Paying a large deposit on house vs pension contributions

L

luke345

New Member
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Hi folks,

Firstly, thanks for taking the time to read this - I've been loosing a lot of sleep over this lately, so any advice would be great.

The background of the question

I'll try and provide as much info as possible here:

- I am a director of a LTD company
- 34. Unmarried
- Salary of €100k
- Max funding an executive pension
- Renting a bungalow
- 12 month emergency fund set aside
- We have access to around €180k in cash

The question

My partner and I now want to buy a place. Our target is in 1.5 years.

With the new PRSA rule, I have been debating making lump sum contributions to my pension.

However, I'm worried that it'd make much more sense to pay myself a higher salary in order to bring down the amount we need to borrow.

I'm just not sure if that's the right approach. In theory, I could double my salary and save a large chunk of it. But it'd kill me to see that much tax being paid over when it could otherwise be in my pension.

Any advice would be great.

Thank you.
 
Hi Luke

The first issue is the most effective way to take cash out of a company.

You say you are a director? I assume you are the sole owner?

At some stage, you have to take the cash out and when you do, you have to pay tax on it. ( You might be able to do a plan to extract it tax efficiently on retirement or on sale of the company, but unless this is in the immediate future, then you should take the cash out now - either as salary or as pension.)

While pension contributions are the best and most tax-efficient, long-term savings option, you must remember that you will pay tax when you draw down your pension.

The company can fund your pension without much in the way of limits, so you are not losing out by deferring pension contributions to later.

Brendan
 
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So, your first priority is to buy your own home and to get the mortgage down to a comfortable level.

Defer making any pension contributions until you have bought a house.


More cash has two huge advantages:
  1. You can buy the same house with a smaller mortgage and so if the Loan to Value is lower, you may get a lower rate on the entire mortgage.
  2. You may buy a more expensive house than you are currently planning. This could be better than buying a starter home and trading up after 3 or 4 years.
 
You don't need a 12 month emergency fund, unless your business is very volatile.

Use it to boost the deposit.

And then, if you need an emergency fund, build it up after you have bought the house.

Brendan
 
Hi Brendan,

That is an incredible amount of useful info. I'm very grateful for the reply.

To answer a couple of your questions:

- Yes, I am the sole owner
- The business is quite volatile and it's likely to become a more volatile industry as it's being heavily disrupted by artificial intelligence

This is the best advice I've received in response to that query (and that includes from a financial planner).

I'd love to show my gratitude properly - is there any particular charity that you are fond of?

Many thanks.
 
luke345 said:
However, I'm worried that it'd make much more sense to pay myself a higher salary in order to bring down the amount we need to borrow.
Click to expand...

Any lender will be alert to owner-directors paying themselves artificially and temporarily paying themselves high salaries in order to quality for higher loans. I am not at all implying that this is what you would be doing! But this could raise red flags if what you are borrowing is close to lender or Central Bank limits.

Maybe it's not relevant for you. But in your shoes a conversation with a few mortgage brokers would be well worth your time.
 
Hey!

No I'm literally trying to get a hold of as much cash as I can - I'm not trying to inflate my salary to get a higher loan amount.

I'm not too worried about getting mortgage approval - it's more to increase the cash I have access to.
 
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