SSIA quandry

Yorky

Was just wondering about SSIA options for a couple in mid thirties who will have made maximum contributions into two SSIA's. Have a mortgage of €240,000 which is about three and a quarter times our joint annual income.

Would it be more advantageous to use SSIA proceeds to pay a lump sum off mortgage or to invest it in pensions. One is thinking about buying notional service i.e. shortfall years in public sector superannuation scheme to maximise pension entitlement or buy AVC's. Will need to buy about six years to have forty years service at age sixty five.

Other has no pension scheme as a basic rate tax payer and am lead to believe that unless one is a higher rate tax payer it is unwise to pay into a pension. Is this correct?

OR, is there another investment which may better the above mentioned options?

Borzoi

Yorky wrote:

Would it be more advantageous to use SSIA proceeds to pay a lump sum off mortgage or to invest it in pensions. One is thinking about buying notional service i.e. shortfall years in public sector superannuation scheme to maximise pension entitlement or buy AVC's. Will need to buy about six years to have forty years service at age sixty five.
?

Given that you've already paid the income tax on the money in your SSIA, I would advise not putting it into a pension plan - instead consider either mortage payments, unit funds or direct investment in the stock market. They're in order of risk vs return.

One of you though might qualify for the Govt top up scheme for those on low income who do put SSIA towards pension - you should check

Yorky

Thanks for your reply. Posed the same question to Eddie Hobbs on The Ryan Tubridy Show and he thinks it would be better to buy the notional service in the superannuation scheme as our mortgage / income ratio is relatively low.

In the lower rate tax payers case, am I correct in saying that a basic rate taxpayer should not pay into a pension scheme?

conor_mc

Borzoi wrote:

Given that you've already paid the income tax on the money in your SSIA, I would advise not putting it into a pension plan

Don't think thats correct, you can claim back tax already paid on AVC's made in the previous and current year I believe. So if you wanted to put €5000 into your pension, it'd cost you €3,700 (ie. 5000 less 20% tax of €1000 less 6% prsi of €300).

In the lower rate tax payers case, am I correct in saying that a basic rate taxpayer should not pay into a pension scheme?

As above, if you were paying tax at 42%, putting €5000 into your pension would cost €5000 less 42% tax of €2100 less 6% prsi of €300 = €2600 so it's more beneficial for higher rate taxpayers, but not necessarily wrong for those on 20%. Depends on your personal circumstances really.

If it's possible that you might move up to the 42% rate in the next couple of years, it may be worthwhile hanging onto your money and putting it in as an AVC then.

You should probably get some independent financial advice on this though, or at least research it on revenue.ie so that you have the correct dates etc for how far back you can reclaim tax.

Blackjack

It depends on a few things really, and utilising the offer related to the lower's earners SSIA returns into pensions would (I think, and remain open to correction) maximise the return available.

Paying off part of the mortgage, thereby reducing payments if you wish to have the extra cash. Or simply continuing to pay the current amount will reduce the length of time you have left to pay your mortgage. The benefits of this can allow you to save further towards your pension once the mortgage is paid off.

If you are currently in a situation where you need to purchase a six years pension then the second part will address this, but only somewhat. The only reference to this I have available right now is a letter in today's Irish Times, which for those with a subscription is here.
This gives some details and a good explanation of the scheme, and shows the downside. I can extract from it here if the Mods are OK with that.
Basically, the offer is to reinvest up to 7500 of SSIA returns in to pension products, which will be matched up to 2500, bringing a return of 10,000. This would be a better return than available to the lower rate earner from tax deductions received than normal AVC contributions.
Downside is (from the perspective of the higher rate earner) that the higher rate earner's better off making the same contribution from direct contributions (AVS's), as the net cost to them in doing so provides a them a return to their pension fund of almost 13,000. A lot more attractive than the governments offer.
There is nothing to stop the higher rate earner submitting the 7500 from current salary, managed from the SSIA return. Or indeed more to the pension as long as it remains within whatever caps (I'm not sure about your personal limits) such as the max 15% of your annual income. The higher rate earner would hugely benefit from this. It would be advisable again for the higher rate earner to contribute as much as available. so here given the net return (in terms of contribution to the pension fund) is exceptional. You could also spread out your AVC contributions for a few years to cover the entire return from the SSIA. Using a figure of 20000 (assuming full SSIA, plus any additional interest earned or accruing) your pension would benefit to the tune of 29,600. Depending on the number of years this may take, you could invest the monies required in various Interest bearing products, deposits etc, ensuring further return.

Its worth bearing in mind that at this stage you've likely managed to save 500 a month without a huge amount of suffering. If you can continue to manage, it may be worthwhile seeing if you can continue to save this amount. Perhaps by declaring it (the 500 you've managed without, or part, allowing for maximum contribution limits) as an AVC contribution?. This would free up your SSIA returns (both) and allow you to pay off a large amount to your Mortgage, with a little left over for spending.
2 SSIA's would be close to 40,000, quite a large chunk (20% in fact) of your currently outstanding mortgage. Again, if you continue to pay off what you're paying now, then that will shorten the life of the mortgage. It may bring increase your options of earlier retirement, which would also be nice.

The above is limited, and very pension centric I'm aware, but if you have gained a culture of saving and wish to address your pension issue, then using your current budget will allow you to sort your this reasonable quickly. Paying a chunk off your Mortgage will also benefit in relation to interest paid. 40,000 Off your mortgage (assuming rate of 4%) now, will save you about 200 a month in repayments, and 24000 in saved interest over 25 years, if that is the term of your Mortgage. You could also possibly have access to better mortgage rates with a lower Loan to Value rate.
If you continue to pay what you are paying now, or overpaying by the 200 above, you will effectively shorten the life of your mortgage by 6 years.
A Calculator for overpayments is here.
6 years off your mortgage and possibly hugely contributing to your pension is quite an attractive return for simply managing on the same amount of money each month.

I'm not a qualified advisor by the way, but I do think the SSIA is a fantastic idea and if it introduces a better culture of saving, all the better.

Apologies for the length and any unnecessary rambling.