# Makeover advice, please.



## rjjd (22 Feb 2017)

Age: 50
Spouse’s/Partner's age: 46

Annual gross income from employment or profession: €90k (private sector)
Annual gross income of spouse: €40k (public sector)

Monthly take-home pay: €6300

In general, we are saving about €700 per month

Rough estimate of value of home €300k

Amount outstanding on your mortgage: 
€140k on first mortgage. Rate: ECB + 1.68%. 140 months remaining. 
€50k on second mortgage (on same property). Rate ECB + 2.25%. Also 140 months remaining.

Other borrowings – car loans/personal loans etc
€10k on car loan. 
€4k on credit union loan.

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

Savings and investments:
1. Zurich unit linked monthly savings product - total value €20k - saving €500 monthly into this (included in the €700 monthly saving mentioned above)
2. 10 yr national solidarity bond - €19k (now in yr 3)
3. 3k in credit union 
4. We've just sold an investment property and have €60k in cash (which is at the heart of our makeover request)

Do you have a pension scheme? 
1. Partner has public sector pension
2. I've 19 yrs of DB scheme (frozen at 2009 salary level c. €70k plus increasing by annual CPI) 
3. I've a further 8 yrs of DC scheme pension which is attracting 10% salary pa.

Do you own any investment or other property? 
No

Ages of children: 
three, under 10

Life insurance: 
Income and mortgage protection

*What specific question do you have or what issues are of concern to you?*
We've debated what to do with the 60k including putting it into a pension, into prize bonds / state savings or moving house. We figure with the state savings and Zurich products we'll have c. €85k cash by the time the children leave secondary school (in ten yrs+ time) which should pay for college expenses.

Lump sum payments are due with both state and DB pension and with DB / DC pension plus state pension we believe our pension is sufficiently well provided for.

Our current position is to 
1. pay off the car and credit union loans
2. carry out some house repairs and stay where we are
3. make a lump payment off the 2nd mortgage, leaving a balance of c.€15k. 

With overpayments (which we haven't used to date but plan to), we could then clear the 2nd mortgage in c.24 months. At that stage, we would then role all payments into the principal mortgage and have that cleared in a further 50 months. 

My question is this: is this the best use of the lump sum we've currently got available to us? It seems to follow the suggested guidelines of paying off more expensive debt first; there doesn't seem to be much value in any savings or investment products.

Thanks for any + all opinions!


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## PGF2016 (22 Feb 2017)

Congrats, you're in an enviable position. Your plan looks good to me (not an expert). Would the solidarity bond or Zurich product be available at short notice in case of emergency? Or do you have any other funds set aside for emergency?


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## Sarenco (22 Feb 2017)

Hi Rjjd

Welcome on board!

Your proposed use of the €60k lump sum and your plan to aggressively pay down your mortgages ahead of schedule make a lot of sense to me.   

However, I can't see the logic of investing €500pm in a taxable unit-linked life product before maxing out your pension contributions.  At your age you can get tax relief, at your marginal income tax rate, on 30% of your gross income - that's a lot of tax-advantaged space that's not being utilised.

I also think you need to maintain a bigger accessible cash reserve to address any unbudgeted expenses that might arise - around six months of your average household expenses maintained in a simple savings account would be my suggestion.

I'm not a fan of the 10-year national solidarity bond but I would probably leave that alone at this stage.

Hope that helps.


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## gnf_ireland (22 Feb 2017)

welcome @rjjd 

I agree with those above who have stated that it makes perfect sense to use the 60k lump sum to reduce your most expensive debt down as quickly as you can. You should target the higher costing loans, followed by the higher mortgage and then the lower one. And of course, spending some on the house makes perfect sense.

I agree with @Sarenco regarding the money into a Zurich unit trust product. I have a thread on this regarding New Years Resolutions where I was advised against it completely and actually went so far as to sell the units I had and paid them down against my mortgage. The taxation of these funds and their inability to offset losses makes them very unattractive products in reality.

I think you have two options in relation to the ~500 a month you are currently investing in it:
1. Invest the money against your mortgage and pay the mortgages down sooner. This money will give you a guaranteed return of 1.68%, but the ECB rate will rise over time. This will ensure you are mortgage free for a number of years before the children are due to go to college which is the best savings scheme possible
2. You are 50 years old. If you set up a personal pension e.g. PRSA (independent of your company pension scheme) you can invest 1000 a month into it (costing you 500 euro a month net). You then are allowed to grow these funds tax free for 10 years until you are 60, when you can access the fund. There is no requirement to actually retire at this point. You can take 25% of the pension fund out tax free at this point. You can then decide what to do with the rest is then up to yourself - take it down and pay tax at marginal rate or wait until you are on a lower tax rate to withdraw the funds. Someone with a more detailed knowledge of pensions will be able to advise you in more detail here.
Either way, your pension pot is likely to be in the region of 140k after the 10 years (120k input + 20k growth), as opposed to around 70k outside a pension vehicle (60k input, 10k growth). Assuming the same funds, it would be double.
Assuming 140k, 35k tax free lump sum and marginal tax at 52% leaves you with 85,400 euro
Assuming 70k outside pension, you have exit tax of 41% on 10k, so left with 65,900 euro.
You also have the ability to reduce the tax paid on the pension pot by deferring until you get to 20% tax rate. Downside is you cannot access it until you are 60... but it appears to be a long term savings option for you in any event.


BTW where are you putting the other 200 euro a month you are saving ?




Sarenco said:


> I also think you need to maintain a bigger accessible cash reserve to address any unbudgeted expenses that might arise


In theory you have 42k here already (20k Zurich, 19k Bonds and 3k credit union). All are accessible relatively quickly.
The other factor here is how easily and quickly you would expect to get a new job if you lost your current one... some industries are better than others in that respect !


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## rjjd (23 Feb 2017)

@PGF2016; @Sarenco; @gnf_ireland

Thanks a million for the insight. It’s greatly appreciated. In response to the questions raised.

1.  The three savings – Zurich, State and CU – are all reasonably accessible in immediate to short (<1 month) timeframes. I don’t have any other funds set aside.

2.  Re six months of average household expenses. Good point. We use the Credit Union account for that (that’s where the €200 goes) – and that moves up and down depending on requirements. €3k is a low point because of expenses related to the selling of the other house but it makes sense to put part of the lump in here for emergencies.

3.  Great commentary on the Zurich product and the pension option (and the possibility of €85.4k vs €65.9k) . I’ll set up an appointment with the pension advisor to discuss. It certainly looks like it makes very good sense to use up more of the tax efficient option via a PRSA or similar using the Zurich funds.

4.  I’m fairly employable – I’m in a senior role with a blue chip. But probably senior enough for it to take a while for the ‘right’ new job to materialise.

Thanks again for the advice and commentary. It really was most useful and helped us clear our minds.


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## Steven Barrett (23 Feb 2017)

gnf_ireland said:


> 2. You are 50 years old. If you set up a *personal pension e.g. PRSA *(independent of your company pension scheme) you *can invest 1000 a month into it (costing you 500 euro a month net)*. You then are allowed to grow t*hese funds tax free for 10 years until you are 60, when you can access the fund.* There is no requirement to actually retire at this point. You can take 25% of the pension fund out tax free at this point. You can then decide what to do with the rest is then up to yourself - take it down and pay tax at marginal rate or wait until you are on a lower tax rate to withdraw the funds. Someone with a more detailed knowledge of pensions will be able to advise you in more detail here.
> Either way, your pension pot is likely to be in the region of 140k after the 10 years (120k input + 20k growth), as opposed to around 70k outside a pension vehicle (60k input, 10k growth). Assuming the same funds, it would be double.
> Assuming 140k, 35k tax free lump sum and marginal tax at 52% leaves you with 85,400 euro
> Assuming 70k outside pension, you have exit tax of 41% on 10k, so left with 65,900 euro.
> You also have the ability to reduce the tax paid on the pension pot by deferring until you get to 20% tax rate. Downside is you cannot access it until you are 60... but it appears to be a long term savings option for you in any event!



Generally good advice but I have to put my pedant hat on and make a few corrections if you don't mind 

The OP is in an employer paid pension and has no other source of income* so he has to make contributions as Additional Voluntary Contributions (AVC's). These may be within the scheme or on a separate basis through a PRSA AVC but it has to be linked to the main scheme. The OP should find out the charges of the main scheme as most blue chip companies pay the administration fees for their members. While the PRSA AVC route gives you the freedom of investing in whatever you want, you have to pay the charges yourself and so it usually works out more expensive. 

As the AVC's are linked to the main scheme, the benefits from the AVC's must be drawn down at the same time as the main scheme. You cannot draw them down at different time.

A €1,000 contribution is more likely to cost you in the region of €700 than €500. You get income tax relief at 40% but have to pay PRSA (4%) and USC (8% at the highest rate). It is still a significant saving but 30% is a better rule of thumb than 50%. 






*in cases where people have two sources of income and one of those incomes is pensionable, you have to maximise the tax relief available under this source of income first before you can make pension contributions in relation to the other. The typical example is hospital consultants with tax relief. For years, they used to maximise pension tax relief in relation to their private practice through personal pensions. At retirement, the could take 25% tax free and ARF/ annuity the rest. The Revenue clamped down on this and they must max out their HSE pension through PRSA AVC's. As their income from the HSE is over the €115,000 limit, there is no scope for additional contributions to private practice income. Under the HSE scheme, the tax free lump sum is based on years service, so they cannot get an additional lump sum through their AVC's. 



Steven 
www.bluewaterfp.ie


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## rjjd (24 Feb 2017)

Steven - thanks for the clarification. I don't have any other sources of income and my employer does pay the administrative charges. An attraction of the earlier proposal was that I could access it separately and in ten years. Note the net cost is 70% rather than 50%. Still very interesting and will be added into the mix (as it still seems the Zurich approach is not the most efficient use of resources).


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## gnf_ireland (27 Feb 2017)

SBarrett said:


> Generally good advice but I have to put my pedant hat on and make a few corrections if you don't mind


I see a few key corrections there. I did caveat it that someone with more knowledgeable pension advice would need to review the idea.

I am surprised on the PRSA with the Occupational Pension though, as I do know a few people with both, but guess they are not actively paying into both at the same time.



SBarrett said:


> A €1,000 contribution is more likely to cost you in the region of €700 than €500.


Accepted - I do like round figures though 



rjjd said:


> An attraction of the earlier proposal was that I could access it separately and in ten years. Note the net cost is 70% rather than 50%. Still very interesting and will be added into the mix (as it still seems the Zurich approach is not the most efficient use of resources).


Apologies @rjjd  I did actually think my idea would work (something similar was recommended to me recently in relation to a different scenario and different pension types (with multiple income sources))
I still believe your Zurich approach is not the most efficient way to save, but its down to personal choice really at this stage.


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## Steven Barrett (28 Feb 2017)

gnf_ireland said:


> I am surprised on the PRSA with the Occupational Pension though, as I do know a few people with both, but guess they are not actively paying into both at the same time.



Unless it's a PRSA AVC plan? If they are contributing to an Occupational pension, you cannot claim tax relief on the PRSA contributions. They would want to be careful as the Revenue could unwind all the tax relief they have claimed in the past. 

Steven
www.bluewaterfp.ie


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## rjjd (28 Feb 2017)

SBarrett said:


> as the Revenue could unwind all the tax relief they have claimed in the past.




This would not be good.


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## Bronte (1 Mar 2017)

rjjd said:


> @PGF2016; @Sarenco; @gnf_ireland
> 
> 4.  I’m fairly employable – I’m in a senior role with a blue chip. But probably senior enough for it to take a while for the ‘right’ new job to materialise.



This is the only thing that stood out for me.  Having had this happen to my OH I can assure you that you very quickly become unemployable as your age goes over 50.  So make sure you consider that as part of your calculations.


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## gnf_ireland (1 Mar 2017)

rjjd said:


> . I’m fairly employable – I’m in a senior role with a blue chip. But probably senior enough for it to take a while for the ‘right’ new job to materialise.





Bronte said:


> This is the only thing that stood out for me. Having had this happen to my OH I can assure you that you very quickly become unemployable as your age goes over 50. So make sure you consider that as part of your calculations.



I think you need to really think about this as Bronte says. I work in Technology, and have been advised many times in the past to stay technical (and current) rather than move more into management as your skill set is harder to differentiate in that case. You would really need to see what skills you have that makes you unique in your field that makes you fall into that fairly employable category.
I find that in general "senior 'management' roles" in particular tend to follow two main scenarios
 - 1. internal hire based on experience within the company (slow steady climb)
 - 2. external hire based on previous working relationship with top management team (the 'trust' factor)
Obviously there are exceptions .... 

Also, any chance you could become 'institutionalised' and work in a company for 20 plus years you know that company backwards but struggle outside of it... 

I cannot comment on the age factor, but I do imagine it is real especially if combined with 'institutionalisation'

*Note* not saying you fall into any of the above, but need to be aware of it


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## rjjd (2 Mar 2017)

These are fair points. I've looked at other roles, had an offer or two but not jumped (I fall into the 'slow steady climb' GNF_Ireland mentions). In a talk with a headhunter last year, he said that consultancy would be a viable option (I've strong general management skills and some unique sector specific skills which might give me opportunities). I passed 50 a few months ago. Its remarkable how the final 1/3 of my career is increasingly a factor in lots of decisions!


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## Gerry Canning (2 Mar 2017)

rjjd,
You are doing well and @ 50 = good time to take stock.
Whatever curves work will throw @ you in the next decade ,( given you are pretty senior) will largely come out of the blue ! and as posted @ 50 + could be hard to get decent work.
I would be inclined to pay down mortgage quickly , in doing that you adjust to living on less ,and it means that if bad times happen, your debts  would then be  manageable.


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