Spare cash into Pension or Mortgage when approaching retirement?

Hi all,

Age: 47

Annual gross income from employment or profession: c.100k a year

Type of employment: Private Sector, relatively precarious job.

Summary of Assets and Liabilities:
Pension (Defined Contribution) 1.2 million
Mortgage 200k (fixed for 10 years at 3.3%). House value c.350k
Shares & Cash (Rainy day fund) 100k


What specific question do you have or what issues are of concern to you?
I hope to retire around age 50. I can put c.20k a year into either my pension or extra mortgage payments, and I can reallocate some of my rainy day fund. I am trying to decide on my best approach. I would appreciate your views.

I've postponed buying a house when younger and have prioritised my pension. I intend retiring when my pension fund reaches around 1.4 million or 50, whichever comes first, and use the tax free lump sum to pay off my mortgage. I will live on c.3% of my pension fund every year.

If I maximise my pension, I can keep my withdrawals relatively low initially and lower-rate tax. But, once I turn 60 and have to take out 4%, I am likely to be paying higher rate tax on a portion of my withdrawals. Is money invested in my pension now just going to end up taxed at the higher rate?

Putting the money into my mortgage would give me an immediate gain and my rate is quite high, but I'm reluctant to give up the pension tax benefit.

I have always liked to maintain a large rainy day fund of around 2 years spending (for reasons). As I approach accessing the tax free sum I am thinking of running that money down, but I don't want to run the risk of running out of money before my pension is accessible if I lose my job.

Any thoughts would be much appreciated.

You can put €25k into your pension which will cost you about €15k after the tax relief.

Let's say your pension fund is €1.6m on retirement.
You can take 25% as a lump sum or €400k
€200k will be at 0%
€200k will be at 20%.

So it looks like the right thing to do. You are deferring tax at 40% to have it taxed at 20%.

Brendan

Against that, there is an upper limit of €2m on the pension fund.

So with €1.2m at age 47, it will hit €2m fairly quickly if you do continue to work past 50.

So if you are not sure that you will retire at 50, you should probably stop contributing.

Brendan

I think this is an excellent example of the advantages of prioritising pension contributions over paying down mortgage debt ahead of schedule.

€1.2m is a seriously impressive pension pot at 47.

So where to from here?

I would keep up the same strategy. Maximise your pension contributions and pay off the mortgage in due course from the TFLS.

Don’t worry about the €2m SFT - worst case scenario you go to cash for a year or two before retiring the fund.

Hats off - you’re in fantastic financial position.

When you say your job is relatively precarious, what does that mean?

Say you lose your job...
Would you get notice?
Would you get a redundancy lump sum?
Would you find alternative employment reasonably easily?

It just seems that €100k sitting in cash while you are paying 3% on borrowings to fund it, is a lot.

Brendan

I'd been so focused on the tax-free aspect of the lump sum that I hadn't really considered the additional amount I could withdraw. Thanks for that.

My job is one where I may struggle to find alternative employment in the same sector, and could be lost unexpectedly. My rainy day fund buys me time to retrain. Once I get access to my pension I wouldn't need to carry anything like as much, and could begin to run it down as I approach that date.

Another consideration is the State contributory pension.

It might be worth splitting off, say, €200k from your occupational pension fund and putting it into a PRSA. Retire the PRSA @50 (or whenever you actually retire), take a €50k TFLS and draw €12,500pa from an ARF.

No income tax or USC on €12,500 and you can maintain your PRSI stamps for State contributory pension purposes. Remember that you still have €150k (plus €12,500pa) to live off until deemed distributions kick in @60.

And you still obviously have €1m in a pension fund that you can retire whenever you want up to 70.

What is the monthly mortgage repayment

Not clear if 10 years is the full term?

At age 50 would you plan to pay that down in full with the lump sum?

So I think what you plan is

Pension 1.4m
Lump sum 350k
Remaining pot 1050k

Cash 100k + 350k = 450k

Pay off mortgage 200k, remaining cash 250k

3% drawdown of 1050k = 31.5k per year
= 2,650 per month

Thinking about this a bit further, I would should you look at the bigger picture?

You have a big rainy day fund because you are worried about losing your job, but you want to retire anyway in 3 years.

Have you a plan for what you will do when you retire? If you plan to travel, then that will be expensive and your fund might not be enough to fund the expected 40 years remaining.

If you are not enjoying your job, should you be looking at doing something else which you might get better job satisfaction from? It may well pay less but you have enough in your pension fund not to worry about that.

It might be worth having a chat with a career advisor to sense test your career and retirement plans. It's easier to do financial calculations than to deal with the fuzzier "what do I want to do with my life?" questions. But these fuzzier questions are more fundamental.

Are you happy in the house you are living in? Would you prefer to live in a more expensive house e.g. a bigger or better located house?

If so, then you should probably work on a few years more and trade up. If you choose to do that, then you should probably pay down your mortgage now in preference to contributing to a pension fund.

Brendan

My main consideration at the moment is not to leave anything (financial) on the table, and to try and retire from the corporate world while I'm still relatively young. I'm happy with my lifestyle and don't want my spending to creep up as it means more income would be required to maintain it.

To a poster above - yes my calculations were based on 1.4m minus 200k TFA, leaving 1.2m @ 3% to live on. Most of the TFA would go to paying the mortgage. I didn't consider the option to go for the full 25%, but I'll think about that now.

@Sarenco, my intention was to convert everything into an ARF at retirement. Is there advantages to the structure you describe in that scenario?

Kilkenny06 said:

@Sarenco, my intention was to convert everything into an ARF at retirement. Is there advantages to the structure you describe in that scenario?

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Well, it would give you more flexibility as to when you retire the balance of your pension but it probably doesn’t matter in your circumstances.

Just my two cents based on figures if pay a extra 20k into pension you get 8k tax relief. What do you plan with this 8k ? I be tempted if avc are maxed* for the year to pay it into the mortgage. Best of the both worlds as I see it.

Overpay the mortgage the monthly repayments get lower better cash flow if you loss you job. Also mortgage overpayment is saving your 3.3% in interest payments over the remainder of mortgage. Pensions might no perform as well over the period.

*Of course avc relief can be carried forward to further years bit with retirement in 3 years may not have the opportunity to claim it all.

FYI Not QFA or APA just have interest in the area.