Mid-career finance decisions

[Runnerdoc]

1. Personal Details
Age: 48
Status: Single
Children: None

2. Income and expenditure
Annual gross income from employment or profession: €115,000
Monthly take-home pay: €5,000
Type of employment - Employee in Semi-State

3. In general
Saving circa €2,000 per month

4. Summary of Assets and Liabilities
Family home value: €650,000
Mortgage on family home: €185,000
Net equity: €485,000

5. Family home mortgage information
Lender: BOI
Interest rate: 2.35%
Type of interest rate: Fixed rate expiring in Oct 2024. Option to stay on 3.3% variable or switch to another lender
Remaining term: 20 yrs
Monthly repayment: €955 but will increase to €1,100 if I switch to a lender with a fixed rate of 3.7% for the lifetime of the mortgage

6. Other borrowings – car loans/personal loans
None, no credit card debt, no personal loans

7. Pension information
Defined Contribution pension fund from previous employer: Value of fund €55k
AVC - Commenced last year - €14k
Defined Benefit Pension Scheme with current employer: 20 years service completed with full service at 68.

8. Buy to let properties
None

9. Other savings and investments:
Cash: €50k Savings on deposit, rainy day fund €20k

10. Other information which might be relevant
Carrying CGT loss forward from sale of investment property bought in 2006
I wish to retire between 55-60 and am currently buying notional years which will allow me to retire at 55 on a 3/4 pension.

11. What specific question do you have or what issues are of concern to you?
I have 4 questions;
(i) I'm considering transferring my DC pension to a PRSA due to its lacklustre performance (5% p.a). My objective is to achieve a higher growth rate and have access to the cash when I'm 60. Any significant drawbacks to this plan?
(ii) What is the best way of maximising the value of my surplus cash to generate an income to supplement my DB pension if I retire between 55-60? I'm not an experienced investor and would prefer to invest in a global index fund except for the 41% exit tax
(iii) Should I switch to a lender who is offering a 3.8% interest rate for the remaining life of the mortgage?

All feedback and advice welcome and appreciated

 

[ClubMan]

2. Income and expenditure
Annual gross income from employment or profession: €115,000
Monthly take-home pay: €5,000

Are you sure that this is correct?
A quick glance at a tax calculator suggests that your monthly net should be closer to €6k.

Monthly repayment: €955 but will increase to €1,100 if I switch to a lender with a fixed rate of 3.7% for the lifetime of the mortgage

Why would you do this when you can well afford to ride out variable rate fluctuations and would most likely pay more in the long term and have less flexibility with overpayments or early redemption on a long term fixed rate?

(i) I'm considering transferring my DC pension to a PRSA due to its lacklustre performance (5% p.a).

What charges apply to the DC pension and what is it invested in? These factors will have a significant bearing on returns. Why do you think that a PRSA is necessarily going to yield better returns?

(ii) What is the best way of maximising the value of my surplus cash to generate an income to supplement my DB pension if I retire between 55-60?

In general two priorities would normally be paying down debt (in your case your mortgage) and maximising pension contributions up to your age related tax relief limit (25% in your case and 30% in the year that you turn 50). But also don't live in penury in order to do these!

I'm not an experienced investor and would prefer to invest in a global index fund except for the 41% exit tax

Investing long term directly in shares might be a better idea given the lower charges and taxes compared to unit linked funds or ETFs especially since you have a CGT loss to eventually write off.

 

[Steven Barrett]

11. What specific question do you have or what issues are of concern to you?
I have 4 questions;
(i) I'm considering transferring my DC pension to a PRSA due to its lacklustre performance (5% p.a). My objective is to achieve a higher growth rate and have access to the cash when I'm 60. Any significant drawbacks to this plan?
(ii) What is the best way of maximising the value of my surplus cash to generate an income to supplement my DB pension if I retire between 55-60? I'm not an experienced investor and would prefer to invest in a global index fund except for the 41% exit tax
(iii) Should I switch to a lender who is offering a 3.8% interest rate for the remaining life of the mortgage?

All feedback and advice welcome and appreciated

The poor performance is because of the fund you are invested in, not the pension itself. You could get the same results in a PRSA. Under a PRSA, you have to have actually retired to access before age 60. With an occupational scheme, you just have to reach age 50. The scheme is almost certainly cheaper. Look at moving to an equity fund and leave it alone.

Are you 100% certain that you will be allowed to access your public service pension from 55.

If you need to supplement your income, you need to invest personally. If you having offsetable losses, you have to invest in individual stocks, which isn't easy to do. Best thing is to pick some of the biggest and best companies in the world and set and forget with a target to harvesting the gains in a few years time to use up your taxes.

If you are single, you should also be looking to protect your income with an income protection plan in case you are unable to work long term.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

Mortgage on family home: €185,000

Cash: €50k Savings on deposit, rainy day fund €20k

After your pension, your best investment is to pay down your mortgage.

Definitely set the €50k against it unless you have it earmarked for something else. You should also probably set the €20k against it.

Then start rebuilding the rainyday fund from your €2,000 + savings a month. If it starts raining heavily, you can always get a Credit Union Loan, Overdraft or Credit Card to buy that very expensive umbrella.

 

[Brendan Burgess]

As your plan should be to clear your mortgage, I would second Clubman's idea of going for a variable rate mortgage. It means you can overpay it without penalty.

 

[Brendan Burgess]

I wish to retire between 55-60 and am currently buying notional years which will allow me to retire at 55 on a 3/4 pension.

My objective is to achieve a higher growth rate and have access to the cash when I'm 60.

To reiterate, the best way to be ready for retirement at 55 is to be mortgage-free.
It also gives you some protection against sickness or loss of income.

 

[Brendan Burgess]

Carrying CGT loss forward from sale of investment property bought in 2006

After clearing the mortgage, maybe invest in Berkshire Hathaway which does not pay any dividends. So any growth should be in increased share value.

There is a risk of investing in just one share and it could fall in value when Buffett dies. But it is almost like an investment fund in that it is diversified itself.

But with a good pension fund and your mortgage cleared off, investing in just one share is probably ok as it will be such a small proportion of your overall wealth.

 

[Brendan Burgess]

Check out this thread. It's very old so if you take any action based on it, verify that it's still correct.

Key Post - Suitable investments for those with CGT losses to use up

Like a lot of people, I have a lot of losses forward for CGT purposes. Normal shares like CRH or DCC pay dividends which are taxable at 50%. It would suit me much better if they didn't pay any dividends. Assuming the share price rises if the cash is reinvested, then I would be getting the...

www.askaboutmoney.com

 

[Runnerdoc]

All, really appreciate the responses as I was feeling overwhelmed and was starting not to see the wood from the trees. Some other pertinent information;
Re lower take home pay; pension contributions are costing €1.2k per month and VHI also deducted
Re 3.8% mortgage: lender will allow overpayments up to 10% each year on the outstanding balance with no penalty and early redemption charge of 2%. Sounds like a good deal to me but maybe I'm missing something.
DC pension is invested 68% at Risk Level 5, 32% in Level 4. Both funds have mix of equities, bonds and property with low exposure to cash
Re retiring at 55 - yes its possible but my annual pension gets a 5% actuarial deduction which decreases year on year until 60.
Re retiring at 55 - I will get a capital lump sum which would in theory, pay off my outstanding mortgage. I don't know if this fact changes any of the above feedback
Thanks again all - I'm feeling a little lighter already.

 

[_OkGo_]

(ii) What is the best way of maximising the value of my surplus cash to generate an income to supplement my DB pension if I retire between 55-60? I'm not an experienced investor and would prefer to invest in a global index fund except for the 41% exit tax

You really don't need to do anything other than pay down your mortgage. The pension income you have is more valuable to you if you have no debt to service.

Type of interest rate: Fixed rate expiring in Oct 2024. Option to stay on 3.3% variable or switch to another lender

BOI's variable rate is 4.15%. It may have been 3.3% when you fixed but it's highly unlikely that you are rolling onto a 3.3% variable rate

Monthly take-home pay: €5,000
....
Saving circa €2,000 per month

This doesn't add up for me. If you are saving €2k and currently have a mortgage of €1k, you are only living on €2k per month. Everything is that bit more expensive on your own so after all utilities and essentials that doesn't leave a lot to work with.

Do you use the €2k 'savings' to pay for one off items like cars, holidays etc? If so it is not saving, you are just budgeting.

With plans for early retirement you need to know exactly what your cost of living is.

Mortgage on family home: €185,000

Cash: €50k Savings on deposit, rainy day fund €20k

This should be very straightforward.You have way too much cash on hand.

Reduce your mortgage to €130k.
Reduce the term to 10 years (min payment ~€1.3k)
Switch to variable or 1 year fixed rates to allow overpayments

You should be very comfortable to make €2k/month on the mortgage which would see it cleared in ~6 years.

After that you can divert the excess cash to an ETF or something similar

 

[ClubMan]

All, really appreciate the responses as I was feeling overwhelmed and was starting not to see the wood from the trees. Some other pertinent information;
Re lower take home pay; pension contributions are costing €1.2k per month and VHI also deducted

Thanks for clarifying.

Re 3.8% mortgage: lender will allow overpayments up to 10% each year on the outstanding balance with no penalty and early redemption charge of 2%. Sounds like a good deal to me but maybe I'm missing something.

As I said before I don't see the need in your case (with generous disposable income and no dependents) to opt for a long term fixed rate when you can well afford to ride out any variable rate fluctuations and your variable rate seems competitive. In the long term you will generall pay less overall interest on a competitive variable rate versus a fixed rate.

DC pension is invested 68% at Risk Level 5, 32% in Level 4. Both funds have mix of equities, bonds and property with low exposure to cash

At your age my personal (non finance professional) opinion is that you should seriously consider being 100% in equities only.
I'm late 50s and am starting to draw down a modest amount of my pensions and am still taking that approach so my money is where my mouth is.

Re retiring at 55 - I will get a capital lump sum which would in theory, pay off my outstanding mortgage. I don't know if this fact changes any of the above feedback

If you have reduced or even cleared the mortgage by that stage then you can use the money for other purposes.

In summary:

1. Stick with the variable rate mortgage
2. Reduce your mortgage with any spare cash without adversely impacting your day to day living expenses/lifestyle
3. Maximise your pension contributions
4. Invest long term in equities with any spare cash that you have to save/invest (I second @Brendan Burgess's suggestion of the likes of Berkshire Hathaway if, like many people, you don't want the hassle of assembling and managing a diversified basket/portfolio of shares).
5. Enjoy the benefits of your comfortable financial situation

 

[Runnerdoc]

Thanks again guys - appreciate I'm lucky to be in the financial situation that I'm in today. I've worked hard and saved hard to get to this place so I'm afraid to make a mistake (like when I bought an apartment in 2006!)

 

[Sarenco]

Just on BRK, I think it should be borne in mind that US estate tax may be relevant to any holding with a value over $60k.

I would be inclined to keep the pension 100% in equities and keep any after-tax savings on deposit once the mortgage is cleared. At that stage, (early) retirement will be coming into view and I don’t think it’s wise to be 100% in equities in the run up to retirement.

 

[ClubMan]

Just on BRK, I think it should be borne in mind that US estate tax may be relevant to any holding with a value over $60k.

Technically yes but, as mentioned elsewhere, many non US investors don't let that trouble them.

Key Post - Be careful if you hold more than $60,000 in US equities

Of course what most people don't appreciate is that if you are not a US citizen or US resident and you hold more than $60,000 in US equities then US estate taxes apply to transfers between spouses on death. That's right if you die your spouse or civil partner would have to pay US Estate taxes...

www.askaboutmoney.com

I would be inclined to keep the pension 100% in equities and keep any after-tax savings on deposit once the mortgage is cleared. At that stage, (early) retirement will be coming into view and I don’t think it’s wise to be 100% in equities in the run up to retirement.

I would disagree - the investment timeframe for a 48 year old could easily be 40 years and investments should reflect that.
I'm not saying that they should necessarily be 100% in equities for the pension and non-pension investments at, say, age 60, but there's a strog argument for still holding significant equity investments even at that age - e.g. when rolling over into an ARF etc.
The fact that this poster has a DB pension may have a bearing on such decisions.

 

[Sarenco]

I would disagree - the investment timeframe for a 48 year old could easily be 40 years and investments should reflect that.

If somebody is drawing down a portfolio evenly over 30 years starting at 55, then they have an investment horizon of 15 years - not 30 years.

I agree with you that an investor should still maintain a substantial allocation to equities in that scenario but I wouldn’t go “all in”.