?


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## Gordon Gekko (3 Nov 2015)

I would agree with that. Paying off debt that's costing 4% per annum generally makes more sense than investing personal monies. Similarly, maxing out one's AVCs generally makes more sense than investing personal monies.

However, I'm hesitant about the wisdom of making AVCs if one is a standard rate tax payer. The PRSI (albeit only to 66) and USC colour things. The time horizon would be key.


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## Bronte (3 Nov 2015)

username123 said:


> Are you guys saying that in general having a long term investment plan while paying a mortgage is a bad idea (if not on tracker) and that any investment monies should be redirected to mortgage instead?



They are I think, but I wouldn't agree.


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## Gordon Gekko (3 Nov 2015)

Bronte said:


> They are I think, but I wouldn't agree.



Say I owe €100k on a 25 year home mortgage and I'm paying 4%. Say I have €100k in cash. Why would I not clear the mortgage?

I can lock in a 7/8% return by paying off the mortgage.


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## Bronte (3 Nov 2015)

Gordon Gekko said:


> Say I owe €100k on a 25 year home mortgage and I'm paying 4%. Say I have €100k in cash. Why would I not clear the mortgage?
> 
> I can lock in a 7/8% return by paying off the mortgage.



Because in my experience money makes money and I'd be looking at buying property based on the cash, but when everything is tied up in your home you can't do naught.


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## Boyd (3 Nov 2015)

Agreed re: AVC vs post tax investing. But if you have cash available post tax I'm not sure sure mortgage vs invest. 

If you say don't invest until mortgage paid off then you'd not start until mid fifties (probably), resulting in not enough time for stock market long term gains?


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## Sarenco (3 Nov 2015)

Bronte said:


> Because in my experience money makes money and I'd be looking at buying property based on the cash, but when everything is tied up in your home you can't do naught.



That's an excellent argument for not tying up too much capital in your PPR but it's not a valid argument for not paying down a mortgage on your PPR.

The annualised return on paying down a mortgage on your PPR is simply the interest rate on the home loan (less any available interest relief), with absolutely no investment costs or taxes.

Would an investment in a BTL produce an annualised return on capital of over 4% per annum over the same time horizon as the term of a PPR mortgage after all costs and taxes are taken into account?  It might but it's very far from guaranteed.


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## Sarenco (3 Nov 2015)

Gordon Gekko said:


> However, I'm hesitant about the wisdom of making AVCs if one is a standard rate tax payer. The PRSI (albeit only to 66) and USC colour things. The time horizon would be key.



Yeah, I ignored USC/PRSI for simplicity but it wouldn't change the conclusion as USC/PRSI would reduce the amount available to pay down the mortgage by exactly the same percentage as the amount available for the pension contribution.

You're absolutely right that the time horizon and assumed rate of return is key.  In my example, I simply chose the outstanding term of the OP's mortgage (29 years) as the time horizon and assumed an improbably low rate of return on the pension contribution of half the mortgage rate.  Even on those facts, the return on the AVC contribution by a standard rate taxpayer still came out way ahead.


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## Sarenco (3 Nov 2015)

username123 said:


> Are you guys saying that in general having a long term investment plan while paying a mortgage is a bad idea (if not on tracker) and that any investment monies should be redirected to mortgage instead?



That's certainly my opinion.

To come out ahead of simply paying down a mortgage on a PPR the return on an investment portfolio, less all taxes and investment costs, would have to beat the rate of interest on the home loan (less any available mortgage interest relief).  This will be very challenging given our high mortgage rates (relative to the "risk-free" rate of return on highly rated, short term sovereign bonds) and our high rate of tax on investment income and gains.

We recently had a lengthy debate on another thread on the challenge of achieving a nominal 3% return, net of investment costs, on assets held within an ARF given the expected returns on stocks and bonds at current valuations.  Outside of a tax exempt pension wrapper, that challenge becomes immeasurably more daunting.


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## Dan Murray (3 Nov 2015)

Sarenco said:


> We recently had a lengthy debate on another thread on the challenge of achieving a nominal 3% return, net of investment costs, on assets held within an ARF given the expected returns on stocks and bonds at current valuations.  Outside of a tax exempt pension wrapper, that challenge becomes immeasurably more daunting.



......I remember that thread
And I have a double   when I see all the references to nominal returns on this thread........whatever happened to real returns and where has inflation gone?! (A dangerous omission!!) - Just kidding.......cryptic message which maybe one or two people will get.

On a more serious note, the math here is flat wrong......I shall leave it as a puzzle/challenge for others to work out. I want to see who has the mathematical gene!! Happy to _líon na bearnaí_ myself, if required!



Sarenco said:


> I thought I'd run some numbers to demonstrate my thinking.
> Let's say the OP has a choice whether to contribute €1,000 (pre-tax) to his pension pot as an AVC or to take the post-tax amount of €800 and use this to pay down his mortgage.  Let's ignore the boost provided by the employer's matching contribution to his pension for this purpose.
> 
> After 29 years, the €800 paid ahead of schedule will result in a saving of €467 in his cost of credit at a mortgage rate of 3.5%.  However, the pension contribution would only have to generate an annualised net return of 1.75% (half his mortgage rate) to produce an investment gain of €653 over the same 29 years.  Even in the very unlikely event that the full amount drawn down from the pension was taxed at, say, 25% the pension contribution would still "win" in these circumstances.
> ...


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## Boyd (3 Nov 2015)

I'd like to follow up but want to hijack OPs make over thread. Maybe I'll start my own thread with my scenario


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## Boyd (3 Nov 2015)

Actually. What if you didn't have the lump sum. OP said he saves E400 per month, so almost E5k per year. Would you do that for say four years and then pay E20K from mortgage in lump sum? Or should he just overpay monthly?


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## Sarenco (4 Nov 2015)

Dan Murray said:


> ......I remember that thread
> And I have a double   when I see all the references to nominal returns on this thread........whatever happened to real returns and where has inflation gone?! (A dangerous omission!!) - Just kidding.......cryptic message which maybe one or two people will get.
> 
> On a more serious note, the math here is flat wrong......I shall leave it as a puzzle/challenge for others to work out. I want to see who has the mathematical gene!! Happy to _líon na bearnaí_ myself, if required!



Well, in this case it obviously doesn't matter whether you use a real or nominal rate of return because you are comparing the rate of return on two alternative investments across exactly the same time horizon.

More than happy to have my maths corrected but I don't have the energy to re-do the calculations at this hour.


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## Dan Murray (4 Nov 2015)

Sarenco said:


> 1. Well, in this case it obviously doesn't matter whether you use a real or nominal rate of return because you are comparing the rate of return on two alternative investments across exactly the same time horizon.
> 
> 2. More than happy to have my maths corrected but I don't have the energy to re-do the calculations at this hour.



1. I was just kidding....

2. Username123 made a very valid point that my initial post risked bringing the thread off in a tangent. So just to cut the Maths question to enable the debate get back on track, your post implied that:

€1,000 * 1.0175^29 * 0.75 is greater than €800 * 1.035^29

which when simplified suggests

€750 * 1.6538 is greater than €800 * 2.7118

which simply ain't true....


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## Gordon Gekko (4 Nov 2015)

Sarenco said:


> Yeah, I ignored USC/PRSI for simplicity but it wouldn't change the conclusion as USC/PRSI would reduce the amount available to pay down the mortgage by exactly the same percentage as the amount available for the pension contribution



Correct, but my reference to USC/PRSI was in the context of a 20% taxpayer making AVCs. No relief from USC/PRSI on the way in, but USC/PRSI payable on the way out.


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## Sarenco (4 Nov 2015)

Dan Murray said:


> Username123 made a very valid point that my initial post risked bringing the thread off in a tangent. So just to cut the Maths question to enable the debate get back on track, your post implied that:
> 
> €1,000 * 1.0175^29 * 0.75 is greater than €800 * 1.035^29
> 
> ...



Ah sorry, I didn't mean to imply that and apologise if my post read that way.


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## Sarenco (4 Nov 2015)

Gordon Gekko said:


> Correct, but my reference to USC/PRSI was in the context of a 20% taxpayer making AVCs. No relief from USC/PRSI on the way in, but USC/PRSI payable on the way out.



Ah understood.  Yes, USC/PRSI payable on the way out certainly reduces the attractiveness of an AVC somewhat but an income of less than €13,000 is now exempt from USC and would only amount to €280 on an income of €18,000.  There is obviously no PRSI for over 65s.


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## Boyd (4 Nov 2015)

Also wondering why OP opted for 30 year term? If brought back to 20 years then repayments are 1250 per month, which is within their remit since paying 1000 at moment as well as 400 into savings. Wouldn't a shorter term reduce overall interest paid quite a bit, since 10 years less?


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## Brendan Burgess (4 Nov 2015)

This has got very complicated and there are two separate issues here. 

1) Should the OP use his lump sum to pay off his mortgage. I think that the answer here is absolutely clear and agreed by most people. He should. It's set out here: 
*Should I overpay my SVR mortgage?*
*
2) Should someone make pension contributions if they are getting only 20% tax relief?*
This is discussed at length here: *Pay down your SVR mortgage before starting a pension, but don't leave it too late *
It seems to me that someone should not borrow at 3.5% to tie their money up in a pension for 29 years.  If you make a lot of assumptions, and these assumptions turn out to be true over 29 years,  it may work out right.  But there are many changes which might happen over 29 years, and you will be kicking yourself that you spent money like this: 
1) You earn income which puts you in the top tax rate, but you no longer have the spare income to put into your pension. 
2) The tax relief changes so that everyone gets tax relief on pension contributions at 30%. 
3) In 29 years, all pensions might be means tested. If you have a big private pension, then you might get no state pension. 
4) Interest rates rise significantly - you will wish you had a lower mortgage 
5) The lower your mortgage, the lower your LTV, the lower the interest rate you will pay. Although, if you are below 50% LTV, you probably won't get it any cheaper. 
6) You might want to trade up within the next 20 years, and money tied up in a pension will be of no use to you.

Of course, against that, circumstances could change in the opposite direction and you may no longer be able to get tax relief at 20% on contributions e.g. if you quit paid work to mind your children or if you lose your job. 

But,on balance, it's just wrong to borrow money at 3.5% to tie up your money for 29 years for tax relief at 20%.  It's probably ok to do it at 40%. But with 29 years to go, I would not be convinced. 

Brendan


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## Brendan Burgess (4 Nov 2015)

username123 said:


> Also wondering why OP opted for 30 year term? If brought back to 20 years then repayments are 1250 per month, which is within their remit since paying 1000 at moment as well as 400 into savings. Wouldn't a shorter term reduce overall interest paid quite a bit, since 10 years less?



This is not a valid argument. The overall interest is a meaningless term, although most people continue to use it. 

The decision must be made on an annual basis.   Is the rate of return on the investment higher than the current cost of borrowing money. 

If he keeps to a 30 year term, he will pay more interest. But if he invests the money and earns a net return higher than the mortgage rate, then his total return will exceed the additional interest paid.

Brendan


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## Sarenco (4 Nov 2015)

That's a good summary of the two separate issues under discussion Brendan.



Brendan Burgess said:


> 1) Should the OP use his lump sum to pay off his mortgage. I think that the answer here is absolutely clear and agreed by most people



Agreed (although I would suggest holding back a liquid cash reserve equivalent to 6 months' household expenses to address emergencies).



Brendan Burgess said:


> *2) Should someone make pension contributions if they are getting only 20% tax relief?*
> This is discussed at length here: *Pay down your SVR mortgage before starting a pension, but don't leave it too late *
> It seems to me that someone should not borrow at 3.5% to tie their money up in a pension for 29 years. If you make a lot of assumptions, and these assumptions turn out to be true over 29 years, it may work out right. But there are many changes which might happen over 29 years, and you will be kicking yourself that you spent money like this



It seems to me that the only significant assumptions you need to make are that (1) the annualised rate of return on the pension fund will at least match the interest rate on the mortgage over the 29 years; and (2) that the tax treatment of pensions and mortgage interest payments will not change over that time period to the point that it materially impacts this analysis.

I would have thought that it is much more likely than not that the rate of return on the pension fund will materially exceed the mortgage rate over that time frame, particularly when you bear in mind that the pension fund will have a 20% "head start" due to the tax relief on contributions.

It is obviously impossible to predict with any accuracy what politicians might do in the distant future but I would have thought that it is fairly unlikely that the tax treatment of pensions and mortgage interest payments will change so materially over that period that it fundamentally changes this analysis.



Brendan Burgess said:


> 1) You earn income which puts you in the top tax rate, but you no longer have the spare income to put into your pension.



Well, if the OP follows the advice at 1. above he will have a very modest mortgage and if he earns income at the top rate he will obviously have additional income from which he can continue to make the maximise his annual pension contributions.



Brendan Burgess said:


> 2) The tax relief changes so that everyone gets tax relief on pension contributions at 30%.



Would that not be an argument in favour of a standard rate taxpayer maximising his annual pension contributions?



Brendan Burgess said:


> 3) In 29 years, all pensions might be means tested. If you have a big private pension, then you might get no state pension.



It's certainly possible (although I think it's unlikely) that the contributory OAP will disappear completely so that we are just left with the means tested OAP.  But surely that's an argument against making pension contributions (or even saving for retirement outside a pension vehicle) in any circumstances?  Also, I don't think you can safely assume that a paid for home would always be excluded from a means test calculation.



Brendan Burgess said:


> 4) Interest rates rise significantly - you will wish you had a lower mortgage



If interest rates rise significantly, it is highly likely that the return on the pension fund will also rise significantly (albeit with a time lag).



Brendan Burgess said:


> 5) The lower your mortgage, the lower your LTV, the lower the interest rate you will pay. Although, if you are below 50% LTV, you probably won't get it any cheaper



Again, if the OP follows the advice at 1. above his mortgage will be well below 50% LTV.



Brendan Burgess said:


> 6) You might want to trade up within the next 20 years, and money tied up in a pension will be of no use to you.



True but the OP will presumably have significant equity in his house if he wants to trade up and will still need to fund his retirement in any event.



Brendan Burgess said:


> But,on balance, it's just wrong to borrow money at 3.5% to tie up your money for 29 years for tax relief at 20%. It's probably ok to do it at 40%. But with 29 years to go, I would not be convinced.



I absolutely agree that it's a question of balance but, in the OP's specific circumstances, I would come to the opposite conclusion on this issue.

If, for the sake of argument, the OP had a mortgage free house (or had a modest home loan on a tracker rate) would you still take the view that a standard rate taxpayer should never make pension contributions?

I also think it's worth making the points again that (1) there is an annual limit on how much can be contributed to a pension and this annual allowance cannot be carried forward; (2) the OP would lose his employer's match on his contributions.


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## Brendan Burgess (4 Nov 2015)

My main argument is that one should not contribute at 20%, if one can contribute later at a higher rate. If a 30% rate is brought in, then it would be better to contribute at that rate. 



Sarenco said:


> I also think it's worth making the points again that (1) there is an annual limit on how much can be contributed to a pension and this annual allowance cannot be carried forward; (2) the OP would lose his employer's match on his contributions.



I have made it abundantly clear that if the employer is matching the contribution, then the employee should contribute the maximum.  I don't think that this is happening in this case. 

There is an annual limit, but most people can't afford the annual limit. If the OP puts all their money in at 20% and then find themselves in later lives under financial pressure  with kids in college and still paying the mortgage, then they will be forgoing contributing at 41%. 

But it is a judgement call at the end of the day.  I simply would not borrow at 3.5% to fund pension contributions at 20% tax relief, when there is a fair chance that I will be able to get 40% tax relief at some stage in the future.


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## Ndiddy (4 Nov 2015)

Great discussion, given me a lot to think about.

Some additional info.
Savings is at 27k because this is our emergency fund (ideal 1 year of bare bones expenses as we have been through 3 redundancy cycles between the 2 of us in last 5 years, took a year to find last job) and we are looking to buy a used car very soon .  Expect about 10k to go to car.  Then ideally keep cash fund at 20 -25k.  Also planning for 2nd child in next year so allowing for getting only the minimum maternity benefit and taking the additional 4 months unpaid.

Because of the redundancies and plan for 2nd child, we opted for 30 year so our mortgage payment would still be payable with one salary, although we are planning to pay more to shorten the term.  Either in additional principal repayments monthly ( 200?) and/ or in a lump sum once a year.  Plugging in to Karl’s Mortgage calculator.  If we increase 200 from Dec 2015, we shorten our mortgage to 22yrs and 9 months and once car ordeal settled, any extra cash over our emergency find threshold will go to paying mortgage down.  Aiming to pay off in 15 to 20 years.

Also 130k is in an  American IRA ( retirement account) with .18% expense ratio, no taxes for now as its in a tax efficient pension account and annualised 9.8% return for last 10 years.  I will have to think about this later on as wife is Irish and we probably will be here near her family but for now, to access this would incur taxes and penalties. 

We are very risk-conscious and like to plan, but also  want to maximise our options.  Was taught to fund retirement early when you have less expenses and that way more wiggle room when kids get older and you need to cut back on pension funding.  But maybe need to run numbers to see if this is still best.

Any thoughts on other questions below ie health insurance for under 12s and cost of topping up free preschool to full day?  What are the long term options for saving toward kid’s futures that the thedaddyman mentions?
Thanks again


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## Sarenco (4 Nov 2015)

Brendan Burgess said:


> My main argument is that one should not contribute at 20%, if one can contribute later at a higher rate.



Fair enough but we don't know if the OP will ever pay substantial amounts of income tax at the higher rate - he has told us that they don't envisage any significant increase in their incomes in the future.



Brendan Burgess said:


> I have made it abundantly clear that if the employer is matching the contribution, then the employee should contribute the maximum.



You have indeed but I didn't want this important point to get lost in the detail.



Brendan Burgess said:


> There is an annual limit, but most people can't afford the annual limit



Yes but the point is that you can't subsequently increase your contributions over and above the annual limit at a later stage in an effort to "catch up".



Brendan Burgess said:


> But it is a judgement call at the end of the day.



Absolutely but if you take the mortgage out of the equation (or if the mortgage is a cheap tracker) would you still take the view that a standard rate taxpayer should never make pension contributions (unless it carries a generous employer's match)?


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## Brendan Burgess (4 Nov 2015)

Sarenco said:


> Absolutely but if you take the mortgage out of the equation (or if the mortgage is a cheap tracker) would you still take the view that a standard rate taxpayer should never make pension contributions (unless it carries a generous employer's match)?



I think that this is better discussed in the other thread, as this should be focussed on trying to answer the OP's question.  The OP has a mortgage at 3.5% not a cheap tracker. When he pays off this mortgage in full, he can ask again about this.


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## Brendan Burgess (4 Nov 2015)

Ndiddy said:


> Also 130k is in an American IRA ( retirement account) with .18% expense ratio, no taxes for now as its in a tax efficient pension account and annualised 9.8% return for last 10 years. I will have to think about this later on as wife is Irish and we probably will be here near her family but for now, to access this would incur taxes and penalties.



Now, it's even clearer to me that you should not be contributing to a pension while you are getting only standard rate tax relief.  It's impossible to figure out the long-term tax implications of all this.  Sarenco made a reasonable assumption that you would be subject to Irish taxes on your retirement. You may well be, but I think it's too uncertain to tie up your money like that.


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## Sarenco (4 Nov 2015)

Brendan Burgess said:


> Now, it's even clearer to me that you should not be contributing to a pension while you are getting only standard rate tax relief.  It's impossible to figure out the long-term tax implications of all this.  Sarenco made a reasonable assumption that you would be subject to Irish taxes on your retirement. You may well be, but I think it's too uncertain to tie up your money like that.



Agreed - that fact changes the picture completely.  I wouldn't know where to start advising the OP in these circumstances but I certainly wouldn't be making AVCs until the long term tax implications are clarified.

Incidentally, I personally don't think health insurance makes financial sense for anybody under the age of 35 but that is a somewhat controversial opinion around here.


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## Sarenco (4 Nov 2015)

Brendan Burgess said:


> I think that this is better discussed in the other thread, as this should be focussed on trying to answer the OP's question.  The OP has a mortgage at 3.5% not a cheap tracker. When he pays off this mortgage in full, he can ask again about this.



Fair enough.  It might actually merit a stand-alone thread.


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## Bronte (4 Nov 2015)

Ndiddy said:


> .  Also planning for 2nd child in next year



Kids cost a lot of money.  Think about this.  Burgess mentioned up thread that not everybody agrees in paying down the SVR, that would be a poster like me.  And I can tell you this, if I need to I can call on the sale of a house to fund third level for our children.  And I like that. A lot.


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## GirlTuesday (9 Nov 2015)

I haven't read the whole thread but I don't think the free preschool years question have been answered. It's basically a con. You can enroll you child at 3 points in the year depending when they turn 3 - September, January and April. So in the case of my daughter who was born mid September she can't start until the following Jan. So she'll do Jan, Feb, March, April, May, June, then Sept, Oct, Nov, Dec, Jan, Feb, March, April, May and June.  Then in September she'll go to school at almost 5. So she'll have 16 months of preschool not "two years" (24 months) also the creche my daughter goes to has preschool from 9-12 daily. The cost is €394 a month. The government "free preschool" takes €200 off the monthly bill. We'll have to pay the balance.


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## GirlTuesday (9 Nov 2015)

Oh I should say then you'll have to pay for the rest of the day in creche at the full rate. Preschool is just generally just from 9-12. The paternity leave brought in is 2 weeks at €230 a week. Your company may or may not top this up. And I think you can take it at any stage in the first year of your child's life but I may not be right about that


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