Pay AVCs or Mortgage ?

[RetiringType]

Hi I’m new to AAM so hoping I’m doing this right . I’m 62 and my wife is 55 , I’m due to retire in 3 years and we have a mortgage payment of just short of 3k a month which I pay while my wife covers household bills etc. The mortgage is due to finish at the same
time I hit retirement age in three years . I have a pensionable employment of 90k per annum but not paying any AVCs due to our high mortgage payment. My question is should we liquidate some savings/ investments to clear the mortgage and use the spare income to purchase AVCs in my pension scheme to the 40% of income maximum ?

 

[ClubMan]

You should probably start with this key post:

Key Post - Overpay mortgage or contribute to pension or do something else?

This comes up in a lot of different threads, so I will set out some principles here to kick off the discussion. I will edit it in the light of feedback. There are many options with your savings in excess of your emergency cash fund Pay down your mortgage Build up a fund to enable you to trade...

www.askaboutmoney.com

If you have significant savings not earmarked for any immediate expenditure and could afford to use them to reduce or clear the mortgage then that could be a no brainer.

However to get a clearer picture and for people to offer more specific feedback it might help to do a Money Makeover post:

Key Post - Basic information required for the "Money Makeover" forum

It can be difficult, but please try to use a meaningful title in your thread For example "27 year old with mortgage arrears". You will get a much better and much more coherent answer if you give as much information as possible in your first post. For example, if you give your mortgage rate, it...

www.askaboutmoney.com

 

[Brendan Burgess]

The comparison with your pension is a false comparison. You must make your mortgage payments anyway, so the question is "Should you cash some investments to make pension contributions?"

How much do you have in your pension fund?

Let's assume you are well below the €800k limit at which you get 25% tax-free.

So if you put in €100 now into your pension fund, you will get €25 back in three years and the other €75 will be taxed at your marginal rate.
So even if you will be paying 40% tax in retirement, you should max your contributions now. (If you will be paying 20% in retirement, the benefit is even greater.)

If you have exceeded the €800k limit, I don't think it's worth it, but others can check my reasoning.

If you put in €100 now, you will pay 20% tax on 25% of it and 40% on 75% for a combined rate of 35% + USC.

 

[ClubMan]

If you have exceeded the €800k limit, I don't think it's worth it, but others can check my reasoning.

Key Post - My pension pot has reached €800k - should I stop contributing ?

I am starting a new role in a company that does not have a pension scheme. They will offer a PRSA as they are legally obliged to do but they is no offer of contribution. I am aged 51 and I have other pensions that mean that all my future income will be at the higher rate of tax. Am I correct in...

www.askaboutmoney.com

Don't forget that up to €200K (€800K x 25%) can be taken as a tax free lump sum. But if a larger amount is taken then any additional amount between €200K and €500K is only subject to 20% tax. Anything over €500K is subject to 40% tax.

Taxation of retirement lump-sums

This page outlines the taxation of an excess lump-sum

www.revenue.ie

So, if the main or only rationale for stopping pension contributions once the pension pot hits €800K is that this is yields the largest tax free lump sum then I'm not sure that this should necessarily be a hard and fast rule.

In fact, there may be an argument for accumulating a pension pot up to the effective SFT (Standard Fund Threshold) of €2.15M if possible...

Is there a better way of dealing with the €2m cap on pension funds?

The present system means that if I have €100k more than €2m in my fund on retirement, it will be immediately taxed at 40% reducing it to €60k within the fund. When I draw it down, I will pay 48% or €29k of the €60k. leaving me with €31k. So the effective tax rate is, in round figures, 70%...

www.askaboutmoney.com

I'm not sure if the imminent increase in the SFT impacts/alters this reasoning, but I don't think that it does?

Why the overdue increase in pension threshold is welcome

Finance Minister Jack Chambers has raised the pension threshold to €2.8M by 2026, aiming to improve talent retention and tax issues. Find out more.

www.ey.com

 

[Fibbernacci]

If your mortgage is due to be paid off in three years time the you are likely paying only a small portion of interest compared to capital.
Ergo, the value in overpaying the mortgage is greater at the start than at the end.

The same can be said of the pension because of the compound interest building up over time However as someone stated there is a 25% tax free lump sum which effectively reduces your tax bill when the money becomes subject to income tax.

My vote is to pay into the pension.

 

[Brendan Burgess]

It is not a question from a 40 year old "Should I overpay my mortgage or contribute more to my pension". Completely different factors are at play here. (So this type of comment is irrelevant: "Ergo, the value in overpaying the mortgage is greater at the start than at the end.")

The question should be "Should I cash directly held investments to max my pension contributions"

And the answer is as I have given it.

 

[Dr Strangelove]

Ergo, the value in overpaying the mortgage is greater at the start than at the end.

This is complete false. Even when making large capital repayments there is a saving on interest costs via compounding.

The relevant comparison is the expected after-tax rate of return of overpaying mortgage versus other options over your investment horizon.