Divorced with 2 kids: notional service, AVCs or overpay mortgage?

[iamaspinner]

Age:
46

Spouse’s/Partner's age:
n/a

Annual gross income from employment or profession:
€64,000

Annual gross income of spouse:
n/a

Monthly take-home pay:
Just under €3,300

Type of employment: e.g. Civil Servant, self-employed:
Public service

In general are you: (a) spending more than you earn, or (b) saving?
Saving

Rough estimate of value of home:
€320,000

Amount outstanding on your mortgage:
Approx. €210,000

What interest rate are you paying?
Variable at 2.95%

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
Yes

Savings and investments:
Rainy fund of €4,500

Do you have a pension scheme?
Public service

Do you own any investment or other property?
No

Ages of children:
5 and 8

Life insurance:
Basic mortgage protection

What specific question do you have or what issues are of concern to you?
I’m divorced with 2 kids. The kids father and I share the kids equally (time and costs). The mortgage is mine alone. At the moment I’m trying to rebuild a rainy fund (while living comfortably) after stretching to the limit to buy the house I intend to live in for many years. I have been able to save at least €500 a month for the last few months. My salary will increase by an average of €2,100 gross each year for the next 5 years starting this summer and by another 1% this autumn. I am however seriously considering going back to pre-Haddington road hours with a reduction in salary of 5% (I’m yet to confirm this figure).

My main concern at the moment is rebuilding the rainy fund to at least €10,000 and also the number of years I will have contributed to my pension at retirement age of 65, currently 28.5 years. Should I purchase a few years of notional service at €27 net monthly cost, make AVCs or even overpay the mortgage?

As an aside, I had two accounts in Rabo for the kids into which I’ve been putting the child benefit and relatives presents for the kids. Any recommendations for where to open two new accounts for this purpose?

Many thanks in advance.

 

[Bronte]

I would pay to have a greater pension. Can you explain how the notional service works. Nothing worse than retirement on the minimum when you can do zero to fix it.

What is your monthly mortgage payment. What is your life insurance. Have you VHI. What future costs will you have. Car, education etc.

 

[Brendan Burgess]

Amount outstanding on your mortgage:
Approx. €210,000

As an aside, I had two accounts in Rabo for the kids into which I’ve been putting the child benefit and relatives presents for the kids. Any recommendations for where to open two new accounts for this purpose?

So you are borrowing money at 2.95% to put the money on deposit at 0% and that 0% is taxable!

The best long-term savings rate is to pay down your mortgage. Obviously not with the kids' presents, but you should do this with your money.

 

[Brendan Burgess]

Should I purchase a few years of notional service at €27 net monthly cost, make AVCs or even overpay the mortgage?

The notional service vs. AVCs is too complicated a question and needs professional advice which is expensive. It's shocking that your trade union does not provide this in an understandable and easy way.

My gut feeling is that additional years are good value for married people because their spouse also benefits when they die. They are less good value for single people.

stretching to the limit to buy the house I intend to live in for many years.

Although a civil servant with a secure job, a mortgage of 3.3 times your income is too high. You would have much more flexibility at twice your income. You could take time off work. You could even change career. So my priority would be to pay down the mortgage to a very comfortable level. But start by using your savings account to clear it down.

Brendan

 

[Early Riser]

I've been following another thread in which a similar question was asked, albeit the other poster's situation and mine are quite different. Pension years, mortgage or avc's?

As regards AVCs V Notional Years part of your question - you need first to decide what you are aiming to achieve pension wise. (It might be useful to say which Public Service scheme you are in. I assume you are Class A PRSI but are you in the pre or post 2004 scheme - or even the new Single Scheme ?)

Notional years give you an increased annual pension for life (and an increase in your lump sum proportionate to the number of years bought). It is guaranteed and life-long (but who knows about future levies) - this may be good for peace of mind. It may be very good value if you live long after retirement but not great if its a short one. Presumably your pension also includes a Spousal pension element - if so, a proportion of the notional years you buy will also go to fund the spousal element. This may, or may not, be what you want.

With AVCs you do not get the guarantee but you do get greater flexibility. For example, you will not qualify for the maximum tax free allowance at retirement. You could use all or part of an AVC fund to top your lump sum to the max allowed by revenue. You could put the remainder into an ARF and flexibibly draw it down as you wish.You may, for example, expect to spend more in the early stage of retirement - but when its gone, its gone! Of course, a proportion of any AVC contribution you make will go on fees and charges, unlike notional years.

The Pensions Authority have a useful guide to AVCs V Notional Years here: [broken link removed].

 

[iamaspinner]

As Early Riser posted, it's a Class A PRSI post 2004 pension and works like he/she has described it in his/her second paragraph. I've got a report from my employer giving me details of the additional annual pension and gratuity I would receive, should I go down this route, as well as net monthly costs per year depending on marginal tax rate. If I do this it will be in the form of periodic contributions (deduction from salary) as opposed to a lump sum payment. At the moment at 40% tax rate I would be paying 25-30 euro per month net per additional year until I retire at 65. At the moment if I retire at 65 I will have just under 30 year contributions. I was thinking of aiming for 35 at least. Max tax relief on pension contributions for my age bracket is set at 25% of earnings.

My mortgage payments are around €1200 per month, €180 service charge, sinking fund, etc., basic mortgage protection at €20 per month. Total outgoings at beginning of the month are around €2000 and include the above plus contents insurance, utilities, child care and car insurance. No VHI, car is 10+ y.o. (pray God it lasts a few more years!). Kids may want to go to college and while it's a long way away, I know we should be thinking about it now (see below).

Not sure what you mean Brendan. I'm not putting anything into the kids savings accounts at the moment, only the child benefit and the odd present from relatives. There's a few thousand in each already. I don't know if the other parent is putting anything into these accounts. I feel we need to build a deposit there for the future (college?). I'm not planning to have a fat savings account. I thought it would be wise to have a rainy fund (€10,000?) and once achieved start overpaying the mortgage. This could be even as low as €100 per month, but I see the benefit of doing that and as you say, 0% taxable interest in a savings account is a no go.

The notional service vs. AVCs issue, I honestly haven't looked into the details of AVCs yet. I could arrange a consultation but I'm trying to grasp the basics of it all first and I feel this would be last in my list. I'm not part of a Union at the moment. Should I be? I was in the past during a period of uncertainty and they weren't really that helpful.

My feeling at the moment would be to do the following in order:

1. Buy say 6 years of pension to bring it up to 35 at my next birthday.
2. Continue to build up a €10,000 rainy fund.
3. Start overpaying mortgage by whichever amount I can comfortably afford when I achieve 2.

I will be getting a pay increase every year for 4 more years, plus the 1% restoration this autumn and I do get the odd mileage and subsistence payments from the occasional work trip in Ireland and abroad, which would amount to maybe €2000-€3000 free of tax after deducting my costs but that is not guaranteed.

P.S.: I'm hoping to get back a €4000 loan from a brother this year.

 

[Bronte]

Not sure what you mean Brendan. I'm not putting anything into the kids savings accounts at the moment, only the child benefit and the odd present from relatives. There's a few thousand in each already. I don't know if the other parent is putting anything into these accounts.

Your child benefit does not belong to the children, it's your income. How do you not know what else is going into that account. Who is allowed to withdraw from it?

If your brother can not pay you back the 4K. Get him to set up a DD to you. Better to be getting something than nothing. You need to be putting aside money for a car.

As a civil servant it would be better to get a decent pension rather than paying the mortgage early.

 

[Bronte]

Notional years give you an increased annual pension for life (and an increase in your lump sum proportionate to the number of years bought). It is guaranteed and life-long (but who knows about future levies) - this may be good for peace of mind. It may be very good value if you live long after retirement but not great if its a short one.

Sounds good. Plus it's guaranteed and life long. Most of us are going to live long retirements.

 

[iamaspinner]

Your child benefit does not belong to the children, it's your income.

Agreed. Since we didn't need it at the time, we decided to start their savings accounts with it. The benefit is lodged directly into these accounts.

How do you not know what else is going into that account. Who is allowed to withdraw from it?

I know nothing is going out. I do check the statements regularly.

If your brother can not pay you back the 4K. Get him to set up a DD to you. Better to be getting something than nothing.

I gave him my IBAN yesterday! I'll be chasing him. It's been too long.

 

[iamaspinner]

Sounds good. Plus it's guaranteed and life long. Most of us are going to live long retirements.

I hope so! 3 grandparents died in their 90s, parents in their mid 70s and going strong... and I'd like to think that my lifestyle is considerably healthier than theirs, so fingers crossed!

 

[Bronte]

I know nothing is going out. I do check the statements regularly.

I gave him my IBAN yesterday! I'll be chasing him. It's been too long.

You didn't answer who can withdraw from that account.

If your brother doesn't pay you by x date, which you inform him of, then go to his house and get him to set up the standing order to you. I said DD but it's a SO.

 

[iamaspinner]

I think the biggest issue short term is going to be the new car.......

 

[iamaspinner]

You didn't answer who can withdraw from that account.

If your brother doesn't pay you by x date, which you inform him of, then go to his house and get him to set up the standing order to you. I said DD but it's a SO.

Originally we set up one account each with each of the children, so we could withdraw from one account each. This was with Rabo. When they closed, the other parent setup one Junior Saver with AIB into which we have put the savings of both Rabo accounts. When the youngest reaches the age of 7 we will open another one and will split the one amount into two probably proportional to their age (we were going to do this anyway).

My brother lives near the beach 3,000km away. I may pay him a visit regardless!

 

[Early Riser]

Not being an actuary, financial adviser, etc and based on some very rough estimates, your notional years purchase comes to about ballpark €37000 (after tax relief) between now and retirement. For this you could expect to get (again ballpark) about €14000 extra tax free at retirement and around €3000 (before tax) annual pension extra. There will also be some increase in the spousal/survivor's pension entitlement. (These are all in today's terms and largely ignore any significant pay increases/promotions down the road.).Of course, along with your occupational pension, you will also qualify for a State Pension (at what ever level or percentage of the total that your PRSI record supports at that time).

Only you can decide if this is worth it and if you can afford it. Given your family history it seems you could look forward to a good return on your investment!

As noted, with AVCs there are fees and you don't have guaranteed returns, but you have much greater flexibility on how you use your fund at retirement - eg, extra lump sum + ARF withdrawals (You do also have the option of using the AVC fund to buy extra notional pension years at retirement, but this may not be as economically efficient as the Notional Years scheme - I suspect it would not be). This flexibility may appeal to someone if, for example, they plan to travel for a few years or otherwise spend significantly, and they consider that they have enough guaranteed pension locked away to support themselves in their more sedate later years (?). It might also appeal to someone who didn't have the same survival expectations!

 

[iamaspinner]

Not being an actuary, financial adviser, etc and based on some very rough estimates, your notional years purchase comes to about ballpark €37000 (after tax relief) between now and retirement. For this you could expect to get (again ballpark) about €14000 extra tax free at retirement and around €3000 (before tax) annual pension extra.

Those are roughly the figures in my Notional Service Quotation!

Of course, along with your occupational pension, you will also qualify for a State Pension

You are correct (and hope you will be in 20 years time!)

 

[Bronte]

My brother lives near the beach 3,000km away.

Nice for him that you helped fund that - lol.

 

[iamaspinner]

Nice for him that you helped fund that - lol.

Haha! I actually helped him fund an enterprise in the far east many years ago! Funny story followed but I'd be giving away too many details...

 

[Bronte]

What have you decided to do?

 

[iamaspinner]

What have you decided to do?

Nothing 100% yet. I still have a few months left until my next birthday if I want follow my plan above:

1. Buy say 6 years of pension to bring it up to 35 at my next birthday.
2. Continue to build up a €10,000 rainy fund.
3. Start overpaying mortgage by whichever amount I can comfortably afford when I achieve 2.

2. is ongoing. How long it depends on my brother and nothing strange happening. 3. is dependent on 2. and the car not packing up, which it shouldn't really.

I think I'd be comfortable with this plan and haven't had negative feedback about it (yet?).

I actually went back to the email in which we were notified of the pay restoration plan. As well as the 1% this October, there will be another 1.75% increase in 2019, and another 2% in 2020, plus favourable pension related threshold revisions. All that added to my yearly pay scale increases should give me a nice cushion if nothing major happens. Plus I suppose I don't have to overpay the mortgage if I can't in case e.g. I need a "new" used car.