Hi Brendan
Just by way of background, what I was challenging in my original post (in the earlier thread) was the conclusion that seemed to be emerging from the earlier thread that there was no benefit in commencing pension payments before paying off one’s standard variable rate mortgage – the idea being that one will always be able to catch up on one’s pension contributions (and the associated tax relief) at a later stage in one’s career. And what I was trying to do is to provide scenarios where this hypothesis may not turn out to be true as I felt the debate had swung too far from the traditional extreme (it’s never too early to start your pension) to almost the opposite extreme. My comments below should be read in this context.
For the purposes of my commentary below, I am assuming that the net return from a pension fund equals the net return on paying down one’s mortgage. This assumption may actually be unfair to the merits of pension funding as, in the long term, I believe that a pension fund is likely to beat the SVR return. Remember the SVR rate
should reduce in line with reductions in the LTV ratio and that pension funds enjoy, Michael Noonan’s idiocy aside, tax exempt growth. This is, of course, a separate debate.
Scenario 1: You die
Brendan: Will the spouse be better off?
Commentary: Spouse is better off! €100k contributed to a pension costs €59K – so €100k returned to spouse in cash v. €59k off mortgage.
Scenario 2: You get sick
Brendan: If my income reduces temporarily, better to have a small mortgage.
Commentary: Just to be clear, the reason I included this in my list was not because having a great pension is a great thing when you are sick!! - when out of work, due to illness, what is needed (apart from good medical and family support, etc.) is sufficient cash in the present and so a need for emergency savings and long-term income (permanent health) insurance is most important. I was simply including this as an example of where pension funding at a later stage in life may not be possible at all or to the same extent.
Scenario 3: You become unemployed
Commentary: Arguably investing in up-skilling (when employed) would be a substantially superior “spend” than either mortgage over-payments / pension contributions. Also, in terms of investments, a “rainy day” fund would have far greater utility than a reduced mortgage or pension fund. However, the points made in relation to scenario 2 remain valid here also as a response to the hypothesis I was challenging.
Scenario 4: Your income reduces
Brendan: I may not be able to contribute enough to a pension.
Commentary: So we agree?!
Scenario 5: Your income is or becomes in excess of the cap
Brendan: I don’t follow this argument. If my income increase beyond the €115k, then I can make the maximum contribution and I should not fund beyond €800k anyway.
Commentary: Your contributions are capped so you cannot catch up on years where no contributions were made. (The Duke, in later posts, accepted this point following inputs from SBarrett.) There is also the possibility that the cap reduces if say, Mary Lou (remember her – she used to be very out-spoken regarding perceived wrongs in our society???!!!) gets her hands on the tiller or part thereof. (Please delete references to Mary Lou if appropriate. Alternatively, please set up a “Letting off - off the scale – steam!!!!”)
The opinion regarding a max fund of €800k is one I do not share. €800k less the €200k TFLS does not give a substantial guaranteed income. Apart from the resultant income being well below the standard rate cut-off point, there are valid reasons for having a more substantial fund, e.g. upon early retirement, upon death, upon foreign residence in a state with lower tax - not to mention having sufficient scope with one’s retirement fund to weather the inevitable volatilities of non-guaranteed investments, etc.
Scenario 6: The rate of tax relief reduces
Brendan: If the rate reduces to 30%, there would be no point in a higher rate taxpayer contributing to a pension fund.
Commentary: There is a possibility that the rate of tax relief may be reduced in the future years. It follows that enjoying full marginal relief when it’s available is a better position to take than, coming back to the original argument, over-paying the mortgage now and contributing to a pension later when the available tax relief is not what it is now! A simple example, in bye-gone years, I enjoyed 48% relief on my contributions; next year it will be 40%, etc. In very simple terms, I do not accept the combined arguments of deferring pension contributions now and that if the rate reduces to 30%, there is no point in making pension contributions for higher rate tax-payers!
Scenario 7: Alternative tax efficient investments become available in the future
Brendan: Is this not an argument for paying off your mortgage? If I paid off my mortgage at age 50, I can choose between contributing to a pension and some other tax efficient investment. If I have already put my money into a pension fund, I can’t choose between paying off my mortgage and the tax efficient alternative.
Commentary: What I am getting at here is that once you pay tax, it is gone, gone, gone – never again to see the light of day.
If you take the tax relief now, you can decide in future years whether continuing to contribute to a pension makes sense or whether there are other more attractive investments. It comes back forcefully to the original premise of what is the most tax efficient investment currently available to me right now? I’ve no idea what the tax laws will be in the future in Ireland or elsewhere – all I know for sure is that they may be different in 20 years’ time and the premise I was challenging didn't recognise this appropriately!
Scenario 8: You wish to early retire
Brendan: This is the big argument that swung it for me.
Commentary: Happy days
