Divorced with mortgage, loans. Plan for kids college and clear down debt.

[dubdub123]

I think you should talk to your wages dept and see how much per month it would cost you to increase your pension contributions by 10%. And be bringing that up the the max (20-30%??) in the next few years.
Also if you get up to 10% bonus and taking it in cash you are losing half of it. But you get the whole benefit of it if you put it in your AVCs.
2.1% interest on your mortgage for 8 more years is a real deal now .
You should definitely increase pension and keep chipping away at loan - but don't use your xmas bonus for the loan .

So you reckon to focus on both starting AVCs with this employer and continue to pay 15k loan, but maybe not as aggressively overpay?
Very roughly if it was 10% that would be around 7k pa, so approx 300pm. I can check the figures but just ball park.
Ideally i do want to get to 30% AVC and was thinking to get rid of the loan ASAP, then switch to overpaying mortgage OR making significant AVCs, but i could look at starting AVCs at lower amount alright.

 

[dubdub123]

Im considering the following
- this years bonus will be ringfenced for some upcoming expected expenses
- in Jan, I will start cobtributing 20% of salary (AVCs)
- i will stop regular overpayment of personal loan (this amount will pretty much cover AVCs)
- later in year I will try to overpay loan on adhoc basis
- once i have loan paid off and bigger emergency fund, i will try increase AVCs to 30%

Does this sound reasonable plan? @Brendan Burgess @RedOnion @ClubMan - any comments feedback? Ive paid off car loan , overpaid personal loan to get it to 15k. Trying to balance short term vs long term needs and think its reasonable to restart AVCs. Any feedback appreciated

 

[Brendan Burgess]

Im currently overpaying the 18k loan @5.7 perfect by 237 pm (brings monthly payment to 500 in total), which should sabe me 2k in interest over the life of the loan.

By overpaying the loan you're "saving" 5.7% on interest avoided. But if you contribute to the pension then you presumably stand to gain a lot more via pension tax relief

It's absolutely clear that you should not be making AVCs.

You should be clearing your expensive loans first.

You should not borrow money at 5.7% to contribute to a pension fund other than to match your employer's contribution.

When the loan is paid off you can contribute to the AVCs.

This is just a question of timing.

If you pay €1,000 off your loan today, you will save yourself 5.7% on that.
But you will have €1,000 less to pay in a couple of years which you will then be able to put into your pension.

Furthermore, with two children, I think it's even more important to get your borrowing down to increase your financial flexibility.

If you put it into a pension, you won't be able to access it for some years.

Brendan

 

[Brendan Burgess]

I am wondering how to explain this better.

Let's say it's the 1 January and you have a loan of €1,000 at 5.7%.
For simplicity, let's say that there will be only one repayment after a year, of €1,057.
You have €1,000 cash.
You can put €2,000 gross into your pension fund or you can pay off the loan immediately.
If you pay off the loan immediately, you will have €1,057 available to you in a year.
You can then put €2,000 into the pension fund instead of repaying the loan.

So, you argue that the pension fund might earn a gross return of 4% or €80 in the year.
It might, or it might not. The return might be lower. The costs will certainly take a bite out of it.
But the key thing is that when your pension is paid, you will be paying tax on it - probably at 15%, but possibly at 30%.

So, all in all, you are getting a guaranteed, tax-free, return of 5.7% by repaying your loan.

I think that this trumps everything.

Brendan

 

[dubdub123]

I am wondering how to explain this better.

Let's say it's the 1 January and you have a loan of €1,000 at 5.7%.
For simplicity, let's say that there will be only one repayment after a year, of €1,057.
You have €1,000 cash.
You can put €2,000 gross into your pension fund or you can pay off the loan immediately.
If you pay off the loan immediately, you will have €1,057 available to you in a year.
You can then put €2,000 into the pension fund instead of repaying the loan.

So, you argue that the pension fund might earn a gross return of 4% or €80 in the year.
It might, or it might not. The return might be lower. The costs will certainly take a bite out of it.
But the key thing is that when your pension is paid, you will be paying tax on it - probably at 15%, but possibly at 30%.

So, all in all, you are getting a guaranteed, tax-free, return of 5.7% by repaying your loan.

I think that this trumps everything.

Brendan

Thank you Brendan, some very good points. I have initially planned on paying down the loan first, then past couple of weeks was thinking how underfunded my pension is and thought that i should tackle that in parallel. My employer pays contribution and i do not have to pay in to get a match. In my previous role I had to make contributions for a match but thankfully thats no longer the case.
Ive managed to get my loan down to 15,500 now and have small emergency fund of 1,000 euro.
Separately i need to look at monthly outgoings as ive a number of old mortgage protection and insurance policies. Ill try pull that info together and post. I have basically held onto them as didnt know what to do.
I feel ive a good opportunity now to get things in good shape going forward but just need direction. Ive spent years in austerity mode and want to make good decisions to prevent that in the future, should something occur.

 

[dubdub123]

Things have been pretty stressful recently due to my son having mental health difficulties and i havent made any changes to our finances.

Im still overpaying the loan of 13,500 at 5.7% as i would really like to pay this off.

I have a DC pension from previous employment which is at about 40k. I also have a PRSA worth around 15k..
From reading other posts I believe I could potentially access those and withdraw 25% without penalty or tax. Is that correct?
Im thinking I could pay off the loan and then start adding 1,000 euro pm gross/ 600 net towards AVCs per month.. this is the amount i am currently paying towards loan.

If things go well i can increase the AVCs, but if things turn badly I can pause AVCs.

What impact would this have on my old pension and the PRSA if i did this?

I think it makes sense numbers wise as I'll build that money back up within the year, and also to decrease some of the stress in case i need to reduce hours at any stage.

@Brendan Burgess @ClubMan @RedOnion @lovethissite

 

[dubdub123]

@LDFerguson any guidance on what happens if i did decide to withdraw 25% of pension from previous employer? Is it complicated to setup ARF?
Also if i ever went back to work for that employer would there be any issues?

Thanks

 

[Brendan Burgess]

The decision here has just not changed.

Don't be thinking of AVCs or any other fancy cashing your pension type stuff until you have cleared your expensive loan.

In particular, if you are light on your pension, don't be thinking of cashing it early.

You have a clear path even if it's a long one.

1) Have a modest emergency fund.
2) Clear your expensive loan
3) Then review. With a mortgage of 2.1% , it is likely that contributing to a pension then will make more sense than clearing your mortgage.

But you don't need to keep asking. Clear your expensive loan and when that is done, come back.

Brendan

 

[dubdub123]

Thanks so much @Brendan Burgess . The big thing is that i feel the options have changed as i wasnt aware that i could withdraw 25% of old pension while still working.. i thought a person had to be retired..

If i pivot as follows it *seems* to make sense numbers wise, but im not sure if I'm missing something.

Option 1 - keep going as I am
- leave the 13,500 in pension
- pay 600 pm towards loan for 2 years.

At the end of the 2 years
- ive paid off the high interest loan
- assuming 10% growth pension money has grown to 13,500 x 1.1 x 1.1 = 16,335 in pension

Option 2 - Withdraw 13,500 and divert money from repayments to AVCs
- loan paid off immediately
- due to tax rate the 600 net pm is worth 1,000 eurp gross pm and I put this into current pension
==> after 2 years theres 24,000 in pension ( extra when growth is taken into account)

In practice, i would try divert more money at this point so i build up pension more quickly...
Paying AVCs instead of loan may also help regarding SUSI application *if* we go down that road..

I think a big risk though is not continuing to make AVCs at this level or higher but im used to not having that 600pm so I'd be ok with that. Im not sure if im missing something else. Up to now my plan has been to continue overpaying my loan to get rid of it before making AVCs. But to be honest id love a win here psychologically if that makes sense. It really would be incredible to only have mortgage debt but only if the numbers and strategy make sense. I dont know enough about ARF and possible repercussions so definitely want to gather as much info as possible. Thanks

 

[Allpartied]

Paying AVCs instead of loan may also help regarding SUSI application *if* we go down that road..

It will. In fact, combined with the tax relief, it could make your AVC's cost neutral. Pension contributions are deducted from the Reckonable Income, for SUSI support.
If you have an annual income of 60k, depending on how much your children earn, you will, already be exempt from the student contribution.
( Because the 7200 per annum AVC will bring your reckonable income to 53k. )

You are very borderline, so you would have to take into account any income your child earns, but, certainly, the SUSI support has to be taken into the equation. If you abandon the AVC and spend the income on your loan, you will not receive any reduction in reckonable income and will have to pay half the Student contribution, currently, 1500 Euros per year.

 

[dubdub123]

It will. In fact, combined with the tax relief, it could make your AVC's cost neutral. Pension contributions are deducted from the Reckonable Income, for SUSI support.
If you have an annual income of 60k, depending on how much your children earn, you will, already be exempt from the student contribution.
( Because the 7200 per annum AVC will bring your reckonable income to 53k. )

You are very borderline, so you would have to take into account any income your child earns, but, certainly, the SUSI support has to be taken into the equation. If you abandon the AVC and spend the income on your loan, you will not receive any reduction in reckonable income and will have to pay half the Student contribution, currently, 1500 Euros per year.

Ok great thank you so much.
I'll have a look at last years earnings and what i reckon i will make this year and see where it might fall after maxing out pension.
A lot to weigh up but skunds like i do have options.

Any idea if i was to take the 25% or even the full amount of old pension, would that be classed as income with SUSI? I had never thought about that, so not sure how it would work.
Thanks!

 

[Allpartied]

Ok great thank you so much.
I'll have a look at last years earnings and what i reckon i will make this year and see where it might fall after maxing out pension.
A lot to weigh up but skunds like i do have options.

Any idea if i was to take the 25% or even the full amount of old pension, would that be classed as income with SUSI? I had never thought about that, so not sure how it would work.
Thanks!

Lump sums, from pension schemes, are treated as reckonable income, for the year they are received.
But they divide the total lump sum, by the number of years you were in your pension scheme.
So, for example, if you receive a lump sum of 30k and you were in the scheme for 20 years, the calculation is 30k/20, which is 1500 euros for the year you receive the lump sum. It is not included in the reckonable income calculations for any subsequent years.

 

[LDFerguson]

@LDFerguson any guidance on what happens if i did decide to withdraw 25% of pension from previous employer? Is it complicated to setup ARF?
Also if i ever went back to work for that employer would there be any issues?

Thanks

As you're over 50 you can take 25% tax-free lump sum from the old DC scheme and put the rest into an ARF. Not overly complicated to do - make choices on what product provider and funds to put the ARF money into and fill out forms.

You can't access the PRSA until you're 60 unless you're retiring from all employments (or retiring early due to ill-health but let's hope the second one won't apply.)

I'm not well versed on the details of the SUSI grant, so be sure to verify that having an ARF with €30,000 or taking the lump sum won't affect it or anything you might be receiving from the State.

While in general I'm hesitant to advise anyone to draw down a pension fund early, this could be one of the instances where it's worth looking at. You get €10,000 tax-free lump sum and pay that off the loan capital. In effect you're getting 5.7% "interest" on that money. The PRSA fund would need to be achieving 6.7% before charges to match that.

The balance goes into an ARF. Let's assume it goes into an ARF that achieves the same growth as the PRSA would have, so no loss there. Two potential downsides I can see...

• You can leave the ARF to grow without making withdrawals until the year in which you turn 61. After that you must start drawing an income of at least 4% per year from it. Assuming you're still working and paying higher-rate tax at age 61, then these withdrawals will be hammered for high-rate tax and you're withdrawing money from your pension fund that you don't really need.
• You can choose to withdraw from an ARF at any time you like, again subject to taxation. Would there be a risk that you'd be tempted to dip into it over the next couple of years for some unexpected expense? You've worked very hard to get your finances on track in the years since the start of this thread so it would be a bit of a shame to give up more of this €30,000 pension fund to the taxman than you need to. If you leave it until you actually retire from work then you may well be paying little or no tax on your pension income by then, so the taxman will chew up less of your withdrawals.

 

[dubdub123]

Lump sums, from pension schemes, are treated as reckonable income, for the year they are received.
But they divide the total lump sum, by the number of years you were in your pension scheme.
So, for example, if you receive a lump sum of 30k and you were in the scheme for 20 years, the calculation is 30k/20k, which is 1500 euros for the year you receive the lump sum. It is not included in the reckonable income calculations for any subsequent years.

Ok great thank you. In my case the reckonible income would fall in around 2k so shouldn't have a massive impact, particularly if i can bring down my reckonible income by increasing AVCs