# Directors pension or pay off mortgage



## 4Winds (13 Jan 2019)

I own a business and there is approx 150,000 that I can take out of the company annually. I have a very high mortgage that I want to use the funds to reduce/clear. 

 I'm trying to work out if it is a better idea to
(a) pay the maximum I can into a company pension each year, draw down at 50 and use the lump sum to pay off part of my mortgage in 13 years time or

(b) take all income from the company as paye income and pay down my mortgage each year by overpaying within allowable limits

I also have a PAYE job so all paye income from my own business is taxed at the highest rate. I pay into the company pension plan (my contribution is 4% and company contribution is 6% ) but my pension is not well funded (30,000)

My mortgage has 30 years outstanding, is 660,000 and is on a 5 year fixed term at 2.5%.

I have set up the directors pension already and have paid 8000 into it.

I am 37, married and my spouse has a pension pot of about 30000 as well.

I don't intend to actually retire at 50 but would like to retire early. I don't expect the income from my own business to last longer then the next 10 years.

Thanks for any advice you can offer.


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## Steven Barrett (14 Jan 2019)

One of the factors used in calculating how much you can put into a directors pension is the salary earned. The lower the salary, the lower the contribution (it costs more to fund a 2/3 pension for someone on €100,000 than someone on €20,000 ). 

As you are on a fixed rate, you are usually restricted to overpaying 10% of the amount owed. If you overpay by more, there will be penalties. You need to check this with your bank. 

Then, your pension is underfunded too and you need to contribute more to a pension. 


The answer is probably do a bit of both. 


Steven
www.bluewaterfp.ie


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## 4Winds (14 Jan 2019)

Hi Steven
Thanks for your response - we can pay down 10% of the remaining balance per year. I agree our pensions are very underfunded but really my main goal is to be as tax efficient as possible with the money I take out so as to be able to pay off as much as possible off the mortgage because ultimately it has to be paid off. I can only see 2 options to pay back the mortgage... either do it yearly (and pay 75000 a year in paye,usc etc as I'm on top rate of tax)  or when I am 50 using the directors pension lump sum. I feel I'd like to pay it down using PAYE income just to get rid of it quicker but is that just not sensible given the high rate of tax I'm paying to take cash out of the company?


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## Blackrock1 (14 Jan 2019)

Have you worked out how much interest you would save by paying off each year v waiting 13 years to pay down a lump sum?


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## 4Winds (16 Jan 2019)

No I hadn't worked that out.... I've done some calcs and think that if I overpaid motgage by 250,000 in the next 5 years that would give a saving of 185,000 in interest. The 250,000 would cost the company 500,000. If i put that same 500000 into pension i can only take out 125,000 tax free at 50 (as far as i understand)....because i havent paid top rate tax on that im thinking of that as approx 125,000 saving.  I can see that as the size of the mortgage reduces the savings from paying it off early reduce so paying off sums earlier is a good idea. I'm starting to see that as Steven said, doing a bit of paying down mortgage and directors pension could be the best approach - loaded towards mortgage in the short term. After 5 years i could start putting more into the pension and less into the mortgage. @Blackrock1 does that sound sensible? Thanks for your help


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## Steven Barrett (16 Jan 2019)

4Winds said:


> Hi Steven
> Thanks for your response - we can pay down 10% of the remaining balance per year. I agree our pensions are very underfunded but really my main goal is to be as tax efficient as possible with the money I take out so as to be able to pay off as much as possible off the mortgage because ultimately it has to be paid off. I can only see 2 options to pay back the mortgage... either do it yearly (and pay 75000 a year in paye,usc etc as I'm on top rate of tax)  or when I am 50 using the directors pension lump sum. I feel I'd like to pay it down using PAYE income just to get rid of it quicker but is that just not sensible given the high rate of tax I'm paying to take cash out of the company?



If you don't take an income from your company, you can't fund a pension and therefore will have no lump sum at 50. 

If you only take out a minimal income, you can only fund a minimal pension, which won't be enough to pay off the mortgage at age 50.

You therefore have to work out how much you need to pay yourself, so you can fund a decent pension that will pay off the rest of your mortgage at 50. This will involve having to pay income tax on the earnings during the years you are taking an income. 


The Revenue have gotten very strict on the funding of company pension plans. Any once off contributions or increases in regular contributions above normal indexation rates require the policy holder to submit proof of earnings and up to date details of all pension benefits. A funding check has to be carried out before the increase will be put through. 


Steven
www.bluewaterfp.ie


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## 4Winds (16 Apr 2019)

Thanks Steven.


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## NewEdition (16 Apr 2019)

Can you have a PAYE pension and pay into a Director pension at the same time? 
I thought that was not allowed.


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## Steven Barrett (25 Apr 2019)

NewEdition said:


> Can you have a PAYE pension and pay into a Director pension at the same time?
> I thought that was not allowed.



What do you mean? The State pension and a private pension? Why not, employees do.


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## NewEdition (25 Apr 2019)

I am a contractor via my own ltd company and sometimes take fixed term contracts, essentially an employee.
I have a directors private pension and thought that while I am on a fixed term contract where I pay x% and the employer pays x% that I am not allowed to contribute to my own director pension.
Is that not the case then?


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## RedOnion (25 Apr 2019)

NewEdition said:


> thought that while I am on a fixed term contract where I pay x% and the employer pays x% that I am not allowed to contribute to my own director pension.
> Is that not the case then?


You can't contribute to both from the same income if that's what you mean?


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## Conan (25 Apr 2019)

An individuals right to a “State Pension” is based on paying A Class PRSI. So if New Edition is paying A Class PRSI as a Director then he will accumulate a record which should entitle him to a State Pension . Equally as a Director, he can establish an “occupational pension” (a Directors Pension) to run in addition to any State Pension based on your income from that employment.


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## Nicetoknow (24 Sep 2019)

I have an occupational DC pension ( part funded by my employer ) and I have a  directors pension ( funded by my own company) and separately I am paying into the state pension by paying class A stamps. 

Is there an issue with this set up?


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## LDFerguson (24 Sep 2019)

Nicetoknow said:


> I have an occupational DC pension ( part funded by my employer ) and I have a  directors pension ( funded by my own company) and separately I am paying into the state pension by paying class A stamps.
> 
> Is there an issue with this set up?



Sounds like you have two distinct sources of income - your employer and other work through your own company.  If you're receiving a salary from both, then they can be treated as two separate employments.  But there are restrictions on pension funding from dual employments where the combined salary is greater than €115,000.  If you have a Financial Broker advising you in relation to either pension scheme, I think you should chat to them about your situation.


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